UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-K
-----------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-26314
JAMES RIVER BANKSHARES, INC.
Virginia 54-1740210
State of Incorporation IRS Employer Identification No.
1514 Holland Road, Suffolk, Virginia 23434
Registrant's telephone number, including area code: (757) 934-8100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5.00 par value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 16, 1998: Common Stock - $55,044,773.
The number of shares outstanding of the registrant's common stock as of
March 16, 1998: 3,741,230.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1998 ("Annual Report") are incorporated by reference in Part
I and Part II of this Form 10-K.
<PAGE>
Certain information appearing elsewhere in this report contains forward
looking statements that are subject to risks and uncertainties that could cause
the Company's future results to differ materially from those anticipated in
these forward looking statements. These forward looking statements include, but
are not limited to, statements regarding management's goals to improve
profitability, make strategic acquisitions, prepare the Company for Year 2000,
and other risks, expectations, or goals. Risks and uncertainties that may affect
the financial condition and results of operations of the Company include, but
are not limited to, general economic and business conditions, competition from
banks and other financial service providers, new financial products and
services, risks inherent in making loans, including repayment risks and changing
collateral value, 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, 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.
PART I
Item 1. Business
General
James River is a Virginia bank holding company that commenced operations
June 1, 1995. James River was capitalized pursuant to a share exchange ("Share
Exchange") between Bank of Suffolk, a Virginia state chartered bank ("BOS"), and
James River Bank ("JRB"), also a Virginia state chartered bank. In the Share
Exchange, shareholders of BOS and JRB exchanged their shares of common stock of
BOS and JRB, respectively, for shares of James River Common Stock. BOS and JRB
became wholly owned subsidiaries of James River on May 31, 1995.
In the first quarter of 1996, James River and its subsidiaries consummated
several significant transactions. First, in two separate transactions that both
closed on March 1, 1996, James River acquired Bank of Isle of Wight, a Virginia
state chartered bank in Smithfield, Virginia ("BIW") and First Colonial Bank,
FSB, a federal savings bank in Hopewell, Virginia ("FCB"). In the aggregate,
these two transactions more than doubled James River's total assets and net
loans. JRB also consummated the acquisition of three branch banking offices on
March 23, 1996, one of which is located in the City of Franklin, Virginia, and
two of which are located in Courtland, Virginia, in Southampton County. JRB
assumed aggregate deposit liabilities of approximately $34 million in connection
with the branch acquisitions. In addition, BOS purchased a branch bank facility
in Suffolk and commenced operations at this branch in June 1996.
In May 1998, FCB converted from a federal savings bank charter to a
Virginia state chartered bank and changed its name to First Colonial Bank. Prior
to its conversion, FCB sold the assets of its consumer finance company
subsidiaries, Family Finance Corporation and Family Finance of Virginia, Inc.,
to the Company.
In October 1998, Mortgage Company of James River, Inc.("MCJR") was formed
as an operating subsidiary of JRB. MCJR is a residential mortgage lending
operation based in Richmond, Virginia and initially plans to originate mortgage
loans from Hampton Roads in the Southeastern portion of Virginia through
Richmond and Charlottesville in the Central portion of the state. MCJR actually
commenced its lending operations in early 1999.
Also, in 1998, BIW changed its name to James River Bank/Colonial ("JRBC")
in conjunction with the opening of two branch offices on the Hampton Roads
Peninsula.
<PAGE>
James River now has four operating bank subsidiaries with a total of 24
banking offices that conduct operations from the Tidewater region of
Southeastern Virginia to the tri-city areas of Hopewell, Petersburg and Colonial
Heights in South-central Virginia.
James River has also entered into an Agreement and Plan of Merger dated
February 17, 1999 ("Merger Agreement") with the State Bank of Remington, Inc.
("State Bank"). Under the terms of the Merger Agreement, State Bank would become
a wholly owned subsidiary of James River and would conduct operations as a free
standing banking subsidiary. The Merger Agreement provides that shareholders of
State Bank would 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 is subject to
regulatory and shareholder approval and to certain other conditions set forth in
the Merger Agreement. Subject to satisfaction of these conditions, James River
expects the transaction to close in the third quarter of 1999 and to be
accounted for as a pooling of interests.
Operations of James River's Banking Subsidiaries
General. All of the banking subsidiaries provide a wide range of financial
services primarily to individuals and to small and medium-sized businesses.
These services include individual and commercial demand and time deposits,
commercial and consumer loans, traveler's checks, safe deposit facilities, U.S.
Government Savings Bonds, collection items, and official checks. BOS and JRBC
are authorized to provide trust services but do not currently do so.
BOS was formed in 1967 and has seven branches in Suffolk, Virginia and one
office in Chesapeake, Virginia, which was opened in October 1998. FCB was formed
in 1972 and commenced operations in 1975. Based in Hopewell, Virginia, FCB has
seven branches located in Hopewell, Petersburg, Colonial Heights, and the
counties of Dinwiddie and Chesterfield. JRB was chartered in 1933. Its main
office is in Waverly, Virginia. It operates a total of six branches in the
Sussex and Southhampton Counties and the city of Franklin. JRBC was formed in
1971 in Smithfield, Virginia. In the fourth quarter of 1998, it opened two
additional offices in Newport News and Grafton, Virginia.
Credit Policies. James River's banking subsidiaries employ written
policies and procedures to manage credit risk. This process includes formulation
of portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for on-going identification and management of credit
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with internal policies.
A major element of credit risk management is the diversification of risk.
The objective of each subsidiary is to maintain a diverse loan portfolio to
minimize the impact of any single event or set of circumstances. Concentration
parameters are based upon individual risk factors, policy constraints, economic
conditions, collateral, and products. James River's subsidiaries generally do
not make loans outside their market area unless the borrower has an established
relationship with the bank and conducts its principal business operations within
the bank's market area. Consequently, James River's banking subsidiaries and
their borrowers are directly affected by the economic conditions prevailing in
their respective market areas.
<PAGE>
The following table sets forth the composition of the loan portfolio of
James River's banking subsidiaries on a restated consolidated basis (by
percentage) for the five years ended December 31, 1998. The amounts reported
below for 1994 include FCB's applicable balances as of June 30 for the period
indicated.
Loan Portfolio by Percentage
December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
Commercial 12.1% 13.1% 9.7% 11.6% 8.9%
Real estate-
commercial 18.0% 19.2% 8.5% 7.6% 10.2%
Real estate-
construction
and land
development 9.0% 7.5% 6.0% 4.0% 2.4%
Real estate-
mortgage 51.3% 49.4% 64.8% 66.7% 63.9%
Agricultural 0.9% 1.8% 1.0% 0.6% 0.5%
Installment 8.7% 9.0% 10.0% 9.5% 14.1%
------------------------------------------------
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
Total Loans $275,607 $263,219 $243,104 $208,143 $174,225
------------------------------------------------
James River's service area provides lending opportunities to small
businesses, farmers, and a wide range of consumers. Most of the small businesses
are either retail or agribusiness companies. The loan portfolio set forth above
for James River's banking subsidiaries is 79.4% collateralized by first and
second deeds of trust on residential and commercial real estate. This heavy
collateralization by real estate requires an ascertainment of property values in
the service areas and lending on the appropriate loan-to-value ratios.
Commercial. Commercial loans represented 30.1% of James River's total loan
portfolio on December 31, 1998. Commercial loans are used to purchase commercial
real estate, to purchase capital equipment, to support letters of credit and to
fund inventory purchases. To support all of the commercial business credits,
borrowers' financials are kept current and are analyzed to determine repayment
through cash flows and annual earnings. Because most of these businesses are
small, principal owners generally are asked to personally guarantee the credit.
Agricultural. At December 31, 1998, agricultural loans totaled $2.5
million. These were all farm operating loans including loans secured by farm
equipment. Loans secured by farm equipment have annual payments and are part of
the loan portfolio with maturities of up to five years.
Real Estate Construction and Land Development. Real estate construction
and land development loans amounted to $24.8 million or 9.0% of the loan
portfolio at December 31, 1998. Most of these loans were made to either
homeowners who were having their own home built or to contractors who were
building a residence under contract. In addition, the Company provides financing
to contractors form residential real estate construction that is not pre-sold.
Real Estate Mortgage. At December 31, 1998, 94.9% of the real estate
mortgages were residential mortgages on one to four family units. These loans
were either open ended adjustable rate mortgages ("ARMS"), amortized monthly,
predominately on a 20 year amortized basis, or closed end balloon loans, monthly
amortized and based on 15 or 20 year amortization. Both the ARMs and the
balloons have one, three or five year adjustable rates. $10.1 million were real
estate loans to individuals used for farm purchases and multifamily residential
properties.
<PAGE>
Installment. On December 31, 1998, 8.7% of total loans were consumer and
installment loans. Installment loans include home improvement loans, automobile
loans and personal unsecured loans. James River's banking subsidiaries, on
consumer collaterized loans, generally use loan to value ratios of 75%.
Loan Portfolio
As described above, the portfolio of James River's banking subsidiaries is
comprised of commercial loans, agricultural loans, real estate loans, and
installment loans. Net loans consist of total loans minus the allowance for loan
losses, unearned discounts, and deferred loan fees. Net loans were $275.5
million at December 31, 1998, 5.76% more than net loans of $260.5 million at
December 31, 1997. The average balance of total loans as a percentage of average
earning assets was 72.2%, 72.1%, 67.4%, 66.0% and 61.0% for 1998, 1997, 1996,
1995 and 1994, respectively. James River's banking subsidiaries had no loans
outstanding to foreign countries or for highly leveraged transactions as of
December 31, 1998, 1997, 1996, 1995, or 1994.
In the normal course of business, James River's banking subsidiaries make
various commitments and incur certain contingent liabilities which are disclosed
but not reflected in its financial statements. These commitments and contingent
liabilities include commitments to extend credit and standby letters of credit.
At December 31, 1998, commitments for standby letters of credit totaled $1.7
million and commitments to extend credit were $65.1 million. At December 31,
1997, commitments for standby letters of credit totaled $1.6 million and
commitments to extend credit totaled $40.1 million.
Interest income on installment, commercial, and real estate mortgage loans
is computed on the principal balance outstanding. Most loans carry an interest
rate tied to the base rate of James River's banking subsidiaries, which is
generally the Wall Street Journal prime rate.
The following table summarizes the composition of the loan portfolio at
the dates indicated for James River's banking subsidiaries. The amounts reported
below for 1994 include FCB's applicable balances as of June 30, 1994.
Loan Portfolio
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
Commercial $ 33,266 $ 34,513 $ 23,689 $ 24,224 $ 15,463
Real estate-commercial 49,495 50,522 20,606 15,780 17,730
Real estate-construction
and land development 24,838 19,683 14,520 8,317 4,151
Real estate-mortgage 141,484 130,055 157,605 138,851 111,403
Agricultural 2,536 4,802 2,256 1,102 945
Installment 23,988 23,644 24,428 19,869 24,533
-----------------------------------------------------
Total Loans 275,607 263,219 243,104 208,143 174,225
Less:
Allowance for loan
losses 3,827 3,457 3,176 2,891 2,691
Unearned discount 17 25 38 60 122
Deferred loan
fees (costs) (129) 50 169 159 106
-----------------------------------------------------
Net loans receivable 271,892 259,687 239,721 205,033 171,306
Loans held for sale 3,599 789 1,192 1,483 3,677
Net loans $ 275,491 $ 260,476 $240,913 $206,516 $174,983
======== ======== ======== ======== =======
<PAGE>
Set forth below is information regarding the maturity of loans for James
River's banking subsidiaries at December 31, 1998:
Maturity Schedule of Loans
December 31, 1998
------------------------------------------
Over One
One Year through Over Five Total
or Less Five Years Years Loans
------- ---------- ----- -----
(Dollars in thousands)
Commercial $ 8,489 $ 19,063 $ 5,714 $ 33,266
Real estate-commercial 7,051 14,059 28,385 49,495
Real estate-construction
and land development 13,720 3,141 7,977 24,838
Real estate-mortgage 13,833 32,362 95,289 141,484
Agricultural 932 1,262 342 2,536
Installment 8,560 14,779 649 23,988
------ ------- ------ -------
Total $ 52,585 $ 84,666 $138,356 $275,607
======== ======== ======== ========
Loans maturing after one year
with predetermined rates 118,879
Loans maturing after one year
with variable rates 104,143
--------
Total $223,022
========
Asset Quality
James River's banking subsidiaries attempt to maintain the allowance for
loan losses at a sufficient level to provide for potential losses in the loan
portfolio. The provision for loan losses is determined periodically by senior
management and lending officers based upon consideration of several factors,
including changes in the character and size of the loan portfolio and related
loan loss experience, a review and examination of overall loan quality which
includes the assessment of problem loans, and an analysis of anticipated
economic conditions in the market area. In addition, bank regulatory agencies
that regularly review the loan portfolio as part of their examination process,
internal loan review personnel, and advice from James River's independent
accountants are considered in reviewing and assessing the adequacy of the
allowance for loan losses.
<PAGE>
An analysis of the allowance for loan losses, including charge off
activity is presented below for James River's banking subsidiaries for the
periods indicated. The amounts reported below for 1994 include FCB's applicable
balances as of June 30 for the period indicated.
Allowance for Loan Losses
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
Balance, beginning
of period $ 3,457 $ 3,176 $ 2,891 $ 2,691 $ 2,258
-----------------------------------------------------
Less charge offs:
Commercial 59 12 17 71 25
Installment 174 187 152 73 56
Real Estate 21 70 133 64 169
-----------------------------------------------------
Total Charge offs 254 249 302 208 250
-----------------------------------------------------
Plus recoveries:
Commercial 8 58 10 23 30
Installment 56 30 15 57 26
Real estate 53 3 71 4 34
-----------------------------------------------------
Total recoveries 117 91 96 84 90
-----------------------------------------------------
Net charge offs 137 158 206 124 160
-----------------------------------------------------
Provision for loan
losses 507 439 491 341 593
-----------------------------------------------------
Adjustment to
conform fiscal year - - - (17) -
-----------------------------------------------------
Balance end of
period $ 3,827 $ 3,457 $ 3,176 $ 2,891 $ 2,691
-----------------------------------------------------
Allowance for loan
losses to period end
total loans 1.37% 1.31% 1.30% 1.38% 1.51%
Allowance for loan losses
to nonaccrual loans 981.28 385.40 1,091.41 388.05 165.60
Average total loans 272,842 258,988 228,009 191,650 169,096
Net charge offs
to average loans 0.05% 0.06% 0.09% 0.06% 0.09%
<PAGE>
A breakdown of the allowance for loan losses for James River's banking
subsidiaries at the periods indicated is provided in the following table;
however, management of James River does not believe that the allowance for loan
losses can be fragmented by category with any precision that would be useful to
investors. The breakdown of the allowance for loan losses is based primarily
upon those factors discussed above in computing the allowance for loan losses as
a whole. Because all of these factors are subject to change, the breakdown is
not necessarily indicative of the category of future loan losses. The amounts
reported below for 1994 include FCB's applicable balances as of June 30 for the
period indicated.
Allocation of Allowance for Loan Losses in Dollars
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
Commercial $ 600 $ 846 $ 625 $ 516 $ 902
Real estate-commercial 1,479 1,161 1,152 1,004 790
Real estate-construction
and land development 145 85 84 75 8
Real estate-mortgage 647 808 852 950 658
Agricultural 221 176 21 22 92
Installment 735 381 442 324 241
-----------------------------------------------------
Total allowance for
loan losses $ 3,827 $ 3,457 $ 3,176 $ 2,891 $ 2,691
-----------------------------------------------------
The following table sets forth the composition of the loan portfolio of
James River's banking subsidiaries on a consolidated basis (by percentage) for
the five years ended December 31, 1998. The amounts reported below for 1994
include FCB's applicable balances as of June 30 for the period indicated.
Amount of Loans to Gross Loans by Percentages
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial 12.1% 13.1% 9.7% 11.6% 8.9%
Real estate-commercial 18.0% 19.2% 8.5% 7.6% 10.2%
Real estate-construction
and land development 9.0% 7.5% 6.0% 4.0% 2.4%
Real estate-mortgage 51.3% 49.4% 64.8% 66.7% 63.9%
Agricultural 0.9% 1.8% 1.0% 0.6% 0.5%
Installment 8.7% 9.0% 10.0% 9.5% 14.1%
-----------------------------------------------------
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
-----------------------------------------------------
<PAGE>
The following table details information concerning nonaccrual,
restructured and past due loans, as well as foreclosed assets for James River's
banking subsidiaries, for the dates indicated. The amounts reported below for
1994 include FCB's applicable balances as of June 30 for the period indicated.
Non-performing Assets
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
Nonaccrual loans $ 390 $ 897 $ 291 $ 745 $ 1,625
Foreclosed assets 264 573 171 4 496
-----------------------------------------------------
Total
non-performing
assets $ 654 $ 1,470 $ 462 $ 749 $ 2,121
-----------------------------------------------------
Loans past due 90
or more days
accruing interest $ 427 $ 431 $ 857 $ 683 $ 203
Non-performing
loans to total loans,
at period end 0.14% 0.34% 0.12% 0.36% 0.91%
Non-performing
loans to period end
loans and foreclosed
assets 0.14% 0.34% 0.12% 0.36% 0.91%
As of December 31, 1998, loans 30 days or more delinquent for James
River's banking subsidiaries totaled $4.7 million, which includes those
non-performing loans above that have possible credit problems and cause
management to have concerns about the borrowers' continuing ability to comply
with existing repayment terms. Of these potential problem loans, $3.1 million
are secured by security interests in real estate.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," on January 1, 1995.
Under this standard, a loan is considered impaired, based on current information
and events, if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Increases and decreases in the
allowance due to changes in the measurement of impaired loans, if applicable,
are included in the provision for loan losses. Loans continue to be classified
as impaired unless they are brought fully current and the collection of
scheduled interest and principal is considered probable. When a loan or portion
of a loan is determined to be uncollectible, the portion deemed uncollectible is
charged against the allowance and subsequent recoveries, if any, are credited to
the allowance.
The recorded investments in impaired loans requiring an allowance for loan
losses as determined in accordance with SFAS No. 114 were $1,408,000, $2,017,000
and $3,137,000 at December 31, 1998, 1997 and 1996, respectively. The impaired
loans at December 31, 1998, consisted of $35,000 of commercial, $78,000 real
estate-commercial, $1,151,000 real estate mortgage, $120,000 agricultural loans,
and $24,000 personal loans. The impaired loans at December 31, 1997, consisted
of $227,000 of commercial, $818,000 real estate-commercial, $386,000 real estate
mortgage, and $586,000 agricultural loans. The impaired loans at December 31,
1996, consisted of $1,871,000 of commercial and $1,266,000 real
estate-commercial loans. All of the impaired loans at December 31, 1998, 1997
and 1996, were measured using the fair value of collateral method. The portion
of the allowance for loan losses allocated to the impaired loan balance was
$162,000, $423,000 and $558,000 at December 31, 1998, 1997 and 1996,
respectively.
<PAGE>
Investments
The carrying value of the investment portfolio of James River and its
subsidiaries was $89.0 million at December 31, 1998, compared to $83.0 million
at December 31, 1997. The average balance of the investment portfolio decreased
$6.4 million or 6.9% in 1998 compared to 1997. The average balance of the
portfolio decreased 10.1%, or $10.3 million, in 1997.
At December 31, 1998, 1997, and 1996, there was no obligation of any
issuer in the investment portfolio, exclusive of obligations of the U.S.
Government or U.S. agencies and corporations, which in the aggregate exceeded
10% of shareholders' equity.
The market value of James River and its subsidiaries Held-to-Maturity
securities was 102.6% and 101.5% of carrying value at years ended December 31,
1998 and 1997, respectively.
The following table summarizes the carrying values of securities for James
River and its subsidiaries for the dates indicated.
Securities Portfolio
December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
U. S. Treasury and other government $ 50,211 $ 43,535 $ 62,576
agencies
State and political subdivisions 27,411 25,789 26,712
Other securities 11,065 13,701 14,198
--------------------------------
Total Securities $ 89,017 $ 83,025 $103,486
--------------------------------
<PAGE>
The following table sets forth the maturity distribution and weighted
average yields of the investment portfolio of James River and it subsidiaries at
December 31, 1998. The weighted average yields are calculated on the basis of
book value of the investments portfolio and on the interest income of
investments adjusted for amortization of premium and accretion of discount.
Yields on tax-exempt investments have been computed on a tax equivalent basis
assuming a federal tax rate of 34%.
Maturities of Investments
December 31, 1998
--------------------------------
Weighted
Book Market average
Value Value yield
----- ----- -----
(Dollars in thousands)
U.S. Treasury securities
One year or less $ 2,353 $ 2,379 4.46%
After one year to five years 4,131 4,310 4.65%
After five years to ten years 514 523 4.72%
After ten years - -
-------- -------
Total 6,998 7,212 4.59%
-------- -------
Federal agency securities
One year or less 1,260 1,254 6.37%
After one year to five years 28,210 28,419 5.34%
After five years to ten years 5,068 5,057 5.90%
After ten years 8,202 8,269 6.06%
-------- -------
Total 42,740 42,999 5.68%
-------- -------
State and political subdivisions
securities
One year or less 2,197 2,220 5.14%
After one year to five years 10,493 10,795 5.66%
After five years to ten years 13,647 14,054 6.26%
After ten years 696 717 6.59%
-------- ------
Total 27,033 27,786 5.94%
-------- ------
Federal Reserve Bank Stock and other
equity stock
One year or less - -
After one year to five years - -
After five years to ten years - -
After ten years 3,047 3,069 -
-------- -------
Total 3,047 3,069 -
-------- -------
Other debt securities
One year or less 100 102 6.12%
After one year to five years 509 522 5.12%
After five years to ten years - - -
After ten years 7,372 7,555 6.41%
-------- --------
Total 7,981 8,179 6.34%
-------- --------
Total securities 87,799 89,245 5.68%
-------- --------
Unrealized gain on securities
available-for-sale 1,218 -
-------- --------
Total securities at period end $ 89,017 $89,245
-------- --------
<PAGE>
Deposits
James River's banking subsidiaries primarily use deposits to fund their
loan and investment portfolios. Since the end of 1996, as demonstrated below,
James River's banking subsidiaries have continued to experience deposit growth,
especially in interest bearing checking, non-interest bearing checking, and time
deposits. Average balances in total deposits increased from $268.1 million in
1995 to $321 million in 1996, a growth of $52.9 million or 19.8%. Approximately
60% of the increase in average total deposits in 1996 was attributable to the
deposit base purchased by JRB in the Franklin and Courtland branches. For the
comparable period ending December 31, 1997, average total deposits increased
$22.2 million or 6.9%. For the period ending December 31, 1998, average total
deposits increased $14.4 million, or 4.1%.
The following table details the average amount of, and the average rate
paid on, the following primary deposit categories for James River's banking
subsidiaries for the periods indicated.
Average Deposits and Average Rates Paid
Years ended December 31,
---------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in thousands)
Interest-bearing deposits:
Checking $ 47,956 2.83% $ 37,023 2.56% $ 36,242 2.67%
Money market savings 23,135 3.52% 23,391 3.22% 23,035 3.31%
Regular savings 46,087 3.26% 48,601 3.35% 47,613 3.42%
Certificates of
deposit:
$100,000 and over 33,588 3.78% 29,396 4.59% 24,834 5.61%
Under $100,000 164,233 5.92% 165,010 5.75% 155,254 5.66%
-------- -------- -------
Total interest-bearing
deposits 314,999 4.66% 303,421 4.67% 286,978 4.72%
Non-interest bearing 42,575 39,789 34,059
-------- -------- -------
Total deposits $ 357,574 4.10% $ 343,210 4.12% $ 321,037 4.22%
========= ========= =========
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more for James River's banking subsidiaries as
of December 31, 1998:
Maturities of CDs of $100,000 or More
at December 31, 1998
<TABLE>
<CAPTION>
Amount Percent
------ -------
<S> <C> <C>
(Dollars in thousands)
Three months or less $ 7,109 20.7%
Over three months to twelve months 15,008 43.7%
Over twelve months 12,190 35.5%
---------- -----
34,307 100.0%
========== ======
</TABLE>
Certificates of deposit in amounts of $100,000 or more at December 31,
1998 and 1997 were $34.3 million and $32.9 million, respectively. The balance of
$32.9 million at December 31, 1997, represented 16.9% of total certificates of
deposit. The December 31, 1998 amount represents 16.9% of the total certificates
of deposit balance of $203.1 million at that date.
James River's banking subsidiaries do not accept brokered deposits, and
all large certificates of deposit are community based.
<PAGE>
Short-Term Borrowings
James River's banking subsidiaries occasionally find it necessary to
purchase federal funds on a short-term basis due to fluctuations in loan and
deposit levels. James River's banking subsidiaries have several arrangements
pursuant to which they may purchase funds. Borrowings of James River's banking
subsidiaries include the purchase and sale of federal funds, and securities sold
under repurchase agreements. Set forth below are short term borrowings for James
River's banking subsidiaries at the periods indicated.
Short-Term Borrowings
Years ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Average daily amount of short-term
borrowings outstanding during the period $ 831 $ 620 $ 396
Weighted average interest rate on average
daily short-term borrowings 5.63% 6.45% 5.81%
Maximum outstanding short-term borrowings
outstanding at any month end 1,601 4,000 4,456
Short-term borrowings outstanding at
period end $ 719 $ - $ -
<PAGE>
The following table illustrates average balances of interest-earning assets and
interest-bearing liabilities for James River and its subsidiaries for the period
indicated, showing the average distribution of assets, liabilities,
shareholders' equity, and the related income, expense, and corresponding
weighted average yields and costs. The average balances used for the purposes of
these tables and other statistical disclosures were calculated by using the
daily average balances
Average Balances, Interest Income and Expenses, and Average Yields and Rates
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------- ----------------------- ---------------------------
1998 1997 1996
----------------------------------- ----------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense rate Balance Expense rate Balance Expense rate
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest bearing assets:
Securities:
U.S. Treasury $ 10,034 $ 631 6.29% $ 12,317 $ 784 6.37% $ 15,496 $ 977 6.30%
Federal agency 44,394 2,825 6.36% 40,317 2,546 6.31% 36,669 2,317 6.32%
State and political subdivisions 27,007 1,966 7.28% 25,075 1,916 7.64% 26,709 2,053 7.69%
Federal reserve stock 1,943 142 7.31% 1,732 123 7.10% 1,476 91 6.17%
Other securities 1,888 138 7.31% 12,185 839 6.89% 21,538 1,490 6.92%
------- ------- --------- -------- -------- --------
Total Securities 85,266 5,702 6.69% 91,626 6,208 6.78% 101,888 6,928 6.80%
------- ------- --------- -------- -------- --------
Loans:
Commercial 70,282 6,168 8.78% 66,152 5,959 9.01% 50,209 4,606 9.17%
Real estate-construction 20,186 1,602 7.94% 17,580 1,678 9.54% 11,230 1,099 9.79%
Real estate-mortgage 151,926 13,330 8.77% 146,564 12,732 8.69% 143,227 12,182 8.51%
Installment 30,448 3,347 10.99% 28,692 3,104 10.82% 23,343 2,562 10.98%
------- ------ --------- -------- -------- --------
Total Loans 272,842 24,447 8.96% 258,988 23,473 9.06% 228,009 20,449 8.97%
------- ------ --------- -------- -------- --------
Interest bearing deposits in
other banks 9,668 553 5.72% 2,161 163 7.54% 1,690 147 8.70%
Federal funds sold 10,020 556 5.55% 6,488 373 5.75% 6,653 363 5.46%
------- ------ --------- -------- -------- --------
Total money market investments 19,688 1,109 5.63% 8,649 536 6.20% 8,343 510 6.11%
------- ------ --------- -------- -------- --------
Total interest-earning assets/
total interest income 377,796 31,258 8.27% 359,263 30,217 8.41% 338,240 27,887 8.24%
------- ------- --------- -------- -------- --------
Non-interest earning assets:
Cash and due from banks 13,029 12,743 11,608
Other assets 8,615 8,729 7,315
Less: Allowance for loan losses (3,621) (3,379) (3,033)
Fixed assets 9,119 8,477 6,918
--------- --------- --------
Total non-interest earning assets 27,142 26,570 22,808
--------- --------- --------
Total Assets $ 404,938 $ 385,833 $361,048
========= ========= ========
Liabilities and shareholders' equity:
Interest bearing liabilities:
Interest bearing deposits:
Checking $ 47,956 $ 1,355 2.83% $ 37,023 $ 949 2.56% $ 36,242 $ 966 2.67%
Money market savings 23,135 815 3.52% 23,391 753 3.22% 23,035 762 3.31%
Regular savings 46,087 1,503 3.26% 48,601 1,626 3.35% 47,613 1,627 3.42%
Certificates of deposit:
$100,000 and over 33,588 1,269 3.78% 29,396 1,348 4.59% 24,834 1,392 5.61%
Under $100,000 164,233 9,723 5.92% 165,010 9,481 5.75% 155,254 8,790 5.66%
--------- --------- -------- --------- -------- --------
Total interest bearing deposits 314,999 14,665 4.66% 303,421 14,157 4.67% 286,978 13,537 4.72%
Federal funds purchased & other 831 47 5.66% 620 40 6.45% 396 23 5.81%
--------- --------- -------- --------- -------- --------
Total interest bearing liabilities/
total interest expense 315,830 14,712 4.66% 304,041 14,197 4.67% 287,374 13,560 4.72%
--------- --------- -------- --------- -------- --------
Non-interest bearing liabilities:
Demand deposits 42,575 39,789 34,059
Other liabilities 4,195 3,267 3,579
--------- -------- --------
Total non-interest liabilities 46,770 43,056 37,638
--------- -------- --------
Total liabilities 362,600 347,097 325,012
Shareholders' equity 42,338 38,736 36,036
--------- -------- --------
Total Liabilities and
Shareholders' equity $ 404,938 $385,833 $361,048
========= ======== ========
Interest spread 3.62% 3.74% 3.53%
Net interest income/net interest margin $ 16,546 4.38% $ 16,020 4.46% $ 14,327 4.24%
========= ========= ========
</TABLE>
(1) Tax equivalent adjustments (using 34% federal income tax rates) have been
made in calculating the yields on tax-free loans and investments.
(2) For the purposes of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(3) Daily average balances are calculated using the aggregate daily average
balances on a monthly basis.
(4) The yield/rate of the investment securties is computed using the amortized
cost basis.
<PAGE>
The following table describes the impact on the interest income of James
River and its subsidiaries resulting from changes in average balances and
average rates for the periods indicated. The change in interest due to both
volume and rate has been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
Rate and Volume Analysis
Years ended December 31,
------------------------------------------------------------------------------------------------------
1998 compared to 1997 1997 compared to 1996
------------------------------------------------------------------------------------------------------
Change Due To: Change Due To:
Increase Increase
(Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities:
U.S. Treasury $ (153) $ (8) $ (145) $ (193) $ 7 $ (200)
Federal agency 279 22 257 229 (2) 231
State and political
subdivisions 50 (98) 148 (137) (11) (126)
Federal Reserve stock 19 4 15 32 16 16
Other equity securities (701) 8 (709) (651) (4) (647)
------ ------ ------- ------ ----- -------
Total Securities (506) (72) (434) (720) 6 (726)
------ ------ ------- ------ ----- -------
Loans:
Commercial 209 (163) 372 1,353 (110) 1,463
Real estate-construction (76) (325) 249 579 (42) 621
Real estate-mortgage 598 132 466 550 266 284
Installment 243 53 190 542 (45) 587
------ ------ ------- ------ ----- -------
Total Loans 974 (303) 1,277 3,024 69 2,955
------ ------ ------- ------ ----- -------
Interest bearing deposits
in other banks 390 (176) 566 16 (25) 41
Federal funds sold 183 (20) 203 10 19 (9)
------ ------ ------- ------ ----- -------
Total money market
investments 573 (196) 769 26 (6) 32
------ ------ ------- ------ ----- -------
Total interest income 1,041 (571) 1,612 2,330 69 2,261
------ ------ ------- ------ ----- -------
Interest expense:
Interest bearing deposits:
Checking 406 126 280 (17) (38) 21
Money market savings 62 70 (8) (9) (21) 12
Regular savings (123) (39) (84) (1) (35) 34
Certificates of deposit:
$100,000 and over (79) (271) 192 (44) (300) 256
Under $100,000 242 287 (45) 691 139 552
------ ------ ------- ------ ----- -------
Total interest bearing
deposits 508 173 335 620 (255) 875
------ ------ ------- ------ ----- -------
Federal funds purchased 7 (7) 14 17 4 13
------ ------ ------- ------ ----- -------
Total interest expense 515 166 349 637 (251) 888
------ ------ ------- ------ ----- -------
Net interest income $ 526 $ (737) $ 1,263 $ 1,693 $ 320 $ 1,373
====== ====== ======= ======= ===== =======
</TABLE>
<PAGE>
Interest Sensitivity
An important element of both earnings performance and liquidity is
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
in a specific time interval. The gap can be managed by repricing assets or
liabilities, by selling investments held for sale, by replacing an asset or
liability at maturity, or by adjusting the interest rate during the life of an
asset or liability. Matching the amounts of assets and liabilities repricing in
the same time interval helps to hedge the interest rate risk and minimize the
impact on net interest income in periods of rising or falling interest rates.
James River's banking subsidiaries evaluate interest sensitivity risk and
then formulate guidelines regarding asset generation and pricing, funding
sources and pricing, and off-balance sheet commitments in order to decrease
sensitivity risk. These guidelines are based upon management's outlook regarding
future interest rate movements, the state of the regional and national economy,
and other financial and business risk factors.
On December 31, 1998, James River and it subsidiaries had $80.7 million
more in liabilities than assets that repriced within three months or less and
was, therefore, in a liability-sensitive position. Positive gaps can affect
earnings adversely in a period of falling rates, while negative gaps can
adversely impact earnings in a period of rising rates. To reduce the impact of
shifts in prevailing interest rates, $107.7 million of the loan portfolio of
James River's banking subsidiaries at December 31, 1998, had a repricing
frequency of less than one year. Moreover, as of December 31, 1998, James River
and its banking subsidiaries collectively held $80.2 million in investments held
as "Available for Sale" which could be sold quickly to meet any special funding
needs.
<PAGE>
The following table illustrates the interest sensitivity gap position of
James River and its subsidiaries as of December 31, 1998. This table presents a
position that existed at one particular day, that changes continually, and that
is not necessarily indicative of James River's position at any other time.
Interest Sensitivity Analysis
December 31, 1998
Maturity or Repricing In:
------------------------------------------
3 Months 4-12 1-5 Over
or Less Months Years 5 Years
------- ------ ----- -------
(Dollars in thousands)
Interest-sensitive assets:
Loans $ 72,834 $ 34,821 $116,471 $ 55,192
Securities 600 5,355 44,019 39,043
Federal Funds sold 10,809 - - -
------- ------- ------- -------
Total interest-sensitive
assets $ 84,243 $ 40,176 $160,490 $ 94,235
======= ======= ======= ======
Cumulative interest-sensitive
assets $ 84,243 $ 124,419 $284,909 $379,144
======= ======= ======= =======
Interest-sensitive liabilities:
NOW accounts $ 58,187 $ - $ - $ -
Regular savings 44,037 - - -
Certificates of deposit 42,172 89,570 70,416 985
Money market savings 20,600 - - -
------- ------- -------- -------
Total interest-sensitive
liabilities $164,996 $ 89,570 $ 70,416 $ $ 985
======= ======= ======= ======
Cumulative interest-sensitive
liabilities $164,996 $ 254,566 $324,982 $325,967
======== ======= ======= =======
Period gap $(80,753) $ (49,394) $ 90,074 $ 93,250
======== ======= ====== ======
Cumulative gap $(80,753) $(130,147) $(40,073) $ 53,177
======== ======= ======= ======
Ratio of cumulative
interest-sensitive assets to
interest-sensitive
liabilities 51.06% 48.87% 87.67% 116.31%
Ratio of cumulative gap to (0.19) (0.31) (0.10) 0.13
total assets
Return on Equity and Assets
The following table summarizes ratios for James River and its subsidiaries
considered to be significant indicators of James River's profitability and
financial condition during the periods indicated:
Return on Equity and Assets
Years ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
Return on average assets 1.06% 0.99% 0.67%
Return on average equity 10.18% 9.82% 6.71%
Dividend payout ratio 36.15% 36.05% 52.80%
Average equity to average
asset ratio 10.46% 10.04% 9.98%
<PAGE>
Market Area and Competition
James River has four operating bank subsidiaries with a total of 24
banking offices that conduct operations from the Tidewater region of
Southeastern Virginia to the tri-city areas of Hopewell, Petersburg and Colonial
Heights in South-central Virginia. All of James River's subsidiaries operate in
highly competitive environments, competing for deposits and loans with other
financial institutions, many of which possess greater financial resources than
those available to James River's subsidiaries. Certain of these institutions
have higher lending limits than James River's subsidiaries and may provide
various services for their customers which James River's subsidiaries do not
offer directly to their customers. In addition, there can be no assurance that
other financial institutions, with substantially greater resources than James
River's subsidiaries, will not establish operations in their respective service
areas.
Supervision and Regulation of James River's Banking Subsidiaries
James River's subsidiaries are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions and provide
for general regulatory oversight with respect to virtually all aspects of their
operations. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of James River.
All four of James River's banking subsidiaries are state chartered banks
and members of the Federal Reserve System. As such, all are subject to
supervision, examination and regulation by the Virginia Bureau of Financial
Institutions and the Federal Reserve. With the exception of FCB, the banking
subsidiaries' deposits are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation ("FDIC"). FCB's deposits continue to be
insured by the Savings Association Insurance Fund ("SAIF") following its
conversion from a federal savings bank to a Virginia state bank.
Federal and state banking laws and regulations govern all areas of the
operations of the banking subsidiaries, including maintenance of cash reserves,
loans, mortgages, maintenance of minimum capital, payment of dividends, and
establishment of branch offices. Federal and state bank regulatory agencies also
have the general authority to eliminate dividends paid by insured banks if such
payment is deemed to constitute an unsafe or unsound practice. The Federal
Reserve has authority to impose penalties, initiate civil administrative
actions, and take other steps to prevent the bank subsidiaries from engaging in
unsafe or unsound practices. In this regard, the Federal Reserve has adopted
capital adequacy requirements applicable to its member banks.
Supervision and Regulation of James River
General. As a bank holding company, James River is subject to state and
federal banking and bank holding company laws and regulations which impose
specific requirements or restrictions and provide for general regulatory
oversight with respect to virtually all aspects of its operations.
Bank Holding Companies. As a bank holding company registered under the
Bank Holding Company Act ("BHC Act"), James River is subject to regulation by
the Federal Reserve. The Federal Reserve has jurisdiction under the BHC Act to
approve any bank or non-bank acquisition, merger or consolidation proposed by a
bank holding company.
The Federal Reserve may require a bank holding company to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee" provisions of
the federal law require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
SAIF or the BIF as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC's claim
for damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions. James River also is
registered under the bank holding company laws of Virginia. Accordingly, James
River and its subsidiaries are subject to regulation and supervision by the BIF.
<PAGE>
Capital Requirements. The Federal Reserve, the Office of the Comptroller
of the Currency and the FDIC have issued substantially similar risk-based and
leverage capital guidelines applicable to United States banking organizations.
In addition, those regulatory agencies may from time to time require that a
banking organization maintain capital above the minimum levels because of its
financial condition or actual or anticipated growth. Under the risk-based
capital requirements of these federal bank regulatory agencies, James River and
its subsidiaries are required to maintain a minimum ratio of total capital to
risk-weighted assets of at least 8%. At least half of the total capital is
required to be "Tier 1 capital," which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangible
assets and other adjustments. The remainder, "Tier 2 capital", consists of a
limited amount of subordinated and other qualifying debt (including certain
hybrid capital instruments) and a limited amount of the general loan loss
allowance. The Tier 1 and total capital to risk-weighted assets ratios of James
River as of December 31, 1998 were 15.6% and 16.9%, respectively, exceeding the
minimums required.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The leverage ratio
of James River as of December 31, 1998, was 9.8%. The guidelines also provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
The following table sets forth in detail the various capital ratios of
James River and its subsidiaries on a consolidated basis at the dates indicated.
Analysis of Capital
December 31,
-------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 18,607 $ 18,363 $ 12,290
Additional Paid Capital 3,878 3,572 3,521
Retained earnings 20,414 17,663 21,629
Less: Intangibles (2,236) (2,504) (2,750)
------- ------- -------
Total Tier 1 capital $ 40,663 $ 37,094 $ 34,690
======= ======= =======
Tier 2 Capital:
Allowance for loan losses 3,260 3,151 2,702
------ ------ -------
Total Tier 2 capital $ 3,260 $ 3,151 $ 2,702
====== ====== =======
Total Risk-Based Capital $ 43,923 $ 40,245 $ 37,392
======= ======= =======
Risk-weighted assets $260,267 $252,115 $216,158
Capital Ratios:
Tier 1 risk-based capital
ratio 15.62% 14.71% 16.05%
Total risk-based capital
ratio 16.88% 15.96% 17.30%
Tier 1 capital to average
adjusted total assets 9.84% 9.68% 9.68%
<PAGE>
Deposit Insurance. The deposits of the Company's banking subsidiaries are
insured up to $100,000 per insured depositor (as defined by law and regulation)
by the FDIC through the SAIF and the BIF. The SAIF and the BIF are administered
and managed by the FDIC. As insurer, the FDIC is authorized to conduct
examinations of and to require reporting by SAIF and BIF-insured institutions.
FIRREA also authorizes the FDIC to prohibit any SAIF and BIF-insured institution
from engaging in any activity that the FDIC determines by regulation or order to
pose a serious threat to the SAIF and BIF.
Section 38 of the Federal Deposit Insurance Act, as amended by the Federal
Deposit Insurance Corporation Improvement Act ("FDICIA"), requires that the
federal banking agencies establish five capital levels for insured depository
institutions - "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and, "critically undercapitalized" - and
requires or permits such agencies to take certain supervisory actions as an
insured institution's capital level falls. The Company has been notified by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
that it is classified as a "well capitalized" institution for this purpose.
Governmental Monetary Policies and Economic Controls. James River and its
banking subsidiaries are affected by monetary policies of regulatory
authorities, including the Federal Reserve, which regulates the national money
supply in order to mitigate recessionary and inflationary pressures. Among the
techniques available to the Federal Reserve are engaging in open market
transactions in United States Government securities, changing the discount rate
on bank borrowings, and changing reserve requirements against bank deposits.
These techniques are used in varying combinations to influence the overall
growth of bank loans, investments and deposits. Their use may also affect
interest rates charged on loans or paid on deposits. The effect of governmental
policies on the earnings of James River cannot be predicted.
Employees
At December 31, 1998, James River and its subsidiaries had the equivalent
of 232 full time employees. None of the Company's employees are represented by
any collective bargaining unit. James River considers relations with its
employees to be good.
Year 2000 Issue
The information captioned "Year 2000 Project" appearing on pages 11
through 13 of the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report is incorporated herein by
reference.
Item 2. Properties
James River's headquarters are located at 1514 Holland Road, Suffolk,
Virginia. The headquarters are owned by James River. James River does not have
any interest in any other properties other than those owned or leased by its
subsidiaries. James River's four banking subsidiaries collectively own 20 of
their 24 branch banking offices and lease the land for three offices.
Item 3. Legal Proceedings
In the course of its operation, James River and its subsidiaries are
parties to various legal proceedings. James River does not believe that the
outcome of these lawsuits, individually or in the aggregate, will have a
material adverse effect on James River's business, financial position or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to James River's shareholders for a vote during
the fourth quarter of the year ended December 31, 1998.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The information included under "Market Price for Common Stock" appearing
on page 40 of the Annual Report is incorporated herein by reference.
Item 6. Selected Consolidated Financial Data
The information included under "Five Year Financial Summary" appearing on
page 14 of the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing on pages 7 through 13
of the Annual Report is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information captioned "Liquidity and Market Risk" appearing on pages
10 and 11 of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
(a) The Financial Statements and the notes thereto appearing on pages
16 through 37 of the Annual Report are incorporated herein by
reference.
(b) Unaudited quarterly financial information for the Company is
contained in Note 16 on page 37 of the Financial Statements
included in the Annual Report and is incorporated herein by
reference. The quarterly financial information in the Annual Report
is presented on a restated basis and reflects consolidated results
of operations of BOS, JRB, FCB and JRBC for the periods presented.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information regarding James River's decision to change its independent
accountants is contained in Reports on Form 8-K and 8-K/A previously filed with
the Securities and Exchange Commission on February 3, 1999 and March 8, 1999.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Company's Bylaws provide that the number of directors shall be between
seven and seventeen. Directors serve a one year term. In two separate
transactions that closed in February 1996, the Company acquired First Colonial
Bank ("FCB") in Hopewell, Virginia ("FCB Transaction") and Bank of Isle of
Wight, now named James River Bank/Colonial ("Colonial") in Smithfield, Virginia
("Colonial Transaction"), pursuant to which FCB and Colonial became wholly owned
subsidiaries of the Company. In accordance with the respective negotiated terms
of the FCB Transaction and Colonial Transaction, Ben P. Kanak and James C.
Stewart, directors of FCB, and John A. Ramsey, Jr. and Robert E. Spencer, Jr.,
directors of Colonial, were all appointed to the Company's Board of Directors in
March 1996. The separate terms of the FCB Transaction and Colonial Transaction
required that Messrs. Kanak and Stewart, on the one hand, and Messrs. Ramsey and
Spencer, on the other hand, be nominated for election as directors at the
Company's 1997 and 1998 Annual Meetings to serve a one year term. For
information regarding an Early Retirement Agreement between FCB and James C.
Stewart, see "Item 11. Executive Compensation - Stewart Retirement Agreement."
The following information relates to the Company's directors and executive
officers. There are no family relationships among any of the directors, except
that Mr. Elmon Gray is the father of Mr. Bruce Gray, nor is there any
arrangement or understanding between any director pursuant to which the director
was elected, except as otherwise described above with respect to Messrs. Kanak,
Stewart, Ramsey and Spencer.
Harold U. Blythe, 56, the Company's President and Chief Executive Officer,
has been an executive officer and director of the Company since it was initially
organized in December 1994. From 1989 until 1997, Mr. Blythe was President and
Chief Executive Officer of Bank of Suffolk ("BOS"), one of the Company's wholly
owned banking subsidiaries. Mr. Blythe also served as a director of BOS from
1989 until 1997. Mr. Blythe is Chairman of the Board of James River Support,
Inc., the Company's non-banking operations subsidiary, and Chairman of the Board
of Mortgage Company of James River, Inc. ("MCJR"), the Company's residential
mortgage lending subsidiary. He is also Chairman of the Board of Family Finance
Corp., a consumer finance subsidiary of the Company. Mr. Blythe is also a
director of Community Bankers Bank, Richmond, Virginia.
James E. Butler, Jr., 73, has been a director of the Company since
December 1994 and a director of BOS since 1973. Mr. Butler is the President of
Butler Paper Company.
Bruce B. Gray, 45, the Company's Vice Chairman, has been a director of the
Company since December 1994. From 1993 until 1997, he was Chairman of the Board
of James River Bank ("JRB"), one of the Company's wholly owned banking
subsidiaries, and served as a director of JRB from 1977 until 1997. Mr. Bruce
Gray is Vice President of Gray Lumber Co., Gray Land & Timber Co. and Gray Co.
Mr. Bruce Gray is also a partner of Grayland Co. and Gray Loblolly Co.
Elmon T. Gray, 73, has been a director of the Company since December 1994,
and served as the Company's Chairman of the Board from 1994 until 1997. Mr.
Elmon Gray was a director of JRB from 1949 until 1996, serving as Chairman of
the Board from 1977 to 1993. Mr. Elmon Gray has been President of Gray Lumber
Co. since 1952 and President of Gray Co. since 1993. He was President of Gray
Land & Timber Co. from 1992 until 1993. Mr. Gray is a partner of Grayland Co.
and Gray Loblolly Co.
Horace R. Higgins, Jr., 51, was elected as a director of the Company in
1998 and has been President of Higgins Trucking Company for over 26 years. Mr.
Higgins served as director of JRB from 1984 until 1998.
<PAGE>
G. P. Jackson, 72, the Company's Chairman of the Board, has been a
director of the Company since December 1994. Mr. Jackson also is currently the
Chairman of the Board of BOS and has been a director of BOS since 1967. Mr.
Jackson is engaged in real estate rentals and contracting, and serves as
President of G.P. Jackson, Inc., Jackson & Jackson Bros., Inc., Holland and
Jackson, Inc. and Suffolk Glass, Inc.
Ben P. Kanak, 76, was appointed to the Board of Directors in March 1996
after consummation of the FCB Transaction as described above. Mr. Kanak is
currently Chairman of the Board of Directors of FCB, a position he has held
since 1982. Mr. Kanak has been a director of FCB since FCB was formed in 1972.
Mr. Kanak also serves as a member of the Board of Directors of Plant Food
Products, Inc. Mr. Kanak has been an independent farmer since 1942.
John A. Ramsey, Jr., 69, was appointed to the Board of Directors in March
1996 after consummation of the Colonial Transaction as described above. Mr.
Ramsey has been Chairman of the Board of Directors of Colonial since 1991, and
is a charter director of Colonial having served as a director since 1971. Mr.
Ramsey is a farmer, and has been President of Ramsey Brothers, Inc. since 1991,
which farms numerous properties in and around Isle of Wight County, Virginia. He
has also been President of Prescription Fertilizer, Inc. since 1991.
Robert E. Spencer, Jr., 57, was appointed to the Board of Directors in
March 1996 after consummation of the Colonial transaction. Mr. Spencer is a
Senior Vice President of the Company and is responsible for bank investments and
asset/liability management, a position to which he was appointed in 1997. Mr.
Spencer served Colonial as a director and President and Chief Executive Officer
from 1986 until 1997. He is also a director of MCJR.
James C. Stewart, 60, was appointed to the Board of Directors in March
1996 after the consummation of the FCB Transaction. Mr. Stewart has been a
director, President and Chief Executive Officer of FCB since 1973. Mr. Stewart
is also a director of MCJR and Family Finance Corp. Mr. Stewart has entered into
an Early Retirement Agreement with FCB. See "Item 11. Executive Compensation -
Stewart Retirement Agreement."
Donald W. Fulton, Jr., 52, is the Company's Senior Vice President and
Chief Financial Officer, a position to which he was appointed in January 1998.
He is also the Treasurer of MCJR. From 1968 to October 31, 1997, Mr. Fulton
served as an executive officer of Jefferson Bankshares, Inc. of Charlottesville,
Virginia as its Vice President-Investor Relations. Jefferson Bankshares was
acquired by Wachovia Corporation on October 31, 1997. From that date through
December 31, 1997, Mr. Fulton was employed by Wachovia on merger transition
activities pertaining to financial reporting, corporate communications, and
corporate securities matters.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors, officers and persons who beneficially own more than 10% of a
registered class of equity securities of the Company to file initial reports of
ownership (Forms 3) and reports of changes in beneficial ownership ( Forms 4 and
5) with the Securities and Exchange Commission ("SEC") and NASDAQ. Such persons
are also required under the rules and regulations promulgated by the SEC to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on a review of the copies of such forms furnished to the Company, the
Company believes that all reporting requirements under Section 16(a) for 1998
were met in a timely manner by its directors, officers and greater than 10%
beneficial owners, except that sales of Company common stock by James C. Stewart
which took place in May and June 1998 and a transfer by him of Company common
stock which took place in September 1998 were not reported on a Form 4, but were
reported on a Form 5 on February 12,1999.
<PAGE>
Item 11. Executive Compensation.
The following table presents an overview of executive compensation paid by
the Company and its subsidiaries during 1998, 1997 and 1996 to Harold U. Blythe,
President and Chief Executive Officer of the Company and to the three other
executive officers of the Company whose combined salary and bonus exceeded
$100,000 in 1998 ( collectively the "Named Executive Officers"). No other
executive officer of the Company or any banking subsidiary received combined
salary and bonus in excess of $100,000 during 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Securities
Underlying All other
Name and principal positon Year Salary($) Bonus($) Options(#) Compensation
- ---------------------------------------- ------------- ----------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Harold U. Blythe, President and CEO 1998 $ 140,184 $16,272 (1) 0 $ 12,213 (2)
of the Company 1997 136,224 13,622 (1) 0 14,701 (2)
1996 132,000 (3) 6,600 37,500 (4) 18,882 (5)
Robert E. Spencer, Jr. Senior Vice 1998 106,980 (6) 12,838 (1) 0 9,628 (2)
President - Bank Investments and 1997 104,425 16,082 (1) 0 9,002 (2)
Asset/Liability Management 1996 95,656 4,963 22,500 (4) 6,192 (2)
Donald W. Fulton, Jr., Senior Vice 1998 102,000 (7) 12,240 (1) 22,500 (4) 20,456 (8)
President and Chief Financial Officer
James C. Stewart, President of FCB (9) 1998 137,566 (10) 9,428 (1) 0 10,114 (2)
1997 134,671 (11) 32,179 (12) 0 11,974 (1)
1996 126,960 (13) - 22,500 (4) 22,191 (14)
</TABLE>
(1) Paid pursuant to the Company's Cash Bonus Program. See "-Cash Bonus Program"
below.
(2) Consists of Company contributions to 401(k) and Profit Sharing Plan.
(3) Includes $22,800 of director fees paid by the Company and BOS
(4) Options granted pursuant to the 1996 Employee Stock Option Plan. See "-1996
Employee Stock Option Plan" below.
(5) Consists of premiums paid for life insurance policies and contributions to
401(k) Plan.
(6) Includes $24,012 of director fees paid by the Company and Colonial.
(7) Mr. Fulton joined the Company in January 1998.
(8) Consists of $15,754 of relocation and moving expenses paid pursuant to
the Fulton Employment Agreement described in "-Executive Officer Employment
Agreements" below. Also includes $4,702 of Company contributions to 401(k)
and Profit Sharing Plan.
(9) Pursuant to the terms of an Early Retirement Agreement, Mr. Stewart has
resigned as an employee of FCB and director of FCB and the Company effective
May 26, 1999. See "Stewart Retirement Agreement" below.
(10)Includes $25,325 of director fees paid by the Company and FCB.
(11)Includes $25,500 of director fees paid by the Company, FCB and FCB's
subsidiaries.
(12)Consists of (i) $10,519 bonus for 1996 paid in January 1997 and (ii) $21,660
bonus for 1997 paid in December 1997 pursuant to the Cash Bonus Program.
(13)Includes $23,500 of director fees paid by the Company and FCB.
(14)Consists of funding of FCB's ESOP and life insurance premiums paid by FCB
to fund Mr. Stewart's supplemental income plan. Also includes contributions
to 401(k) Plan.
<PAGE>
Option Grants in Last Fiscal Year
The table below sets forth information regarding stock option grants to
Donald W. Fulton, Jr. during the fiscal year ended December 31,1998. No other
stock options were granted to Named Executive Officers in 1998.
<TABLE>
<CAPTION>
Number % of total
of Securities Options
Underlying Granted to
Options Employees in Exercise Expiration Grant Date
Name Granted Fiscal Year Price Date Present Value($)
- ---- ------- ----------- ----- ---- ----------------
<S> <C> <C> <C> <C> <C>
Donald W. Fulton, Jr. 22,500 60% $21.45 02/25/08(1) $367,875 (2)
</TABLE>
- -------------
(1) 4,500 option shares vested on February 26, 1999. The remaining option
shares vest in 4 tranches of 4,500 shares each on February 26, 2000, 2001,
2002 and 2003. Each tranche expires if unexercised on February 25, 2008.
(2) Value determined using the Black-Scholes option pricing model with the
following weighted average assumptions: dividend yield of 2.2%, expected
volatility of 24%, risk free interest rate of 5.5% and expected life of 5
years. The actual value, if any, that may be realized on the options will
depend on the excess of the stock price over the exercise price on the date
the option is exercised. Accordingly, there can be no assurance that the
value realized on the options will be at or near the value estimated by the
Black-Scholes model.
Aggregate Option Exercises and Fiscal Year End Option Values
The table below sets forth information regarding stock options exercised
by Named Executive Officers in 1998 and exerciseable and unexerciseable stock
options held as of December 31, 1998, by the Named Executive Officers. All of
these options were granted pursuant to the Company's 1996 Employee Stock Option
Plan except as otherwise indicated.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options
Shares at Fiscal Year-End (#) At Fiscal Year-End (#)(1)
Acquired --------------------- -------------------------
Upon Value
Name Exercise(#) Realized($) Exerciseable Unexerciseable Exerciseable Unexerciseable
- ---- ---------- ---------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Harold U. Blythe 2,642 $10,092(2) 12,358 22,500 $48,691(3) $88,650(3)
Robert E. Spencer, Jr. 0 0 9,000 13,500 35,460(3) 53,190(3)
Donald W. Fulton, Jr. 0 0 0 22,500 0 -(4)
James C. Stewart 6,880 118,542(5) 29,640(6) 13,500 246,607(6) 53,190(3)
</TABLE>
- -------------------
(1) The closing sale price of the Company's Common Stock on NASDAQ/NMS on
December 31, 1998 was $17.50 per share.
(2) Mr. Blythe exercised the options in March, 1998 at an exercise price of
$13.56 per share.On the date of exercise, the closing price of the Company's
Common Stock on NASDAQ/NMS was $17.38.
(3) The exercise price of these options is $13.56 per share.
(4) The exercise price of these options is $21.45 per share.
(5) Mr. Stewart exercised the options in April, 1998 at an exercise price of
$7.27 per share. On the date of exercise, the closing price of the Company's
Common Stock on NASDAQ/NMS was $24.50.
(6) Includes 20,640 options which were originally granted by FCB and were
converted into options to buy the Company's Common Stock when the Company
acquired FCB in February 1996. The exercise price of these options is $7.27
per share. Also includes 9,000 options granted pursuant to the Company's
1996 Employee Stock Option Plan, the exercise price of which is $13.56 per
share. On March 16, 1999, Mr. Stewart exercised a total of 43,140 options
pursuant to the terms of an Early Retirement Agreement described in
"-Stewart Retirement Agreement" below.
<PAGE>
Compensation of Directors
Other than Mr. Stewart, directors of the Company who are also employees of
the Company or its subsidiaries do not receive director fees. Mr. Stewart and
the non-employee directors who serve on the Executive Committee are paid a fee
of $1,500 per month and non-employee directors who do not serve on the Executive
Committee are paid a fee of $1,000 per month. The Chairman of the Board of the
Company, who serves on the Executive Committee, is paid a fee of $1,700 per
month. Directors also receive annual retainers and monthly fees if they serve on
the Boards of the Company's subsidiary banks. The fees are based on the asset
sizes of those banks and are payable in accordance with the following schedule:
ASSETS: $0-50 $51-100 $101-150 $151-200
--------------------------------------------------
(dollars in millions)
--------------------------------------------------
FEES:
Annual Retainer payable monthly $2,400 $3,000 $3,600 $4,200
Monthly board meeting 100 150 200 250
Board Chairman per board monthly 150 200 250 300
Committee meeting 50 75 100 125
In addition to the fees payable above, Mr. Jackson also receives $600 per
month from BOS, of which he is Chairman of the Board, for appraisal review
services. Directors of the Company currently have the option of receiving
registered shares of Common Stock of the Company in lieu of receiving cash
payments for director fees.
Executive Officer Employment Agreements
Harold U. Blythe, a director and the President and Chief Executive Officer
of the Company is currently compensated pursuant to an Employment Agreement
("Blythe Employment Agreement") that was entered into in June 1995 in connection
with the capitalization and formation of the Company by BOS and JRB. The Blythe
Employment Agreement has a term of seven years, commencing on July 1, 1995. In
1995, the Compensation Committee of the Board of Directors ("Compensation
Committee") established an initial annual salary of $109,200 under the Blythe
Employment Agreement which can be adjusted periodically, provided that no
adjustment can be made that would provide for a salary lower than the original
$109,200. Mr. Blythe's current annual salary under the Blythe Employment
Agreement is $142,968, which includes amounts formerly payable to Mr. Blythe as
director fees that are now paid as salary. The Blythe Employment Agreement
provides that in the event of a change of control of the Company following which
Mr. Blythe is not given reasonably equivalent, acceptable duties and
responsibilities as he had prior to the change of control, Mr. Blythe may be
terminated or resign, and, in either such case, Mr. Blythe is entitled to
receive 2.99 times his annual base compensation then being paid to him pursuant
to the Blythe Employment Agreement. In the event the Company terminates Mr.
Blythe's employment without cause, and provided that Mr. Blythe does not
thereafter compete with the Company, the Blythe Employment Agreement provides
that Mr. Blythe will receive his regular compensation for a period of one year
following termination, or during the remaining term of the agreement, whichever
is less.
Effective May 1, 1996, the Company and Mr. Blythe entered into a deferred
compensation agreement ("Blythe Deferred Agreement"). The Blythe Deferred
Agreement provides for the payment of certain retirement, death and disability
benefits. The retirement benefit is payable if Mr. Blythe retires at any time
after age 60. Thereafter, the Company will pay Mr. Blythe or his beneficiaries a
base monthly benefit of $2,000 per month for 120 consecutive months. The monthly
payment is subject to upward or downward adjustment based on cost of living
increases or decreases. In the event that Mr. Blythe dies before his retirement
date, the Company will pay $5,000 per month for 120 consecutive months to Mr.
Blythe's designated beneficiary. In the event Mr. Blythe's employment with the
Company terminates prior to retirement as a result of disability, the Company
will pay Mr. Blythe a disability benefit of $3,166 per month.
<PAGE>
The disability benefit will continue throughout the period of disability or
until Mr. Blythe reaches age 60, at which time Mr. Blythe will commence
receiving the retirement benefit described above. In addition, in the event Mr.
Blythe terminates his employment with the Company for any reason other than
death or disability prior to attaining age 60, the Company will pay Mr. Blythe a
lump sum termination benefit. Commencing May 1, 1998, the termination benefit is
$25,000 and increases by $25,000 on May 1 of each year thereafter for a total of
a $100,000 termination benefit should Mr. Blythe terminate employment under the
conditions described in the preceding sentence between May 1, 2001 and April 30,
2002. After May 1, 2002, Mr. Blythe is eligible for full retirement benefits.
Mr. Blythe's deferred compensation arrangement is funded by a life insurance
policy on the life of Mr. Blythe for which the Company pays premiums and is the
beneficiary. Finally, the benefits provided under the Blythe Deferred Agreement
will immediately vest and become nonforfietable in the event of a
Change-in-Control of the Company as defined in the agreement.
The Company has also entered into an employment agreement with Robert E.
Spencer, Jr. ("Spencer Employment Agreement"). The Spencer Employment Agreement,
which was initially entered into in connection with the Colonial Transaction
described in "Item 10 - Directors and Executive Officers of the Registrant", has
an initial five year term that commenced in 1996. The Company is currently
paying Mr. Spencer a base salary of $109,104 under the Spencer Employment
Agreement. If Mr. Spencer is terminated without cause, the Spencer Employment
Agreement provides that he will continue to receive his salary for a period of
one year following termination of employment. The Spencer Employment Agreement
also contains a change of control provision that is the same as that provided
for in the Blythe Employment Agreement.
Effective September 1, 1998, the Company and Mr. Spencer entered into a
deferred compensation agreement ("Spencer Deferred Agreement"). The Spencer
Deferred Agreement provides for the payment of certain retirement, death and
disability benefits. The retirement benefit is payable if Mr. Spencer retires
any time after the age of 62. Thereafter, the Company will pay Mr. Spencer or
his beneficiaries a base monthly benefit of $2,000 per month for 120 consecutive
months. The monthly payment is subject to upward or downward adjustment based on
cost of living increases or decreases. In the event Mr. Spencer dies before his
retirement date, the Company will pay $5,000 per month for 120 consecutive
months to Mr. Spencer's designated beneficiary. In the event Mr. Spencer's
employment terminates prior to retirement as a result of disability, the Company
will pay Mr. Spencer a disability benefit of $3,000 per month. The disability
benefit will continue throughout the period of disability or until Mr. Spencer
reaches age 62, at which time Mr. Spencer will commence receiving the retirement
benefit described above. Finally, in the event Mr. Spencer terminates his
employment with the Company for any reason other than death or disability prior
to attaining age 62, the Company will pay a lump sum termination benefit.
Commencing September 1, 2000, the termination benefit is $50,000 and increases
by $25,000 on September 1 for each year thereafter for a total of a $100,000
termination benefit should Mr. Spencer terminate employment under the conditions
described in the preceding sentence between September 1, 2002 and August 31,
2003. After September 1, 2003, Mr. Spencer is eligible for full retirement
benefits. Mr. Spencer's deferred compensation agreement is funded by a life
insurance policy on the life of Mr. Spencer for which the Company pays the
premiums and is the beneficiary. The Spencer Deferred Agreement contains
Change-in-Control provisions similar to those in the Blythe Deferred Agreement.
On January 1, 1998, the Company entered into an Employment Agreement with
Donald W. Fulton, Jr. ("Fulton Employment Agreement"), pursuant to which Mr.
Fulton serves as the Company's Senior Vice President and Chief Financial
Officer. The initial term of the Fulton Employment Agreement was one year with
successive one year renewals upon the mutual agreement of the Company and Mr.
Fulton. The Fulton Employment Agreement was extended for a second one year term
on January 1, 1999. Under the Fulton Employment Agreement, Mr. Fulton's base
salary is currently $104,040. Pursuant to the Fulton Employment Agreement, the
Company also granted Mr. Fulton options to purchase 22,500 shares of Common
Stock at an exercise price of $21.45 per share. The Fulton Employment Agreement
contains termination of employment and change of control provisions similar to
those contained in the Blythe Employment Agreement.
The Company and Mr. Fulton entered into a deferred compensation agreement
("Fulton Deferred Agreement") on September 1, 1998. The Fulton Deferred
Agreement contains similar terms and provisions as those described above with
respect to the Spencer Deferred Agreement. In the event Mr. Fulton
<PAGE>
terminates his employment for any reason other than death or disability prior to
reaching age 62, the Company will pay a lump sum termination benefit. Commencing
January 1, 2003, the termination benefit is $50,000 and increases $15,000 on
January 1 for each year thereafter for a total of a $125,000 termination benefit
should Mr. Fulton terminate employment under the conditions described in the
preceding sentence between January 1, 2008 and October 31, 2008. After October
31, 2008, Mr. Fulton is eligible for full retirement benefits.
Stewart Retirement Agreement
FCB has entered into an Early Retirement Agreement with James C. Stewart
("Stewart Retirement Agreement"), a director of the Company and the President
and Chief Executive Officer of FCB. Under the terms of the Stewart Retirement
Agreement, Mr. Stewart's last day of employment with FCB and last day of service
as a director of FCB and the Company will be May 26, 1999. FCB will pay Mr.
Stewart, over 24 consecutive semi-monthly pay periods, an amount totaling
$140,225, less applicable withholdings required by law. Mr. Stewart will also
receive deferred compensation pursuant to the terms of his Deferred Compensation
Agreement dated November 1, 1988. Deferred compensation payments will commence
June 1, 1999 and will be $40,723 per year over a 15 year period. As long as Mr.
Stewart is receiving payments under the Stewart Retirement Agreement, he will
continue to be bound by the non-competition restrictions contained in his
Employment Agreement with FCB dated February 28, 1997. If Mr. Stewart violates
these non competition restrictions, he will forfeit the right to receive any
payments otherwise due under the Stewart Retirement Agreement.
Compensation Committee Interlocks and Insider Participation
No member of the Company's Compensation Committee was an officer or
employee of the Company during 1998. During 1998, no executive officer of the
Company served as a member of the Compensation Committee of another entity, nor
did any executive officer of the Company serve as a director of another entity,
one whose executive officers served on the Company's Compensation Committee. Two
members of the Compensation Committee, Messrs. Jackson and Butler, have
outstanding loans with certain of the Company's banking subsidiaries. Each of
these loans was made in the ordinary course of business on substantially the
same terms, including interest rates, collateral and repayment terms, as those
prevailing at the time for comparable transactions with unrelated parties and
did not involve more than normal risk of collectibility or present other
unfavorable features. See "Item 13. Certain Relationships and Related
Transactions".
Cash Bonus Program
In 1998, the Compensation Committee of the Company's Board of Directors
adopted specific criteria and parameters for awards of cash bonuses to Executive
Officers, including certain executive officers of the Company's subsidiaries.
Under the Company's cash bonus program ("Bonus Program"), bonuses are paid as a
percentage of base salary. The percentage of salary awarded as a bonus is in
turn based on the Company's or a particular subsidiary's net after tax income.
Executive Officers of the Company receive bonuses based solely on the Company's
overall financial performance. Executive Officers of subsidiaries receive
bonuses based solely on the financial performance of the subsidiaries by which
they are employed and the overall financial performance of the Company.
<PAGE>
The Bonus Program currently provides that, absent special circumstances,
annual salary adjustments will be limited to cost of living increases. In
addition, the maximum bonus under the Bonus Program is 20% of base salary. The
specific criteria, terms and conditions of the Bonus Program are subject to
adjustment at any time by the Compensation Committee. For 1998, a total of
$190,401 in cash bonuses was awarded under the Bonus Program. The chart below
sets forth information regarding the cash bonuses for 1998 received by the Named
Executive Officers:
Name Bonus % of 1998 Base Salary (1)
- ---- ----- -------------------------
Harold U. Blythe $16,272 11.6%
Robert E. Spencer, Jr. $12,838 12.0%
Donald W. Fulton, Jr. $12,240 12.0%
James C. Stewart $ 9,428 8.4%
(1)Percentages relate to 1998 base salary exclusive of director fees that are
included in the Named Executive Officers' salary for purposes of the Summary
Compensation Table. See-"Summary Compensation Table."
1996 Employee Stock Option Plan
During 1995, the Board and the Compensation Committee studied and
considered means by which the Company could award and compensate key employees
of the Company in a manner that would align closely the interests of such key
employees with the interests of the Company's shareholders. In furtherance of
this goal, the Board adopted the 1996 Employee Stock Option Plan ("Option
Plan"), which was approved by the Company's shareholders at the 1996 Annual
Meeting. The purpose of the Option Plan is to support the business goals of the
Company and to attract, retain and motivate management officials of high caliber
by providing incentives that will, through the award of options to acquire the
Company's Common Stock, associate more closely the interests of Executive
Officers and key employees of the Company with the interests of the Company's
shareholders. Participation is limited to Executive Officers and key employees
of the Company who are in positions in which their decisions, actions and
efforts significantly contribute to the success of the Company. In 1998, the
Compensation Committee awarded options to purchase 37,500 shares of the
Company's Common Stock to eligible employees.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 16, 1999, relating
to the beneficial ownership of the Company's Common Stock by (i) each of the
Company's directors and Named Executive Officers, (ii) all of the Company's
current directors and Named Executive Officers as a group, and (iii) other
persons known by the Company to be the beneficial owner of more than five
percent (5%) of the Company's Common Stock. Except as otherwise set forth below,
the Company is not aware of any person or group of affiliated persons who owns
more than 5% of the Common Stock of the Company. All of the Company's directors
and Named Executive Officers receive mail at the Company's principal executive
offices at 1514 Holland Road, Suffolk, Virginia 23434.
Number of Shares Percent of
Name Beneficially Outstanding
Owned Shares
Harold U. Blythe 38,858 (1) 1.04
James E. Butler, Jr. 57,405 (2) 1.53
Bruce B. Gray 99,216 (3) 2.65
Elmon T. Gray 72,512 (4) 1.94
Horace R. Higgins, Jr. 1,763 *
G. P. Jackson 160,000 4.28
Ben P. Kanak 75,176 (5) 2.01
John A. Ramsey, Jr. 51,768 (6) 1.38
Robert E. Spencer, Jr. 44,946 (7) 1.20
Donald W. Fulton, Jr. 5,500 (8) *
James C. Stewart 123,071 (9) 3.29
Current Directors and
Executive Officers as a
Group (11 persons) 730,315 19.52
Bank America Corporation(10) 190,656 (11) 5.10
101 South Tryon Street
Charlotte, NC 28255
- ---------------------------------------
* Less than 1% ownership
(1) Includes (i) 22,750 shares owned jointly by Mr. Blythe and his wife, (ii)
75 shares owned by Mr. Blythe's wife, for which Mr. Blythe disclaims
beneficial ownership, and (iii) 1,500 shares owned by a family trust for
which Mr. Blythe has voting and investment power. Also includes options to
purchase 12,358 shares of Common Stock that are currently exerciseable,
which were granted pursuant to the Company's 1996 Employee Stock Option
Plan ("Option Plan").
(2) Includes 4,485 shares owned by Mr. Butler's wife, for which Mr. Butler
disclaims beneficial ownership.
(3) Includes (i) an aggregate of 45,314 shares held in six trusts for which
Mr. Bruce Gray and Mr. Garland Gray, II share voting and investment power,
(ii) an aggregate of 1,602 in custodian accounts for which Mr. Bruce Gray
and Mr. Garland Gray, II share voting and investment power. Does not
include any shares beneficially owned or otherwise described in this Proxy
Statement by or with respect to Mr. Elmon T. Gray or by Mr. Garland Gray,
II, Mr. Bruce Gray's father and brother respectively. Mr. Bruce Gray
disclaims beneficial ownership of any shares other than the 99,216 shares
listed above.
(4) Includes (i) 6,297 shares owned by Mr. Elmon Gray's wife, Pamela B. Gray,
and (ii) 63,969 shares owned by various family trusts for which Mr. Elmon
Gray shares voting and investment power with NationsBank. Does not include
(i) 84,721 shares owned collectively by Elizabeth Gray Duff, Mr. Elmon
Gray's sister, and her husband and various children, (ii) 93,900 shares
owned collectively by Florence Gray Tullidge, Mr. Elmon Gray's sister, and
her husband and various children, (iii) 95,902 shares owned collectively
by Mary G. Stettinius, Mr. Elmon Gray's sister, and her husband and
various children, or (iv) 15,921 shares owned collectively by Katharine T.
Gray, Mr. Elmon Gray's daughter, and her various children. Also does not
include any shares beneficially owned or other1wise described in the Proxy
Statement by or with respect to Mr. Bruce Gray or Mr. Garland Gray, II,
who are both sons of Mr. Elmon Gray. Mr. Elmon Gray disclaims beneficial
ownership of any shares other than the 2,246 shares he owns individually
and the 63,969 shares owned by family trusts as described above.
(5) Includes 2,571 shares owned by Mr. Kanak's wife, for which Mr. Kanak
disclaims beneficial ownership.
(6) Includes 36,792 shares owned jointly by Mr. Ramsey and his wife and 1,320
shares owned by Mr. Ramsey's wife. Mr. Ramsey disclaims beneficial
ownership of the 1,320 shares owned directly by his wife.
(7) Includes options to purchase 9,000 shares of Common Stock that are
currently exerciseable, which were granted pursuant to the Company's
Option Plan.
(8) Includes options to purchase 4,500 shares of Common Stock that are
currently exerciseable, which were granted pursuant to the Company's
Option Plan.
(9) Includes 1,482 shares owned by Mr. Stewart's wife, for which Mr. Stewart
disclaims beneficial ownership and 2,407 shares owned jointly by Mr.
Stewart and his wife. Mr. Stewart has entered into an Early Retirement
Agreement with FCB. See "Item 11. Executive Compensation- Stewart
Retirement Agreement."
(10) Information regarding BankAmerica Corporation ("BankAmerica") has been
derived by the Company from a Schedule 13G filed by BankAmerica with the
Securities and Exchange Commission ("Schedule 13G"). The 13G states that
BankAmerica filed the 13G on behalf of BankAmerica, NB Holdings
Corporation, 100 North Tryon Center, Charlotte, NC 28255, and NationsBank,
N.A., 110 South Tryon Street, Charlotte, NC 28255.
(11) The Schedule 13G indicates that certain of these shares are subject to
shared voting and dispositive power.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The directors and executive officers of the Company and its banking
subsidiaries, and their family members and certain business organizations and
individuals associated with each of them, have been customers of the Company's
various subsidiary financial institutions with which they are affiliated, have
had normal banking transactions, including loans, with them, and are expected to
continue to do so in the future. As of December 31, 1998, the Company's banking
subsidiaries had aggregate direct and indirect loans to the directors and
executive officers of the Company and its banking subsidiaries totaling
approximately $8.76 million, which represented approximately 20% of the
Company's shareholders' equity as of that date. Except as set forth below with
respect to Mr. Stewart, each of these transactions was made in the ordinary
course of business on substantially the same terms, including interest rates,
collateral and repayment terms, as those prevailing at the time for comparable
transactions with unrelated parties and did not involve more than normal risk of
collectibility or present other unfavorable features.
James C. Stewart, a Named Executive Officer, currently has two loans
outstanding with FCB with an aggregate principal balance of $120,054. These
loans were made in 1987 and1988 under then existing FCB loan policies that
allowed FCB to make loans to its employees at an interest rate equal to FCB's
cost of funds adjusted annually. Under these terms, the current interest rates
of Mr. Stewart's loans are 4.85% and 4.88%, respectively. Both of Mr. Stewart's
loans are current with no history of payment default and are secured by real
property. FCB discontinued the policy of making below market rate loans to its
employees in 1989.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements of the Company at
December 31, 1998 and 1997 and for the three years ending December
31, 1998, 1997 and 1996, and the auditors' report thereon are
incorporated by reference to the pages indicated in the Annual
Report:
Consolidated Financial Statements Page
--------------------------------- ----
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Report of Independent Auditors 15
2. Financial Statement Schedules - None.
3. The exhibits listed on the accompanying Exhibit Index are filed
or incorporated by reference as part of this Form 10-K and such
Exhibit Index is incorporated herein by reference.
<PAGE>
(b) Reports on Form 8-K in quarter ended December 31, 1998: None
(c) The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this Form 10-K and such Exhibit
Index is incorporated herein by reference.
(d) Financial Statements excluded from Annual Report pursuant to Rule
14(a)-3(b) - Not applicable.
Signatures
In accordance with Section 13 of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, in the City of
Suffolk, State of Virginia, on March 25, 1999.
JAMES RIVER BANKSHARES, INC.
By: /s/ Harold U. Blythe
--------------------------
Harold U. Blythe, President
In accordance with the Exchange Act, this Report has been signed by the
following persons in the capacities and on the dates stated. Each person, in so
signing, also makes, constitutes and appoints Harold U. Blythe and Robert E.
Spencer, Jr. and each of them individually, his true and lawful attorney-in-fact
in his place and stead, with full power of substitution, to execute and cause to
be filed with the Securities and Exchange Commission, any and all amendments to
this Report, including any exhibits or other documents filed in connection
therewith.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ G. P. Jackson Chairman of The Board March 25, 1999
- ------------------------------ Director
G. P. Jackson
/s/ Bruce B. Gray Vice Chairman of The March 25, 1999
- ------------------------------ Board and Director
Bruce B. Gray
/s/ Harold U. Blythe President and Chief Executive March 25, 1999
- ------------------------------ Officer, Director
Harold U. Blythe (Principal Executive Officer)
/s/ Donald W. Fulton, Jr. Senior Vice President and March 25, 1999
- ------------------------------ Chief Financial Officer
Donald W. Fulton, Jr. (Principal Financial and
Accounting Officer)
/s/ James E. Butler, Jr. Director March 25, 1999
- ------------------------------
James E. Butler, Jr.
/s/ Elmon T. Gray Director March 25, 1999
- ------------------------------
Elmon T. Gray
/s/ H. R. Higgins, Jr. Director March 25, 1999
- ------------------------------
H. R. Higgins, Jr.
/s/ Ben P. Kanak Director March 25, 1999
- ------------------------------
Ben P. Kanak
/s/ John A. Ramsey, Jr. Director March 25, 1999
- ------------------------------
John A. Ramsey, Jr.
/s/ Robert E. Spencer, Jr. Director March 25, 1999
- ------------------------------
Robert E. Spencer, Jr.
/s/ James C. Stewart Director March 25, 1999
- ------------------------------
James C. Stewart
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
*2.1 Agreement and Plan of Reorganization dated November 21, 1994 (Incorporated
by reference to the Registrant's Registration Statement of Form S-4,
Commission File No. 33-88322, previously filed with the Commission on
January 6, 1995).
*2.2 First Colonial Bank Agreement and Plan of Merger dated June 30, 1995, as
amended (Incorporated by reference to the Registrant's Registration
Statement on Form S-4, Commission File No. 33-99254, previously filed with
the Commission on November 13, 1995).
*2.3 Bank of Isle of Wight Agreement and Plan of Merger dated June 30, 1995
(Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Commission File No. 33-99254, previously filed with the
Commission on November 13, 1995).
*3.1 Articles of Incorporation of James River Bankshares, Inc. (Incorporated by
reference to the Registrant's Registration Statement on Form S-4,
Commission File No. 33-88322, previously filed with the Commission on
January 6, 1995.)
*3.2 Amended and Restated Bylaws of James River Bankshares, Inc. (Incorporated
by reference to the Registrant's Form 10-K/A, Commission File No. 0-26314,
previously filed with the Commission on August 12, 1996).
*4 Form of Common Stock certificate of James River Bankshares, Inc.
(Incorporated by reference to the Registrant's Registration Statement on
Form S-4, Commission File No. 33-88322, previously filed with the
Commission on January 6, 1995).
*10.1 Agreement between The Bank of Waverly and First Union National Bank,
dated November 13, 1995, regarding branch acquisitions (Incorporated by
reference to the Registrant's Registration Statement on Form S-4,
Commission File No. 33-99254, previously filed with the Commission on
December 22, 1995).
*10.2 Employment Agreement between James River Bankshares, Inc. and Harold U.
Blythe dated July 18, 1995 (Incorporated by reference to Amendment No. 1
to the Registrant's Registration Statement on Form S-4, Commission File
No. 33-99254, previously filed with the Commission on December 22, 1995).
*10.3 Employment Agreement between James River Bankshares, Inc. and Glenn T.
McCall dated July 18, 1995 (Incorporated by reference to Amendment No. 1
to the Registrant's Registration Statement on Form S-4, Commission File
No. 33-99254, previously filed with the Commission on December 22, 1995).
*10.4 Employment Agreement between First Colonial Bank and James C. Stewart
dated February 29, 1996 (Incorporated by reference to the Registrant's
Form 10-K, Commission File No. 0-26314, previously filed with the
Commission on April 15, 1996).
*10.5 Employment Agreement between Bank of Isle of Wight and Robert E. Spencer,
Jr. dated February 29, 1996 (Incorporated by reference to the Registrant's
Form 10-K, Commission File No. 0-26314, previously filed with the
Commission on April 15, 1996).
*10.6 Employment Agreement between James River Bankshares, Inc. and Donald W.
Fulton, Jr. dated January 1, 1998. (Incorporated by reference to the
Registrant's Form 10-K, Commission File No. 0-26314, previously filed with
the Commission on March 30, 1998.)
***10.7 Early Retirement Agreement dated March 05, 1999, between First Colonial
Bank and James C. Stewart.
***13 Annual Report to security holders.
*21 List of Subsidiaries. (Incorporated by reference to the Registrant's
Form 10-K, Commission File No. 0-26314, previously filed with the
Commission on April 15, 1996.)
***23.1 Consent of Goodman & Company, L.L.P.
***24.1 Power of Attorney (appears on the signature page hereto)
***27.1 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
* (Not filed herewith. In accordance with Rule 12b-32 of the General Rules
and Regulations under the Securities Exchange Act of 1934, the exhibit is
incorporated by reference.)
*** Filed herewith.
AGREEMENT
This Agreement (hereinafter "Agreement") is made and entered into by and
between First Colonial Bank (hereinafter referred to as the "Bank") and James C.
Stewart (hereinafter referred to as "Employee").
R E C I T A T I O N S
A. Employee has served as President and Chief Executive Officer of the
Bank since its formation in 1972. Under Employee's leadership, the Bank has
expanded and prospered.
B. Employee has requested early retirement and the Bank has agreed to
accept such retirement. C. In recognition of all of the Employee's efforts, and
in order to effect a smooth transition, the parties are entering into this
Agreement.
A G R E E M E N T
In consideration of the mutual covenants contained in this Agreement,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Bank and Employee agree as follows:
1. Employee's last day of employment with the Bank and service as a
director of the Bank, and service as a director of the Bank's parent, James
River Bankshares, Inc. ("JRB"), and all subsidiaries of the Bank and JRB shall
be May 26, 1999. Employee will receive paid vacation from April 5, 1999 through
May 26, 1999.
2. As consideration for this Agreement, after May 26, 1999, Employee
will receive payments other than those which would have been due under his
Employment Agreement dated February 28, 1997. The Bank will pay Employee, over
24 consecutive, semi-monthly pay periods, an amount totaling $140,225 ($5,842.71
per pay period), less applicable withholding required by law at the rate(s)
required by law. The first payment shall be made on the Bank's first payday in
June 1999.
<PAGE>
3. Employee understands and agrees that coverage under all Bank group
insurance plans ends on his last day of active employment. Employee has
indicated that he wishes to continue medical and/or dental coverage pursuant to
COBRA. To do so, Employee must notify Bank within 60 days of receiving notice of
COBRA eligibility. All premiums are payable wholly by Employee. Upon expiration
of Employee's COBRA eligibility, he shall be eligible to continue in JRB's group
health insurance plan, wholly at his own expense, for so long as such plan or
any comparable plan is offered or until his death, whichever first occurs.
4. Employee will receive deferred compensation pursuant to the
Supplemental Income Agreement dated November 1, 1988 (the "Supplemental Income
Agreement"), commencing on June 1, 1999. The amount of such compensation shall
be $40,723.37 per year payable in equal monthly payments of $3,393.62 for the
period provided in the Supplemental Income Agreement.
5. On or before May 26, 1999, Employee may purchase the car currently
provided to him by the Bank at a price equal to $10,000.
6. Pursuant to the terms of the Bank's written option plan and options
previously granted to Employee, Employee has 60 days from May 26, 1999, to
exercise all vested stock options. Failure to exercise these options within this
time period will result in termination of any unexercised stock options.
Employee may pay for such options in JRB stock at its Fair Market Value on the
date Employee exercises the options. The term "Fair Market Value" shall have the
same meaning ascribed to it in the JRB 1996 Employee Stock Option Plan, which is
"the average of the last price of the common stock of JRB on the NASDAQ National
Market for the 10 consecutive trading days immediately preceding the date in
question."
7. JRB will provide Employee with coverage under JRB's directors' and
officers' liability insurance policy in Employee's capacity as a former director
of JRB and former director and officer of the Bank and any of the Bank's or
JRB's affiliated or related companies to the same extent that JRB provides such
insurance for its existing and former directors and officers of JRB and its
subsidiary banks.
<PAGE>
8. Employee agrees and affirms that as long as he is receiving payments
under this Agreement, he shall be bound by the non-competition restrictions
contained in Sections 7.2 and 7.3 of his Employment Agreement dated February 28,
1997 ("Employment Agreement"), which restrictions shall remain in full force and
effect but be applied to payments called for hereunder. Violation of the
non-competition restrictions will result in forfeiture of all payments under
this Agreement. Employee further agrees and affirms that he will continue to be
bound by the nondisclosure provisions of Section 12 of the Employment Agreement.
Sections 7.2, 7.3 and 12 of the Employment Agreement are hereby incorporated by
reference and shall remain in full force and effect.
9. Employee agrees to relocate his self-directed IRA to another
financial institution by March 15, 1999.
10. (a) Each party hereto agrees to defend, indemnify and hold the
other party harmless from and against any and all damages, penalties, costs
(including reasonable attorneys' fees) or any other amount arising out of or in
connection with (i) any material breach of this Agreement; and (ii) any claim by
a nonparty hereto arising out of or related to a claim against either party
hereto.
(b) Upon becoming aware of any claim, the party claiming
indemnification (the "Indemnified Party") shall give the other party (the
"Indemnifying Party") prompt notice of such claim setting forth all essential
facts then known to the Indemnified Party in connection therewith. After the
Indemnified Party has given the Indemnifying Party notice of a claim, the
Indemnified Party and the Indemnifying Party shall thereafter attempt in good
faith for a period of not less than 15 days to agree upon whether and to what
extent the Indemnified Party is entitled to be indemnified under this Section
10. If the Indemnified Party and Indemnifying Party cannot so agree within said
period, the Indemnified Party may thereafter commence litigation and/or take any
other action to protect his or its interests.
(c) Defense of Third-Party Claims.
(i) The Indemnifying Party shall have the right to
control the handling and defense, at his or its expense, and with counsel and
representatives selected by he or it that are reasonably acceptable to the
Indemnified Party, of any third-party claim for which he or it may be liable for
indemnification, and the Indemnifying Party shall have the right to compromise
or settle said third-party claim as he or it deems advisable with the prior
consent of the Indemnified Party, which consent shall not be unreasonably
withheld. The Indemnified Party shall have the right to participate in, but not
to control, the handling and defense of any such third-party claim, at his or
its expense, and with counsel and representatives selected by him or it.
<PAGE>
(ii) If any proposed compromise or settlement for any
third party claim has been accepted by such third party and involves solely
money damages for a sum certain, payable in cash, and such settlement is
objected to by the Indemnified Party, the Indemnifying Party shall not
consummate said settlement; provided that the Indemnifying Party shall be fully
relieved of and released from all liability for indemnification or otherwise
with respect thereto by tendering to the Indemnified Party the amount of such
proposed settlement, and the Indemnified Party shall assume all responsibility
for said third-party claim.
(iii) Notwithstanding anything set forth herein to the
contrary, the Indemnified Party shall not be required to refrain from paying any
third party claim which has matured by a court judgment or decree that has
become final.
11. Employee shall not be entitled to any compensation or benefits other
than those described in the above paragraphs.
12. This Agreement constitutes the entire agreement between the parties
pertaining to the matters with which it deals, and, except as set forth
expressly herein, supersedes all prior agreements pertaining to those matters.
This Agreement may not be altered or modified in any respect except by a writing
duly executed by the parties to be bound.
13. The parties represent and warrant that Bank has advised Employee in
writing to consult an attorney, and Employee has consulted an attorney before
signing this Agreement.
14. If any clause or provision of this Agreement is illegal, invalid, or
unenforceable under present or future laws, then the remainder of this Agreement
shall not be affected thereby, and in lieu of each clause or provision of this
Agreement which is illegal, invalid, or unenforceable, there shall be added, as
part of this Agreement, a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provisions as may be possible and as
may be legal, valid and enforceable.
<PAGE>
15. This Agreement (including, without limitation, the non-competition
and indemnity provisions) shall be binding upon and will inure to the benefit of
any successor or assigns of Bank, JRB and/or any affiliated or related company.
16. This Agreement shall be governed by and construed in accordance with
the laws of Virginia.
3/4/99 /s/ James C. Stewart
____________________ ___________________________________
Date James C. Stewart
FIRST COLONIAL BANK
3/5/99 /s/ Ben P. Kanak
____________________ By_________________________________
Date Ben P. Kanak
Chairman of the Board
<TABLE>
<CAPTION>
Financial Highlights
Percent
(Dollars in thousands, except per share data) 1998 1997 Change
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings Net Interest Income $ 15,929 $ 15,410 3.37%
Net Income 4,309 3,805 13.25
Per Share Net Income
Basic $ 1.16 $ 1.04 11.54%
Diluted 1.14 1.02 11.76
Dividends 0.42 0.37 13.51
Book Value at Period End 11.74 11.00 6.73
At Year Loans, Net $ 275,491 $ 260,476 5.76%
End Securities 89,017 83,025 7.22
Total Earning Assets 391,175 364,060 7.45
Total Assets 419,820 390,076 7.63
Total Deposits 372,772 347,573 7.25
Shareholders' Equity 43,703 40,384 8.22
Ratios Return on Average Assets 1.06% 0.99%
Return on Average Equity 10.18 9.82
Allowance for Loan Losses to
Loans, Net of Unearned Income 1.37 1.31
Leverage Capital Ratio 9.84 9.68
</TABLE>
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
The following discussion is intended to assist readers in understanding and
evaluating the financial condition and results of operations of James River
Bankshares, Inc. ("James River" or the "Company") and its subsidiaries for the
periods presented. In addition to historical information, the following
discussion, as well as certain information appearing elsewhere in this report,
contains forward looking statements that are subject to risks and uncertainties
that could cause the Company's future results to differ materially from those
anticipated in such forward looking statements. These forward looking statements
include, but are not limited to, statements regarding management's goals to
improve profitability, make strategic acquisitions, prepare the Company for Year
2000, and other future plans, expectations, or goals. Risks and uncertainties
that may affect the financial condition and results of operations of the Company
include, but are not limited to, general economic and business conditions,
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, 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.
EARNINGS PERFORMANCE
James River's net income increased 13% in 1998 to $4.3 million. In 1997, net
income was $3.8 million. Diluted net income per share increased 12% in 1998 to
$1.14 from $1.02 in 1997. A 3% increase in net interest income and a 46%
increase in non-interest income contributed to the higher net income in 1998.
Partially offsetting these positive factors was a 6% increase in non-interest
expense in 1998.
Higher net income in 1998 resulted in improved profitability ratios. The
return on average assets increased in 1998 to 1.06% from .99% in 1997. The
return on average shareholders' equity rose to 10.18% in 1998 from 9.82% in
1997. In addition, the Company's efficiency ratio showed improvement, declining
to 65.18% in 1998 from 67.18% in 1997. A decline in the effiency ratio is
considered positive as this ratio measures operating expenses as a percent of
income (tax-equivalent net interest income plus non-interest income).
While encouraged by the progress demonstrated in 1998 in these measures of
profitability, management recognizes the need for further improvement. Growth
initiatives, such as the formation of a new mortgage company and the addition of
four new branch offices in 1998, are anticipated to contribute to long-term
future profitability, although no assurance can be given in this regard. Because
of start-up costs and initial operating expenses, these initiatives had a
negative effect on profitability in the fourth quarter of 1998 and are expected
to have a similar effect during a portion of 1999.
Net income in 1997 of $3.8 million represented a 57% increase over 1996 net
income of $2.4 million. Diluted net income per share was $1.02 in 1997 compared
with $.65 in 1996. The increase in net income in 1997 was attributable partially
to $1.3 million of non-recurring expense in 1996 associated with the acquisition
of two bank subsidiaries and a one-time assessment by the Federal Deposit
Insurance Corporation. In addition, in 1996 the Company incurred expense related
to the opening of two new branch offices, the acquisition of three branches from
another financial institution, the formation of a new non-bank operations
support subsidiary, and the conversion of three bank subsidiaries to a new data
processing system. Excluding non-recurring expense from 1996, net income
improved 11% in 1997.
NET INTEREST INCOME
Net interest income is the difference between interest income and
interest expense and represents the Company's gross profit margin. In 1998, net
interest income increased 3% to $15.9 million from $15.4 million in 1997. Both
interest income and interest expense increased 4% in 1998 over 1997. The
increases in interest income and expense and net interest income were
attributable to growth in earning assets and interest bearing liabilities.
The net interest margin represents tax-equivalent net interest income divided
by average earning assets and reflects the effective rate earned by the Company
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
on its average earning assets. For comparative purposes, the income from
tax-exempt securities and loans is adjusted to a tax-equivalent basis, which
results in presenting such income on a comparable basis with fully taxable
income. In 1998, the Company's net interest margin decreased to 4.38% from 4.46%
in 1997. Yields on earning assets declined to 8.11% in 1998 from 8.24% in 1997,
while rates paid on interest-bearing liabilities decreased to 4.66% in 1998 from
4.67% in 1997. Thus, the decline in market interest rates, particularly in the
second half of 1998, had a stronger influence on the rates earned on loans and
other earning assets than on deposits and other interest-bearing liabilities.
In 1997, net interest income increased 13% to $15.4 million from $13.7 million
in 1996. Interest income grew 9% in 1997, while interest expense increased only
5%. The increase in interest income was attributable partially to an 8% increase
in the loan portfolio.
The net interest margin widened in 1997 to 4.46% from 4.24% in 1996. The
tax-equivalent yield on earning assets increased 17 basis points to 8.45% in
1997, while the cost of funds decreased 5 basis points to 4.67%. The two factors
that had the strongest influence on the net interest margin were the change in
the mix of earnings assets related to loan growth and a decrease in rates paid
on deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount charged to expense that is
intended to maintain an adequate allowance, or reserve, for loan losses in the
future. The amount of the provision for loan losses in any given period is
dependent upon a variety of factors including the size, growth, and composition
of the loan portfolio, historical and expected loan loss experience, and an
analysis of the quality of the loan portfolio and general economic conditions.
In 1998, the Company increased its provision for loan losses to $507 thousand
from $439 thousand in 1997. In 1996, the provision was $491 thousand. The higher
provision in 1998 over 1997 reflected a 6% increase in the loan portfolio,
changes in the composition and risk characteristics of the portfolio, concerns
over the longevity of the economic expansion, and uncertainty over the possible
effects of Year 2000 issues on the ability of borrowers to meet their
obligations.
NON-INTEREST INCOME
Non-interest income includes service charges and other related income from
services rendered by the Company. It also includes gains and losses realized
from the sale of securities, loans, and fixed assets and other income items. In
1998, non-interest income increased 46% to $2.7 million from $1.9 million in
1997. Service charges on deposit accounts increased 27% to $1.4 million in 1998
from $1.1 million in 1997. Gains realized on the disposition of securities
increased to $457 thousand in 1998 compared with $100 thousand in 1997. The
higher gains in 1998 resulted principally from the sale of certain equity
securities, which produced a gain of $439 thousand. In addition, other
non-interest income in 1998 included $128 thousand related to mortgage servicing
rights and $84 thousand from the sale of real estate.
In 1997, non-interest income increased 14% to $1.9 million over $1.7 million
recorded in 1996. The increase was attributable primarily to an increase in
certain customer charges and fees. In addition, income from the disposition of
securities increased $59 thousand in 1997 over 1996.
NON-INTEREST EXPENSE
Non-interest expense represents the overhead expenses of the Company. In 1998,
non-interest expense increased 6% to $12.3 million from $11.6 million in 1997.
Salaries and employee benefits increased 7%, occupancy expense increased 15%,
and other expense was 5% higher in 1998 compared with 1997. Equipment expense
decreased 3% in 1998. Overhead expense increases in 1998 were affected by the
formation of a mortgage company, the addition of four new branch offices, and
the completion of the Company's new administrative building. These factors are
expected to affect overhead expense and prior period comparisons in the first
three quarters of 1999. Income generated by the mortgage company and the
branches also will affect 1999 results of operations and prior period
comparisons.
In 1997, non-interest expense increased $54 thousand, or .5%, to $11.6 million
from $11.5 million in 1996. Salaries and employee benefits increased 19%,
occupancy expense increased 7%, and equipment expense was 37% higher in 1997
compared with 1996. Substantially offsetting these increases was a 75% decrease
in other expense in 1997. This decrease was attributable to certain
non-recurring expense in 1996 as previously described related to acquisition
expenses, a Federal Deposit Insurance Corporation special assessment, the
addition and acquisition of branch offices, the start-up of an operations
support subsidiary, and computer related conversion costs.
INCOME TAXES
Income tax expense in 1998 was $1.6 million, or 7% above $1.5 million recorded
in 1997. In 1996, income tax expense was $908 thousand. The increases in expense
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
in 1998 and 1997 related primarily to higher taxable income. The effective tax
rates in 1998, 1997, and 1996 were 27.03%, 28.20%, and 27.32% respectively.
FINANCIAL CONDITION
The Company's financial condition is measured in terms of its asset and
liability composition, asset quality, capital resources, and liquidity. At
December 31, 1998, total assets were $420 million, or 8% higher than the year
earlier total of $390 million. Average assets in 1998 of $405 million were 5%
above the year earlier average of $386 million. The addition of four branch
offices contributed to the growth of assets at year-end 1998.
LOANS
Loans, net of unearned income, at year-end 1998 totaled $276 million, or 5%
above the year earlier total of $263 million. Loans averaged $273 million in
1998 and $259 million in 1997. Loan growth in 1998 was concentrated principally
in real estate loans and construction loans.
INVESTMENTS
At December 31, 1998, investment securities totaled $89 million, or 7% above
the year earlier total of $83 million at December 31, 1997. In 1998, however,
investment securities averaged 7% lower than in 1997. The higher total at
year-end 1998 resulted from balance sheet growth late in the year and the
re-deployment of funds from short-term investments. In 1998, the portfolio
produced a tax-equivalent yield of 6.7% compared with 6.8% in 1997. At year-end,
92.1% of all securities were rated "A" or better or were issued by the U.S.
Government or its agencies.
DEPOSITS
Total deposits increased 7% to $373 million at year-end 1998 compared with
$348 million one year earlier. Average deposits increased 4% in 1998 to $358
million compared with the 1997 average of $343 million. Interest checking, which
was $21 million higher, accounted for the greatest portion of the year-end
increase.
ASSET QUALITY
The Company strives to maintain asset quality by emphasizing strong credit
underwriting and by monitoring the portfolio's repayment performance, among
other measures. The Company maintains an allowance for loan losses that it
believes is sufficient to absorb losses that might be incurred. In determining
the adequacy of the allowance for loan losses, management considers the size and
composition of the loan portfolio, historical loss experience, economic
conditions, the value and adequacy of collateral and guarantors, and the current
level of the allowance. In addition, consideration is given to potential losses
associated with non-accrual loans, impaired loans, and delinquent loans.
Management believes that the allowance for loan losses is maintained at a
sufficient level to provide for potential losses in the portfolio.
At December 31, 1998, the allowance totaled $3.8 million, or 1.37% of loans.
The allowance totaled $3.5 million, or 1.31% of loans at the end of 1997. Net
loans charged off were $137 thousand in 1998 and $158 thousand in 1997. The
ratio of net charged off loans to average loans was .05% in 1998, .06% in 1997,
and .09% in 1996. Non-performing loans as a percent of total loans at year-end
were .14%, .34%, and .12% in 1998, 1997, and 1996, respectively. Additional
information concerning impaired loans and the allowance for loan losses is
contained in Note 4 of the Notes to Consolidated Financial Statements.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' equity at year-end 1998 was $43.7 million, or 8% higher than the
year earlier total of $40.4 million. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, shareholders' equity includes an adjustment
for the increase in the market value of securities available for sale, net of
deferred taxes. The amounts were $804 thousand and $786 thousand at year-end
1998 and 1997, respectively. In 1998, shareholders' equity averaged $42.3
million, which was 9% above the 1997 average of $38.7 million.
Federal banking law sets forth certain regulatory capital requirements that
apply to the Company and its banking subsidiaries. Within the framework
established by this law, the Company and its banking subsidiaries qualify for
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
the classification "well capitalized," which is the highest regulatory
classification. At year-end 1998, the Company's regulatory capital ratios were
as follows: Tier 1 Capital to Risk Weighted Assets - 15.6%; Total Capital to
Risk Weighted Assets - 16.9%; and Tier 1 Capital to Quarterly Average Assets
(leverage ratio) - 9.8%. Additional information concerning regulatory capital
requirements is contained in Note 8 of the Notes to Consolidated Financial
Statements. At December 31, 1998 and 1997, the Company's equity to asset ratio
was 10.4%.
The Company's common stock is traded on the NASDAQ Stock Market's National
Market System under the trading symbol JRBK. At December 31, 1998, the book
value of a share of common stock was $11.74 compared with the year earlier book
value of $11.00. Cash dividends paid on the Company's common stock totaled $1.6
million in 1998 and $1.4 million in 1997. In the fourth quarter of 1998, the
Company's board of directors increased the quarterly cash dividend 20% to $.12
per share from $.10 per share. On an annualized basis, the cash dividend
following the increase was $.48 per share.
LIQUIDITY AND MARKET RISK
Liquidity in a banking company measures the ability of the company to generate
sufficient cash to meet its daily obligations, pay dividends to shareholders,
and to provide funds for customer's demands for loans and deposit withdrawals
without impairing profitability. To meet these needs, the Company maintains cash
reserves and readily marketable investment securities in addition to regular
fund flows provided from loan repayments and maturing securities. Funds also can
be obtained through increasing deposits or short-term borrowings and through the
banks' borrowing privileges at the Federal Reserve and the Federal Home Loan
Bank. In addition, the Company has a $1 million line of credit available. At
year-end 1998, the Company's federal funds sold and interest-bearing deposits
totaled $22.8 million, and securities with maturities of one year or less
totaled $6.0 million. The Company has no long term debt. Management believes
that its liquidity is adequate to meet its projected needs.
A related concern of liquidity management is interest rate sensitivity.
Changes in interest rates may affect funding requirements, the liquidity of
certain assets, and, potentially, the income stream of the Company. The Company
currently uses traditional asset and liability management techniques to manage
its interest rate risk. As such, it monitors the difference, or gap, between the
volume of interest sensitive assets and liabilities that will mature or reprice
over various time intervals. At December 31, 1998, the Company had $80.7 million
more in liabilities than assets that mature or reprice within three months or
less, and, therefore, was in a liability sensitive position. In a period of
declining interest rates, this position could have a positive impact on the
Company's earnings. Conversely, in a rising rate environment a liability
sensitive position could adversely affect earnings. In either scenario, certain
repricing decisions are within management's discretion and can influence actual
results.
Another method for measuring interest rate sensitivity is to analyze the
potential gain or loss in fair values of interest rate sensitive instruments.
The Company's analysis assumes a hypothetical interest rate shock of an
instantaneous change in interest rates of 200 basis points up and down. A
present value computation is used in determining the effect of the hypothetical
interest rate changes on the fair value of interest sensitive assets and
liabilities. Computations of prospective effects of these hypothetical interest
rate changes are based on many assumptions, including relative levels of market
interest rates, loan prepayments, and deposit decay. The results of the analyses
should not be relied upon as indicative of actual results. The computations do
not contemplate actions that could be undertaken by management in response to
changes in interest rates. In addition, certain shortcomings, which could affect
the actual values of interest sensitive assets and liabilities, are inherent in
this method of analysis. Given these and other limitations of the analysis, if
interest rates increased or decreased 200 basis points instantaneously, the net
fair value of interest sensitive instruments would decrease $5.4 million and
increase $5.2 million, respectively. The above analysis uses standard present
value methodology and makes assumptions regarding balance sheet growth and mix,
market interest rate levels, and pricing spreads based on instrument type.
The Company is not engaged in investment strategies involving derivative
financial instruments. Asset and liability management is conducted without the
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
use of forward-based contracts, options, swap agreements, or other synthetic
financial instruments.
BUSINESS COMBINATIONS
On March 1, 1996, the Company acquired First Colonial Bank (previously First
Colonial Bank, FSB) and James River Bank/Colonial (previously Bank of Isle of
Wight) in separate transactions. The Company issued a total of 914,941 shares of
its common stock to the shareholders of the two companies. At March 1 1996,
First Colonial Bank had total assets of approximately $137 million and
shareholders' equity of approximately $8.3 million. At March 1, 1996, James
River Bank/Colonial had total assets of approximately $33 million and
shareholders' equity of approximately $3.3 million. Both acquisitions were
accounted for as pooling of interests transactions and are explained more fully
in Note 12 of the Notes to Consolidated Financial Statements.
On February 17, 1999, the Company entered into a definitive merger agreement
with State Bank of Remington, Inc. ("State Bank"). Under the terms of the
agreement, State Bank would become a wholly owned subsidiary of the Company. The
merger agreement provides for the Comany to exchange 2.9 shares of its common
stock for each of the approximately 291,000 shares of State Bank common stock.
Among other conditions, the transaction is subject to shareholder and regulatory
approval. The merger is expected to qualify as a tax-free exchange and to be
accounted for as a pooling of interests.
ACCOUNTING RULE CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative information embedded in other contracts
(collectively referred to as derivatives), and 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. Management will assess the impact, if any, on the Company's
financial statements.
The American Institute of Certified Public Accountants ("AICPA") 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. It is not expected to materially
affect the Company's financial condition or results of operations.
The AICPA issued SOP 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. The SOP requires
entities to capitalize certain internal-use software costs once certain criteria
are met. Generally, internal costs with respect to software configuration and
interface, coding, installation to hardware, testing (including parallel
processing), and data conversion costs allowing access of old data by new
systems should be capitalized. All other data conversion costs, training,
application maintenance, and ongoing support activities should be expensed. The
Company will adopt this SOP in 1999 and does not expect it to have a material
effect on the Company's financial condition or results of operations.
YEAR 2000 PROJECT
STATE OF READINESS
In its evaluation of Year 2000 readiness, James River Bankshares 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 original 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
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
year 2000 project, and, with some modifications, James River is on target with
the original dates projected for each phase of the project. 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 phases and timetable for completion are described below.
o Awareness Phase-Completed third quarter 1997;
o Assessment Phase-Completed first quarter 1998;
o Renovation Phase-No significant renovation to existing systems
expected;
o Validation Phase-Testing currently on-going, to be completed by first
quarter 1999; and
o 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 our 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 used by James River and has
provided the Company with Year 2000 compliance certifications. The conversion
was completed in January 1999. Because of the timing of the conversion, testing
of the mainframe applications was delayed beyond year-end 1998 as scheduled.
James River and SBS have established a test plan in accordance with Federal
Financial Institutions Examination Council ("FFIEC") guidelines. The tests are
expected to be completed during the first quarter of 1999.
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 or 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. 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 also 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, no difficulty is expected
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 is being evaluated for
Year 2000 readiness. Because of the age of some of the equipment, vendors have
been contacted to determine readiness.
Several significant outside systems that James River is dependent upon are
provided by the Federal Reserve Bank of Richmond. Testing of these systems was
delayed as the result of an internal reorganization of the accounting and
operations functions to provide adequate testing of the systems that will be in
place at Year 2000. Testing on these applications began in the last week of
January 1999 and continued through mid-February. The testing revealed no
difficulties with processing in 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 for disaster recovery services for its data processing at a
back-up facility. James River plans to conduct its own testing of the disaster
recovery capabilities in the first quarter of 1999.
In 1998, 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 for Year 2000. The Company's newsletter, as well as training sessions,
are utilized to keep employees informed. 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.
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
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 previous
estimate. 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 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
our subsidiary banks. To assess that risk, James River recently completed a
survey of its large commercial loan customers to determine their ability 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 subsidiary banks 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. 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. In 1999, the Company will evaluate the need for training to
implement this aspect of the contingency plan. In addition, the disaster
recovery plans of each subsidiary will be reviewed in 1999 in terms of Year 2000
issues. 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 its contingency back-up plan.
Another issue that the subsidiary banks will address 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 plan to establish
borrowing privileges at the Federal Reserve and the Federal Home Loan Bank. In
conjunction with the anticipated above normal cash needs, the Company and the
subsidiary banks are reviewing insurance coverage and security measures that may
be necessary.
<PAGE>
Five Year Financial Summary
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Years ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest Income $ 30,641 $ 29,607 $ 27,224 $ 22,797 $ 20,605
Interest Expense 14,712 14,197 13,560 11,137 9,714
- ----------------------------------------------------------------------------------------------------
Net Interest Income 15,929 15,410 13,664 11,660 10,891
Provision for Loan Losses 507 439 491 342 593
- ----------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 15,422 14,971 13,173 11,318 10,298
Non-Interest Income 2,745 1,885 1,655 1,240 1,808
Non-Interest Expense 12,262 11,557 11,503 8,319 7,538
- ----------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,905 5,299 3,325 4,239 4,568
Income Taxes 1,596 1,494 908 1,146 1,066
- ----------------------------------------------------------------------------------------------------
Net Income $ 4,309 $ 3,805 $ 2,417 $ 3,093 $ 3,502
- ----------------------------------------------------------------------------------------------------
PER SHARE DATA*
Net Income - Basic $ 1.16 $ 1.04 $ 0.66 $ 0.85 $ 1.01
Net Income - Diluted 1.14 1.02 0.65 0.84 1.00
Cash Dividends 0.42 0.37 0.35 0.29 0.25
Book Value at Period End 11.74 11.00 10.20 10.04 9.02
Tangible Book Value at Period End 11.53 10.78 9.45 10.00 8.97
BALANCE SHEET DATA
Total Assets $ 419,820 $ 390,076 $ 381,608 $ 326,280 $ 306,148
Loans, Net 275,491 260,476 240,913 206,516 174,983
Securities 89,017 83,025 103,486 85,974 97,003
Deposits 372,772 347,573 342,332 287,364 270,906
Shareholders' Equity 43,703 40,384 37,603 36,885 32,473
PERFORMANCE RATIOS
Return on Average Assets 1.06% 0.99% 0.67% 1.01% 1.19%
Return on Average Shareholders'
Equity 10.18 9.82 6.71 8.97 11.15
Efficiency Ratio 65.18 67.18 77.79 65.56 63.04
Net lnterest Margin 4.38 4.46 4.24 4.20 4.08
CREDIT QUALITY RATIOS
Allowance for Loan Losses to
Non-Performing Loans 981.28% 385.40% 1,091.41% 388.05% 165.60%
Allowance for Loan Losses to
Non-Performing Assets 585.17 235.17 687.45 385.98 126.87
Allowance for Loan Losses to
Year-End Loans, Net of
Unearned Income 1.37 1.31 1.30 1.38 1.51
Net Charged-off Loans to Average
Loans, Net of Unearned Income 0.05 0.06 0.09 0.06 0.09
CAPITAL AND LIQUIDITY RATIOS
Leverage 9.84% 9.68% 9.68% 11.78% 11.38%
Risk Based:
Tier 1 Capital 15.62 14.71 16.05 22.17 20.12
Total Capital 16.88 15.96 17.30 23.42 21.73
Average Loans to
Average Deposits 76.30 75.43 71.02 71.48 65.20
Average Shares Outstanding*
Basic 3,703,458 3,675,201 3,676,034 3,656,148 3,477,177
Diluted 3,789,155 3,733,214 3,737,057 3,702,564 3,488,631
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Restated to reflect three-for-two stock split in the form of a stock dividend
in November 1997.
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
James River Bankshares, Inc.
Suffolk, Virginia
We have audited the accompanying consolidated balance sheets of James River
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of James River
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ GOODMAN & COMPANY, L.L.P.
- -------------------------------
GOODMAN&COMPANY, L.L.P.
Certified Public Accountants
131 Temple Lake Drive, Suite One
Colonial Heights, Virginia 23834
January 28, 1999, except for Notes 1 and 17,
as to which the date is February 17, 1999.
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,268 $ 14,087
Interest bearing deposits with banks 12,031 2,720
Federal funds sold 10,809 14,382
Securities available-for-sale, at fair value 80,155 71,952
Securities held-to-maturity, at amortized cost (fair value
approximates $9,090 and $11,244 at
December 31, 1998 and 1997) 8,862 11,074
Loans, net of allowance for loan losses 271,892 259,687
Loans held for sale, net 3,599 789
Accrued interest receivable 2,970 2,939
Premises and equipment, net 10,137 7,480
Intangible assets, net 2,342 2,503
Other assets 2,755 2,463
- ----------------------------------------------------------------------------------------------------
$ 419,820 $ 390,076
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
NON-INTEREST BEARING $ 46,805 $ 46,490
INTEREST BEARING 325,967 301,083
- ----------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 372,772 347,573
ACCRUED INTEREST PAYABLE 810 752
OTHER LIABILITIES 2,535 1,367
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 376,117 349,692
- ----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
PREFERRED STOCK, $5 PAR VALUE PER SHARE
(2,000,000 SHARES AUTHORIZED; NONE ISSUED) - -
COMMON STOCK, $5 PAR VALUE PER SHARE (10,000,000
SHARES AUTHORIZED; 3,721,348 AND 3,672,557 SHARES
ISSUED AND OUTSTANDING AT DECEMBER 31, 1998 AND
1997, RESPECTIVELY) 18,607 18,363
ADDITIONAL PAID-IN-CAPITAL 3,878 3,572
RETAINED EARNINGS 20,414 17,663
ACCUMULATED OTHER COMPREHENSIVE INCOME 804 786
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 43,703 40,384
- ----------------------------------------------------------------------------------------------------
$ 419,820 $ 390,076
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $ 24,447 $ 23,473 $ 20,449
Investment securities:
Taxable 3,888 4,414 4,980
Exempt from federal income taxes 1,197 1,184 1,285
Federal funds sold and other 1,109 536 510
- ----------------------------------------------------------------------------------------------------
Total interest income 30,641 29,607 27,224
- ----------------------------------------------------------------------------------------------------
Interest expense
Deposits 14,665 14,157 13,531
Federal funds purchased and other 47 40 29
- ----------------------------------------------------------------------------------------------------
Total interest expense 14,712 14,197 13,560
- ----------------------------------------------------------------------------------------------------
Net interest income 15,929 15,410 13,664
Provision for loan losses 507 439 491
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 15,422 14,971 13,173
- ----------------------------------------------------------------------------------------------------
Non-interest income
Service charges on deposit accounts 1,399 1,099 1,089
Other fees and commissions 478 482 362
Net realized gains on disposition
of securities 457 100 41
Other income 411 204 163
- ----------------------------------------------------------------------------------------------------
Total non-interest income 2,745 1,885 1,655
- ----------------------------------------------------------------------------------------------------
Non-interest expense
Salaries and employee benefits 6,673 6,232 5,254
Occupancy expense 871 756 704
Equipment 906 932 680
Other expense 3,812 3,637 4,865
- ----------------------------------------------------------------------------------------------------
Total non-interest expense 12,262 11,557 11,503
- ----------------------------------------------------------------------------------------------------
Income before income taxes 5,905 5,299 3,325
Provision for income taxes 1,596 1,494 908
- ----------------------------------------------------------------------------------------------------
Net income $ 4,309 $ 3,805 $ 2,417
- ----------------------------------------------------------------------------------------------------
Net income per common share
Basic $ 1.16 $ 1.04 $ 0.66
Diluted $ 1.14 $ 1.02 $ 0.65
- ----------------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding during the year
Basic 3,703,458 3,675,201 3,676,034
Diluted 3,789,155 3,733,214 3,737,057
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except share data)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF OTHER
COMMON COMMON ADDITIONAL RETAINED COMPREHENSIVE
STOCK STOCK PAID-IN-CAPITAL EARNINGS INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 2,448,693 $12,244 $ 3,447 $20,487 $ 707 $36,885
Comprehensive income:
Net income - - - 2,417 - 2,417
Change in unrealized gains and
losses on securities available-for-sale,
net of taxes - - - - (445) (445)
Transfer of held-to-maturity securities
to available-for-sale, net of taxes,
in conjunction with business
combinations - - - - (99) (99)
- --------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - 1,873
- --------------------------------------------------------------------------------------------------------------
Common stock issued 9,257 46 74 1 - 121
Cash dividends declared ($0.35 per
share) - - - (1,276) - (1,276)
- --------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 2,457,950 12,290 3,521 21,629 163 37,603
Comprehensive income:
Net income - - - 3,805 - 3,805
Change in unrealized gains and
losses on securities available-for-sale,
net of taxes - - - - 623 623
- --------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - 4,428
- --------------------------------------------------------------------------------------------------------------
Common stock issued 1,699 9 27 - - 36
ESOP termination (18,352) (92) - (281) - (373)
Stock options exercised 7,783 39 27 - - 66
Cash paid in lieu of fractional
shares (209) (1) (3) - - (4)
Cash dividends declared ($0.37 per
share) - - - (1,372) - (1,372)
Stock split effected in the form
of a stock dividend 1,223,686 6,118 - (6,118) - -
- --------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 3,672,557 18,363 3,572 17,663 786 40,384
Comprehensive income:
Net income - - - 4,309 - 4,309
Change in unrealized gains and
losses on securites available-for-sale,
net of taxes - - - - 18 18
- --------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - - 4,327
- --------------------------------------------------------------------------------------------------------------
Common stock issued 1,681 9 26 - - 35
Stock options exercised 47,110 235 280 - - 515
Cash dividends declared ($0.42 per
share) - - - (1,558) - (1,558)
- --------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 3,721,348 $18,607 $ 3,878 $20,414 $ 804 $43,703
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(In thousands)
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,309 $ 3,805 $ 2,417
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 507 439 491
Depreciation and amortization 1,227 1,248 857
Gain on disposition of securities (457) (100) (41)
Gain on sale of loans (63) (32) (56)
Gain on sale of fixed assets (84) - -
Changes in:
Loans held for sale (2,747) 435 291
Interest receivable (31) 185 (346)
Other assets (416) 65 (989)
Interest payable 58 140 193
Other liabilities 449 307 (552)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,752 6,492 2,265
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from dispositions of available-
for-sale securities 32,233 25,473 29,666
Purchase of available-for-sale securities (39,962) (5,136) (49,341)
Redemption of held-to-maturity securities 2,211 1,391 2,631
Purchase of held-to-maturity securities - (255) (1,235)
Net increase in loans (12,808) (20,841) (35,123)
Purchase of property and equipment (3,555) (335) (2,475)
Proceeds from sale of property and equipment 138 360 -
Net cash and cash equivalents received
in acquisition of branches - - 30,484
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (21,743) 657 (25,393)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities
Cash dividends paid (1,558) (1,372) (1,276)
Net increase in deposits 25,199 5,241 20,633
Issuance of stock 550 102 126
Common stock repurchased - (373) -
Purchase of fractional shares - (4) (5)
Proceeds from short-term borrowings 719 - -
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 24,910 3,594 19,478
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 5,919 10,743 (3,650)
Cash and cash equivalents - beginning 31,189 20,446 24,096
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending $ 37,108 $ 31,189 $ 20,446
- ---------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 14,745 $ 14,057 $ 13,366
- ---------------------------------------------------------------------------------------------------
Income taxes $ 1,837 $ 1,426 $ 1,449
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
James River Bankshares, Inc. ("the Company") is a Virginia multi-bank holding
company headquartered in Suffolk, Virginia that commenced operations June 1,
1995. The Company owns James River Bank, Waverly, Virginia; Bank of Suffolk,
Suffolk, Virginia; First Colonial Bank, Hopewell, Virginia; James River
Bank/Colonial, Smithfield, Virginia (collectively the "Banking Subsidiaries");
and Family Finance Corporation, a consumer loan company, Family Finance of
Virginia, Inc., a consumer equity lender, and James River Support, Inc., an EDP
operation center. In addition, James River Bank owns Mortgage Company of James
River, Inc., which is a residential mortgage loan company formed in the fourth
quarter of 1998. The Banking Subsidiaries operate twenty-four banking offices in
southeastern Virginia. The Company's primary source of revenue is providing
loans to customers who are predominantly small and middle-market businesses and
individuals.
PRINCIPLES OF CONSOLIDATION AND
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of James River
Bankshares, Inc. and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in the consolidation. The
consolidation has been prepared using the pooling of interests method of
accounting. All information included in the financial statements has been
combined as if mergers had occurred at the earliest date presented. Certain
previously reported amounts have been reclassified to conform to current
presentations.
POOLING OF INTERESTS TRANSACTIONS
Effective March 1, 1996, in two separate transactions, the Company merged with
First Colonial Bank, FSB, a federal-chartered savings bank, and Bank of Isle of
Wight (renamed James River Bank/Colonial in 1998), a Virginia state-chartered
bank. Each of the 1,244,895 outstanding shares of First Colonial Bank, FSB
common stock was converted to .4816 shares of the Company's stock, and each of
the 78,850 outstanding shares of Bank of Isle of Wight common stock was
converted to four shares of the Company's stock.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet captions,
cash and due from banks, interest bearing deposits with banks, and Federal funds
sold.
The Company is required to maintain reserves with the Federal Reserve Bank.
The aggregate daily average reserves required for the final reporting period in
the years ended December 31, 1998 and 1997 were $1,436,000 and $1,153,000,
respectively.
INVESTMENT SECURITIES
Investment securities are classified into three categories: held-to-maturity,
available-for-sale and trading. Securities that management has both the intent
and ability to hold to maturity are classified as securities held-to-maturity
and are carried at cost, adjusted for amortization of premium or accretion of
discount using the interest method. Securities that may be sold prior to
maturity for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment risk, to increase
regulatory capital or other similar factors are classified as securities
available-for-sale and carried at fair value with any adjustments to fair value,
after tax, reported as a separate component of shareholders' equity. The Company
has no trading securities. Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that are
other than temporary, if any, are included in earnings as realized losses.
Interest and dividends on securities, including the amortization of premiums
and the accretion of discounts, are reported as interest and dividends on
securities using the interest method. Gains and losses on the sale of securities
are recorded on the trade date and are calculated using the specific
identification method.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
LOANS
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are stated at their outstanding
unpaid principal balances net of any deferred fees or costs on originated loans,
or unamortized premiums or discounts on purchased loans. Interest income is
accrued on the unpaid principal balance. Discounts and premiums are amortized to
income using the interest method. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the yield
(interest income) on the related loans.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well secured and in the
process of collection. If a loan or a portion of a loan is classified as
<PAGE>
Notes to Consolidated Financial Statements
doubtful or is partially charged off, the loan is classified as non-accrual.
Loans that are on a current payment status or past due less than 90 days may
also be classified as non-accrual if repayment in full of principal and/or
interest is in doubt. Loans may be returned to accrual status when all principal
and interest amounts contractually due (including arrearage) are reasonably
assured of repayment.
While a loan is classified as non-accrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal
generally are applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. The adequacy of the allowance for loan
losses is periodically evaluated by the Company in order to maintain the
allowance at a level that is sufficient to absorb probable credit losses.
Management's evaluation of the adequacy of the allowance is based on a review of
the Company's historical loss experience, known and inherent risks in the loan
portfolio, including adverse circumstances that may affect the ability of the
borrower to repay interest and/or principal, the estimated value of collateral,
and an analysis of the levels and trends of delinquencies, charge-offs, and the
risk ratings of the various loan categories. Such factors as the level and trend
of interest rates and the condition of the national and local economies also are
considered. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments of information available to them at the
time of their examination.
A loan is considered impaired, based on current information and events, if it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is based generally on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Increases and decreases in
the allowance due to changes in the measurement of impaired loans, if
applicable, are included in the provision for loan losses. Loans continue to be
classified as impaired unless they are brought fully current and the collection
of scheduled interest and principal is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and amortization
computed principally by the straight-line method. Net gains and losses on
disposal or retirement of premises and equipment are included in other income.
REAL ESTATE OWNED
Real estate acquired in settlement of loans is initially recorded at estimated
fair value at the date of foreclosure. Subsequent to foreclosure, the carrying
value of real estate owned is reduced when it exceeds fair value minus estimated
costs to sell. Costs relating to improvement of the property are capitalized,
while holding costs of the property are charged to expense in the period
incurred.
Other real estate acquired and held for sale is stated at the lower of cost or
net realizable value. Valuations are periodically performed by management, and
an allowance for losses is established by a charge to income if the carrying
value of a property exceeds its estimated net realizable value.
INTANGIBLE ASSETS
Intangible assets are amortized using accelerated methods over their estimated
periods of benefit.
INCOME TAXES
The Company files a consolidated tax return. The provision for income taxes
reflects tax expense incurred as a consolidated group. The expense is allocated
among the members of the consolidated group in accordance with an intercompany
agreement for tax expense. Income taxes are provided for the tax effects of the
transactions reported in the consolidated financial statements and consist of
taxes currently due plus deferred taxes related primarily to differences between
the basis of investment securities, deferred loan fees, allowance for loan
losses, accumulated depreciation and deferred compensation for financial and
income tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled,
and the deferred tax asset or liability created by the difference in market
value and carrying value of available-for-sale securities.
EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, "Earnings per Share," on December 31, 1997.
This Statement establishes standards for computing and presenting earnings per
share (EPS). This Statement supersedes standards previously set in APB Opinion
<PAGE>
Notes to Consolidated Financial Statements
No. 15, "Earnings per Share." The Statement requires dual presentation of basic
and diluted EPS on the face of the income statement, and it requires a
reconciliation of the numerator and denominator of basic EPS with the numerator
and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997. In accordance with the requirements of the Statement,
all prior period EPS data have been restated to reflect the change in reporting
requirements.
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 on 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.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowance may be necessary based on changes in local economic
conditions and other factors.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. Comprehensive income is displayed in
the Company's Consolidated Statements of Changes in Shareholders' Equity. The
Company's comprehensive income includes net income and net unrealized gains or
losses on available-for-sale securities. The adoption of SFAS No. 130 had no
effect on the Company's net income or shareholders' equity.
SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about a company's
operating segments. For calendar year companies, this reporting is first
required in 1998. Although financial condition and results of operations for
each subsidiary bank are continually monitored, management believes that its
Banking Subsidiaries have products, services, and economic prospects so similiar
that segment information is not currently relevant.
<PAGE>
Notes to Consolidated Financial Statements
NOTE 2 - INVESTMENT SECURITIES
The carrying amount of securities and their approximate fair values at
December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale Securities:
December 31, 1998
U.S. Government and
agency securities $49,738 $ 566 $ 93 $50,211
State and municipal securities 25,543 716 8 26,251
Other debt securities 609 15 - 624
Equity securities 3,047 26 4 3,069
- ----------------------------------------------------------------------------------
$78,937 $ 1,323 $ 105 $80,155
- ----------------------------------------------------------------------------------
December 31, 1997
U.S. Government and
agency securities $43,410 $ 330 $ 205 $43,535
State and municipal securities 23,756 562 17 24,301
Other debt securities 1,110 14 - 1,124
Equity securities 2,488 504 - 2,992
- ----------------------------------------------------------------------------------
$70,764 $ 1,410 $ 222 $71,952
- ----------------------------------------------------------------------------------
Held-to-Maturity Securities:
December 31, 1998
State and municipal securities $ 1,490 $ 45 $ - $ 1,535
Other debt securities 7,372 183 - 7,555
- ----------------------------------------------------------------------------------
$ 8,862 $ 228 $ - $ 9,090
- ----------------------------------------------------------------------------------
December 31, 1997
State and municipal securities $ 1,490 $ 26 $ - $ 1,516
Other debt securities 9,584 174 30 9,728
- ----------------------------------------------------------------------------------
$11,074 $ 200 $ 30 $11,244
- ----------------------------------------------------------------------------------
</TABLE>
Equity securities include restricted investments of $2,398,000 and $1,932,000
at December 31, 1998 and 1997, respectively. These securities do not have a
readily determinable fair value and lack a market. Therefore, they are carried
at cost and periodically evaluated for impairment.
The scheduled maturities of securities held-to-maturity and securities
available-for-sale at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Securities Held-to-Maturity Securities Available-for-Sale
-------------------------- ----------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 5,910 $ 5,955
Due from one to five years 1,055 1,082 42,288 42,964
Due from five to ten years 435 453 18,794 19,181
Due after ten years 7,372 7,555 8,898 8,986
Equity securities - - 3,047 3,069
- ---------------------------------------------------------------------------------------------------
$ 8,862 $ 9,090 $ 78,937 $ 80,155
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Investment securities with a carrying amount of approximately $16,019,000 at
December 31, 1998 and $15,174,000 at December 31, 1997 were pledged to secure
public deposits.
Gross realized gains and losses on dispositions of securities
available-for-sale were as follows:
<TABLE>
<CAPTION>
(In thousands)
Available-for-Sale 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $ 474 $ 165 $ 103
Gross realized losses (17) (65) (62)
- --------------------------------------------------------------------------------
Net realized gain $ 457 $ 100 $ 41
- --------------------------------------------------------------------------------
</TABLE>
In connection with the business combination of the Company and First Colonial
Bank, FSB, First Colonial Bank, FSB transferred most of its investment portfolio
from the held-to-maturity category to available-for-sale on March 1, 1996, in
order to maintain the Company's existing interest rate risk position and credit
risk policy. The transfer consisted of the entire investment portfolio of U.S.
Government agency and corporation obligations (except mortgage-backed
securities). The transfers are shown separately on the consolidated statement of
changes in shareholders' equity, as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fair market value at date of transfer $ 9,095
Amortized cost 9,245
- --------------------------------------------------------------------------------
Unrealized loss (150)
- --------------------------------------------------------------------------------
Related income tax effect 51
- --------------------------------------------------------------------------------
Net decrease to shareholders' equity $ (99)
- --------------------------------------------------------------------------------
</TABLE>
NOTE 3 - COMPONENTS OF COMPREHENSIVE INCOME
Comprehensive income consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 4,309 $ 3,805 $ 2,417
Other comprehensive income 18 623 (544)
- --------------------------------------------------------------------------------
$ 4,327 $ 4,428 $ 1,873
- --------------------------------------------------------------------------------
</TABLE>
The components of other comprehensive income and related tax effects for the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on
available-for-sale-securities $ 487 $ 852 $ (695)
Transfer of held-to-maturity
securities to available-for-sale - - (99)
Reclassification adjustment for
gains realized in income 457 100 41
- --------------------------------------------------------------------------------
Net unrealized gains (losses) 30 952 (835)
Tax effect 12 329 (291)
- --------------------------------------------------------------------------------
Net-of-tax-amount $ 18 $ 623 $ (544)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 33,266 $ 34,513
Real estate - commercial 49,495 50,522
Real estate - construction 24,838 19,683
Real estate - mortgage 141,484 130,055
Agricultural 2,536 4,802
Installment 23,988 23,644
- --------------------------------------------------------------------------------
Total loans 275,607 263,219
Less:
Allowance for loan losses (3,827) (3,457)
Unearned discount (17) (25)
Deferred loan (fees) expenses 129 (50)
- --------------------------------------------------------------------------------
Net loans receivable $ 271,892 $ 259,687
Loans held for sale 3,599 789
- --------------------------------------------------------------------------------
$ 275,491 $ 260,476
- --------------------------------------------------------------------------------
</TABLE>
The allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - beginning of year $ 3,457 $ 3,176 $ 2,891
Provision charged to operations 507 439 491
Charge-offs (254) (249) (302)
Recoveries 117 91 96
- --------------------------------------------------------------------------------
Balance - end of year $ 3,827 $ 3,457 $ 3,176
- --------------------------------------------------------------------------------
</TABLE>
The recorded investment in impaired loans requiring an allowance for loan
losses as determined in accordance with 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 $1,408,000 and
$2,017,000 at December 31, 1998 and 1997, respectively. The portion of the
allowance for loan losses allocated to the impaired loan balance was $162,000
and $423,000 at December 31, 1998 and 1997, respectively. The recorded
investment in impaired loans that do not have a portion of the allowance for
loan losses allocated was $660,000 and $385,000 at December 31, 1998 and 1997,
respectively. For the year ended December 31, 1998, the average recorded
investment in impaired loans was $1,524,000, and interest income recognized on
impaired loans was $149,000. For the year ended December 31, 1997, the average
recorded investment in impaired loans was $2,346,000, and interest income
recognized on impaired loans was $199,000. For the year ended December 31, 1996,
the average recorded investment in impaired loans was $3,250,000, and interest
income recognized on impaired loans was $151,000.
Mortgage loans serviced for others are not included in the consolidated
balance sheets. The unpaid principal balances of these loans at December 31,
1998, 1997, and 1996 were $18,969,000, $28,814,000, and $23,474,000,
respectively.
Non-cash additions to real estate owned were $254,000 and $436,000 for the
years ended December 31, 1998 and 1997, respectively.
NOTE 5 - RELATED PARTIES
The Company has had and expects to have in the future, lending transactions in
the ordinary course of its business with directors, officers, principal
shareholders, and their associates, on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others. Such extensions of credit do not involve
more than the normal risk of collectibility or present other unfavorable
features. The aggregate amount of loans to such individuals as of December 31,
1998 and 1997 was $8,756,000 and $8,935,000, respectively. During 1998, new
loans to such related parties amounted to $5,702,000 and repayments amounted to
$5,881,000. The amount of deposits from related parties held by the Company at
December 31, 1998 and 1997 were $8,487,000 and $8,645,000, respectively.
<PAGE>
Notes to Consolidated Financial Statements
NOTE 6 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,228 $ 1,432
Buildings 7,113 5,216
Furniture and equipment 5,877 5,069
- ------------------------------------------------------------------------------
15,218 11,717
Accumulated depreciation and amortization (5,081) (4,237)
- ------------------------------------------------------------------------------
Net book value $ 10,137 $ 7,480
- ------------------------------------------------------------------------------
</TABLE>
NOTE 7 - DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing demand $ 46,805 $ 46,490
Interest bearing demand 58,187 37,380
Money market 20,600 22,154
Savings 44,037 47,130
Time deposits $100,000 and greater 34,307 32,868
Other time deposits 168,836 161,551
- ------------------------------------------------------------------------------
$ 372,772 $ 347,573
- ------------------------------------------------------------------------------
<CAPTION>
The scheduled maturities of time deposits at December 31, 1998 and 1997, were
as follows:
(In thousands) 1998 1997
- -------------------------------------------------------------------------------
Less than one year $ 131,742 $ 119,764
One to five years 70,416 73,963
Over five years 985 692
- -------------------------------------------------------------------------------
$ 203,143 $ 194,419
- -------------------------------------------------------------------------------
</TABLE>
NOTE 8 - COMMITMENTS, CONTINGENT LIABILITIES AND
LEGAL PROCEEDINGS
COMMITMENTS AND STANDBY LETTERS OF CREDIT
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of the Company's involvement in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
<PAGE>
Notes to Consolidated Financial Statements
The following table summarizes the Company's off-balance sheet financial
instruments by type as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit:
Commercial real estate $ 10,555 $ 9,763
Commercial 22,524 11,320
Real estate mortgage 19,185 15,085
Other 12,800 3,890
- --------------------------------------------------------------------------------
$ 65,064 $ 40,058
- -------------------------------------------------------------------------------
Standby letters of credit $ 1,714 $ 1,629
- -------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer, as long as
there is no violation of any condition established in the contract, and includes
unutilized credit card lines. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
majority of commitments to extend credit have terms up to one year with variable
interest rates. There are no significant fixed rate commitments. Management
evaluates each customer's credit worthiness in determining the amount of
collateral to obtain. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support the financing needs of the Company's commercial
customers, and have varying terms. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk (whether on or off balance sheet) arising from
financial instruments may exist in relation to certain groups of customers. A
group concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Company
does not have significant exposure to any individual customer or counterparty.
However, the Company's loan portfolio is comprised of credit extensions
principally to customers in the Central and Southeastern areas of Virginia. Most
of these customers are also depositors of the Company.
Loans secured by real estate are approximately 79% and 75% of total loans at
year-end 1998 and 1997, respectively. Approximately 61% and 60% of these real
estate loans in 1998 and 1997, respectively, are secured by 1-4 family
residential real estate. Commercial and standby letters of credit are granted
primarily to commercial borrowers.
OPERATING LEASES
The Company has several noncancellable operating leases for branch offices.
The expirations of these leases range from one to fifteen years. Rent expense
charged to operations under operating lease agreements totaled $136,000,
$95,000, and $81,000 in 1998, 1997, and 1996, respectively.
Future minimum rentals are as follows:
<TABLE>
<S> <C> <C>
(In thousands) 1999 $ 127
2000 120
2001 120
2002 120
2003 121
Thereafter 296
--------------------------------------------------------
Total minimum lease payments $ 904
--------------------------------------------------------
</TABLE>
LEGAL PROCEEDINGS
There were no material legal proceedings other than ordinary routine
litigation incidental to the business at December 31, 1998.
CREDIT AVAILABILITY
At December 31, 1998, the Company's Banking Subsidiaries had $29,240,000
available under lines of credit with the Federal Home Loan Bank. In addition,
the Company has a $1,000,000 line of credit with another financial institution,
which had a zero balance at December 31, 1998.
<PAGE>
Notes to Consolidated Financial Statements
NOTE 9 - SHAREHOLDERS' EQUITY
At December 31, 1998, the Company had three qualified incentive stock-based
compensation plans. The Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plan. Accordingly, no compensation cost has been recognized for its plans. The
effect of applying SFAS No. 123 for pro-forma disclosures is not likely to be
representative of the effects on basic and diluted earnings per share for future
years. However, had compensation cost for the Company's plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method prescribed by SFAS No. 123, the Company's net income
and earnings per share would have been as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Net income - basic and diluted As reported $ 4,309 $ 3,805 $ 2,417
Pro-forma $ 4,109 $ 3,645 $ 2,241
- -----------------------------------------------------------------------------------------------------
Basic earnings per share As reported $ 1.16 $ 1.04 $ 0.66
Pro-froma $ 1.11 $ 0.99 $ 0.61
- -----------------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ 1.14 $ 1.02 $ 0.65
Pro-forma $ 1.08 $ 0.98 $ 0.60
- -----------------------------------------------------------------------------------------------------
</TABLE>
Under the 1996 Stock Option Plan, the Company may grant options to its
employees up to 10 percent of the issued and outstanding common stock of the
Company at any time. Under this plan, the exercise price of each option equals
the market price of the Company's stock on the date of the grant, and an
option's maximum term is 10 years with 20 percent of the options becoming
exerciseable annually beginning one year following the date of grant. The
Company's other two plans were plans of subsidiaries prior to joining the
Company, and granting of options under both plans has been terminated. The
options for the three plans are vested upon the commencement date of the
exercise periods.
Stock option transactions are summarized below:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
1998 Per Share 1997 Per Share 1996 Per Share
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -
beginning of year: 255,458 $ 11.88 267,058 $ 11.68 91,845 $ 7.41
Granted 37,500 21.45 - - 187,500 13.53
Exercised (47,110) 13.10 (11,000) 5.94 (11,270) 6.78
Lapsed (4,980) 13.53 (600) 10.20 (1,017) 11.08
- -------------------------------------------------------------------------------------------------------
Options outstanding -
end of year 240,868 $ 13.52 255,458 $ 11.88 267,058 $ 11.68
- -------------------------------------------------------------------------------------------------------
Options exercisable -
end of year 107,428 $ 10.74 104,708 $ 9.51 76,558 $ 7.07
- -------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted was $5.29 and $4.70 in 1998
and 1996, respectively. Fair value is estimated using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield 2.2% - 2.0%
Expected life 5 years - 5 years
Expected volatility 24% - 37%
Risk-free interest rate 5.5% - 6.2%
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------- ----------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Contractual Price Number Price
Per Share Outstanding Life (years) Per Share Exercisable Per Share
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 7.27 48,005 3 $ 7.27 48,005 $ 7.27
$ 13.45 27,505 8 $ 13.45 10,315 $ 13.45
$ 13.56 127,858 8 $ 13.56 49,108 $ 13.56
$ 21.45 37,500 10 $ 21.45 - $ -
- -----------------------------------------------------------------------------------------------
$ 7.27-21.45 240,868 7 $ 13.52 107,428 $ 10.74
- -----------------------------------------------------------------------------------------------
</TABLE>
REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and, possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its Banking Subsidiaries must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification also are subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its Banking Subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Company meets all capital adequacy requirements to which it is
subject.
As of September 30, 1998, the most recent notification, the Federal
Reserve Bank of Richmond categorized the Company and its Banking Subsidiaries as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Company and its Banking Subsidiaries
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes has changed the institution's category.
<PAGE>
Notes to Consolidated Financial Statements
The Company's actual and required capital amounts and ratios as of
December 31, 1998 and 1997, are presented in the table.
<TABLE>
<CAPTION>
To be Well
Capitalized
For Capital Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets):
Consolidated $ 43,924 16.9% $ 20,821 >=8.0% $ N/A >= N/A%
Bank of Suffolk 13,987 19.1 5,866 8.0 7,332 10.0
James River Bank 8,631 14.1 4,910 8.0 6,138 10.0
James River Bank/Colonial 3,723 14.4 2,070 8.0 2,588 10.0
First Colonial Bank 12,734 12.5 8,143 8.0 10,179 10.0
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $40,663 15.6% $ 10,411 >=4.0% $ N/A >= N/A%
Bank of Suffolk 13,069 17.8 2,933 4.0 4,399 6.0
James River Bank 7,862 12.8 2,455 4.0 3,683 6.0
James River Bank/Colonial 3,412 13.2 1,035 4.0 1,553 6.0
First Colonial Bank 11,460 11.3 4,072 4.0 6,107 6.0
Tier 1 Capital (to Average Assets)
Consolidated $ 40,663 9.8% $ 16,535 >=4.0% $ N/A >= N/A%
Bank of Suffolk 13,069 11.3 4,645 4.0 5,807 5.0
James River Bank 7,862 8.6 3,657 4.0 4,571 5.0
James River Bank/Colonial 3,412 8.5 1,611 4.0 2,014 5.0
First Colonial Bank 11,460 7.0 6,523 4.0 8,154 5.0
</TABLE>
<TABLE>
<CAPTION>
To be Well
Capitalized
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets):
Consolidated $ 40,245 16.0% $ 20,169 >=8.0% $ N/A >= N/A%
Bank of Suffolk 13,258 18.2 5,843 8.0 7,303 10.0
James River Bank 10,565 18.4 4,599 8.0 5,749 10.0
James River Bank/Colonial 3,413 16.0 1,705 8.0 2,132 10.0
First Colonial Bank 11,959 12.3 7,801 8.0 9,751 10.0
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $ 37,094 14.7% $ 10,085 >=4.0% $ N/A >= N/A%
Bank of Suffolk 12,343 16.9 2,921 4.0 4,382 6.0
James River Bank 9,815 17.1 2,300 4.0 3,450 6.0
James River Bank/Colonial 3,146 14.8 853 4.0 1,279 6.0
First Colonial Bank 10,739 11.0 3,900 4.0 5,851 6.0
Tier 1 Capital (to Average Assets)
Consolidated $ 37,094 9.7% $ 15,433 >=4.0% $ N/A >= N/A%
Bank of Suffolk 12,343 11.6 4,249 4.0 5,311 5.0
James River Bank 9,815 11.0 3,655 4.0 4,568 5.0
James River Bank/Colonial 3,146 8.3 1,521 4.0 1,901 5.0
First Colonial Bank 10,739 7.2 5,992 4.0 7,490 5.0
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NOTE 10 - INCOME TAXES
The significant components of the provision for income taxes for the years ended December 31 were as follows:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provision:
Federal $ 1,613 $ 1,426 $ 875
State 32 89 14
- ------------------------------------------------------------------------------------------------------
1,645 1,515 889
Deferred tax provision (49) (21) 19
- ------------------------------------------------------------------------------------------------------
$ 1,596 $ 1,494 $ 908
- ------------------------------------------------------------------------------------------------------
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Federal statutory income tax rates 34.00% 34.00% 34.00%
State income taxes 0.54 1.65 0.47
Tax-exempt interest income (6.86) (7.26) (12.14)
Nondeductible merger costs - - 5.10
Other (0.65) (0.19) (0.11)
- -----------------------------------------------------------------------------------------------------
27.03% 28.20% 27.32%
- -----------------------------------------------------------------------------------------------------
The significant components of deferred income tax assets and liabilities as of December
31 consist of the following:
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,202 $ 1,105
Deferred compensation 248 191
Other 23 27
- ------------------------------------------------------------------------------------------------------
Total deferred tax assets 1,473 1,323
- ------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 285 285
Deferred loan fees 258 156
Dividends on FHLB/FHLMC stock 110 122
Unrealized gain on AFS securities 414 402
Discount accretion on securities 49 45
Other 45 33
- -------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 1,161 1,043
- -------------------------------------------------------------------------------------------------------
Net deferred income tax asset 312 280
Less valuation allowance (14) (19)
- -------------------------------------------------------------------------------------------------------
$ 298 $ 261
- -------------------------------------------------------------------------------------------------------
</TABLE>
Included in retained earnings is $1,082,000 at December 31, 1998 and 1997 for
which no provision for income taxes has been made. This represents allocations
of income to bad debt deductions for tax purposes only in years prior to 1988
related to First Colonial Bank and its subsidiaries. Since the Company does not
intend to use the reserves for purposes other than to absorb its tax bad debt
losses, deferred income taxes have not been provided on such reserves. The
approximate amount of unrecognized tax liability allocated with these historical
additions is $411,000. For years after 1988, deferred income taxes have been
provided
<PAGE>
Notes to Consolidated Financial Statements
on the difference between tax and book bad debt deductions in accordance with
SFAS 109, "Accounting for Income Taxes." If the amounts that qualify as
deductions for federal income tax purposes only are used for purposes other than
bad debt losses or operations losses, they will be subject to federal income tax
at the then current corporate rate.
NOTE 11 - RETIREMENT PLANS
The Company has a defined contribution plan with 401(K) features, which covers
substantially all employees who have completed six months of service. Employees
may contribute up to 15% of their salaries, and the Company matches 50% of the
first 4% and 25% of the next 4% of employee contributions. Additional
contributions can be made by the Company at the discretion of the Board of
Directors. Prior to joining the Company, each of the Company's subsidiaries had
qualified retirement plans for the future benefit of their employees. All of
these plans, which consisted of defined benefit, defined contribution, employee
stock ownership and 401(k) plans, were terminated. Costs of these plans included
in salaries and employee benefits in the consolidated statements of income are
as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Defined contribution/401(k) plan $ 342 $ 405 $ 171
Defined benefit plan - terminated effective
December 31, 1995 $ - $ - $ 10
Employee stock ownership plan -
terminated effective May 31, 1996 $ - $ - $ 56
</TABLE>
The Company has entered into deferred compensation agreements providing
retirement for certain officers and employees. Vested benefits under the
agreements are payable in installments over a ten or fifteen year period upon
death or retirement. The present value of the liabilities for the benefits is
being accrued over the expected term of active service of the employees. The
deferred compensation expense for the officers and employees was $116,000,
$104,000 and $59,327 for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE 12 - OTHER EXPENSES
The following items shown in the other expense category are disclosed because
their amounts exceed one percent of total income for the years ended December
31:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deposit insurance premiums $ 111 $ 112 $ 1,028
Directors' fees $ 341 $ 363 $ 379
Merger expenses $ - $ - $ 530
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
NOTE 13 - PARENT COMPANY
The Parent Company, in the ordinary course of business, provides its
subsidiaries with certain centralized management services and staff support. The
cost of these services is allocated to each subsidiary based on analyses of the
services rendered and on analyses of each subsidiary's total assets and net
income.
The primary source of funds for the dividends paid by the Company is dividends
received from its subsidiaries. Each of the Banking Subsidiaries is subject to
certain restrictions on the amount of dividends that it may declare without
prior regulatory approval. The following is a summary that, based upon these
restrictions, the various Banking Subsidiaries could have declared at December
31, 1998: (In thousands)
Bank of Suffolk $ 1,055,000
James River Bank $ -
First Colonial Bank $ 2,445,000
James River Bank/Colonial $ 330,000
In 1998, the Company sought and received approval from the Federal Reserve
Bank for James River Bank to pay dividends to the Company in excess of its
regulatory limit. Accordingly, in years 1999 and 2000, any dividends paid to the
Company by James River Bank must be approved by the Federal Reserve Bank.
The parent company's condensed balance sheets as of December 31, 1998 and
1997, and the related condensed statements of income and cash flows for each of
the years in the three year period ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,598 $ 430
Securities available-for-sale 194 798
Investments in subsidiaries:
Bank 38,847 39,010
Bank-related 1,641 461
Other assets 1,772 191
- ---------------------------------------------------------------------------------------------------
$ 44,052 $ 40,890
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 349 $ 506
Shareholders' equity 43,703 40,384
- ---------------------------------------------------------------------------------------------------
$ 44,052 $ 40,890
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from bank subsidiaries $ 4,822 $ 2,733 $ 2,399
Management fees from subsidiaries:
Bank 1,308 964 633
Bank-related 50 13 -
Interest income 2 2 2
Other income 474 74 -
- ----------------------------------------------------------------------------------------------------
Total income 6,656 3,786 3,034
Expenses
Salaries and benefits 1,010 559 345
Directors fees 128 140 158
Other expense 672 472 934
- ----------------------------------------------------------------------------------------------------
Total expense 1,810 1,171 1,437
- ----------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed net income of subsidiaries 4,846 2,615 1,597
Income tax benefit 17 44 71
- ----------------------------------------------------------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 4,863 2,659 1,668
Equity in undistributed net income of
subsidiaries (1) (554) 1,146 749
- ----------------------------------------------------------------------------------------------------
Net income $ 4,309 $ 3,805 $ 2,417
- ----------------------------------------------------------------------------------------------------
(1) Amount in parentheses represents the excess of dividends declared by the
subsidiaries to the Parent over the net income of the subsidiaries.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,309 $ 3,805 $ 2,417
Adjustments:
Depreciation 29 16 7
Gain on sale of securities (439) (65) -
Equity in undistributed net income of
subsidiaries 554 (1,147) (749)
Change in other assets (94) (17) 81
Change in other liabilities 10 294 73
- ---------------------------------------------------------------------------------------------------
Net cash provided by operations 4,369 2,886 1,829
- ---------------------------------------------------------------------------------------------------
Investing activities:
Purchase of property and equipment (1,239) (9) (8)
Proceeds from sale of securities 745 175 -
Purchase of available-for-sale securities (198) - (87)
Capitalization of subsidiaries (1,501) (1,150) (600)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,193) (984) (695)
- ---------------------------------------------------------------------------------------------------
Financing activities:
Cash dividends paid (1,558) (1,372) (1,275)
Common stock issued 550 98 121
Common stock repurchased - (373) -
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,008) (1,647) (1,154)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 1,168 255 (20)
Cash and cash equivalents - beginning 430 175 195
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending $ 1,598 $ 430 $ 175
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the
Company's financial instruments; however, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates indicated.
The estimated fair value amounts have been measured as of year end, and have not
been reevaluated or updated for purposes of these consolidated financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the Company since a fair value calculation is only provided for a
limited portion of its assets. Due to a wide range of valuation techniques and
the degree of subjectivity used in making the estimates, comparisons between the
Company's disclosures and those of other companies may not be meaningful. The
following methods and assumptions were used to estimate the fair values of the
Company's financial instruments at December 31, 1998 and 1997.
<PAGE>
Notes to Consolidated Financial Statements
FINANCIAL INSTRUMENTS VALUED AT CARRYING VALUE
The carrying amounts of cash and cash equivalents approximate their fair
value. The carrying amounts of accrued interest receivable and payable
approximate their fair values.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
Fair values for securities, excluding restricted equity securities, are based
on available quoted market prices. If quoted market prices are unavailable, fair
values are based on quoted market prices of comparable instruments. For unquoted
securities for which no comparable instruments exist, the reported fair value is
estimated on the basis of cost, book or appraised value as deemed appropriate by
management. Available-for-sale securities are carried at their aggregate fair
value.
LOANS
For variable rate commercial loans that reprice frequently (within a
relatively short time frame) and have no significant change in credit risk, fair
values are based on carrying values. Residential first mortgages are based on
quoted market prices of similar loans. Fair values for certain junior mortgage
loans, consumer installment loans, credit-card loans, and other consumer loans
are estimated using discounted cash flows models. The discount rates are based
on current market interest rates for similar types of loans. Fair values for
commercial real estate and commercial loans that do not reprice or do not mature
within relatively short time frames are estimated using discounted cash flow
analysis. The discount rates used are those currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
DEPOSITS
The fair values of demand deposits and deposits with no defined maturity are
taken to be the amount payable on demand at the reporting date. The fair values
for fixed-maturity deposits are estimated using discounted cash flow models
based on rates currently offered for the relevant product types with similar
remaining maturities.
SHORT-TERM BORROWNGS
The carrying amounts of short-term borrowings approximate their fair values.
The carrying amount in the table below is the amount at which the financial
instruments are reported in the financial statements.
<TABLE>
<CAPTION>
1998 1997
------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 14,268 $ 14,268 $ 14,087 $ 14,087
Interest bearing deposits
with banks 12,031 12,031 2,720 2,720
Federal funds sold 10,809 10,809 14,382 14,382
Investment securities 89,017 89,245 83,025 83,196
Loans 275,491 283,424 260,476 265,923
Interest receivable 2,970 2,970 2,939 2,939
- -----------------------------------------------------------------------------------------------------
$ 404,586 $ 412,747 $ 377,629 $ 383,247
- -----------------------------------------------------------------------------------------------------
Liabilities
Non-interest bearing
deposits $ 46,805 $ 46,805 $ 46,490 $ 46,490
Interest bearing deposits 325,967 327,162 301,083 303,301
Short-term borrowings 719 719 - -
Interest payable 810 810 752 752
- ----------------------------------------------------------------------------------------------------
$ 374,301 $375,496 $ 348,325 $350,543
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 15 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Numerator, Basic and Diluted) $ 4,309 $ 3,805 $ 2,417
Basic average shares outstanding (Denominator) 3,703 3,675 3,676
Basic net income per share $ 1.16 $ 1.04 $ 0.66
- --------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Basic average shares outstanding 3,703 3,675 3,676
Effect of stock options 86 58 61
- ---------------------------------------------------------------------------------------------------
Diluted average shares outstanding (Denominator) 3,789 3,733 3,737
Diluted net income per share $ 1.14 $ 1.02 $ 0.65
- --------------------------------------------------------------------------------------------------
NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, except per share data) 1998
- ---------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 7,502 $ 7,757 $ 7,691 $ 7,691
Net interest income $ 3,922 $ 4,084 $ 3,966 $ 3,957
Net income $ 1,330 $ 1,091 $ 1,021 $ 867
Basic Earnings per share $ 0.36 $ 0.30 $ 0.27 $ 0.23
Diluted Earnings per share $ 0.35 $ 0.29 $ 0.27 $ 0.23
1997
- ----------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 7,136 $ 7,393 $ 7,508 $ 7,570
Net interest income $ 3,650 $ 3,854 $ 3,924 $ 3,982
Net income $ 876 $ 908 $ 968 $ 1,053
Basic Earnings per share $ 0.24 $ 0.25 $ 0.26 $ 0.29
Diluted Earnings per share $ 0.24 $ 0.24 $ 0.26 $ 0.28
</TABLE>
NOTE 17 - SUBSEQUENT EVENT
On February 17, 1999, the Company entered into a definitive merger agreement
with State Bank of Remington, Inc. ("State Bank") under which State Bank would
become a wholly owned subsidiary of the Company. The agreement provides for
State Bank shareholders to recieve 2.9 shares of the Company's common stock for
each outstanding share of State Bank's common stock. At December 31, 1998, State
Bank had approximately 291,000 shares of common stock outstanding. The
transaction is expected to qualify as a tax-free exchange and to be accounted
for as a pooling of interests. The merger is subject, among other conditions, to
shareholder and regulatory approvals.
<PAGE>
General Information
EXECUTIVE OFFICE
1514 Holland Road
P.O. Box 440
Suffolk, Virginia 23439-0440
REQUESTS FOR INFORMATION
Deborah R. Scott, Administrative Assistant
(757) 934-8100, Fax (757) 934-8612
FORM 10-K
A form 10-K Report filed with the Securities and Exchange Commission is
available to shareholders without charge upon written request.
STOCK TRANSFER AGENT
First Union National Bank of North Carolina
1525 W. W.T. Harris Blvd., Building 3C3
Charlotte, North Carolina 28288-1154
STOCK LISTING
The common stock of James River Bankshares, Inc. is traded on the NASDAQ Stock
Market's National Market System under the symbol JRBK.
MARKET PRICE FOR COMMON STOCK
The following table sets forth the high, low, and closing sales prices of the
Common Stock as reported by the NASDAQ Stock Market's National Market System for
the periods listed. Sales prices have been restated to reflect the Company's
three-for-two stock split effected in the form of a 50% stock dividend in
November 1997. The Common Stock is thinly traded. On February 28, 1999, there
were approximately 1,732 shareholders of record.
<TABLE>
<CAPTION>
1998 Sales Prices
- ----------------------------------------------------------------------------------------------
HIGH LOW CLOSING DIVIDENDS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fourth Quarter 19.50 16.50 17.50 $0.12
Third Quarter 24.00 17.50 18.25 $0.10
Second Quarter 26.00 21.50 22.00 $0.10
First Quarter 23.00 19.63 21.25 $0.10
1997
- ----------------------------------------------------------------------------------------------
HIGH LOW CLOSING DIVIDENDS
- ----------------------------------------------------------------------------------------------
Fourth Quarter 21.00 16.83 21.00 $0.10
Third Quarter 18.17 15.00 16.00 $0.09
Second Quarter 15.17 13.33 15.17 $0.09
First Quarter 14.17 13.17 13.33 $0.09
</TABLE>
(Reflects changes through February 28, 1999)
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
James River Bankshares, Inc.
We consent to incorporation by reference in the Registration Statements on
Form S-8 (Registration Nos. 33-99156, 333-07997, 333-07999 and 333-61329) of
James River Bankshares, Inc. of our report dated January 28, 1998 (except for
Notes 1 and 17, as to which the date is February 17, 1999), relating to the
consolidated balance sheets of James River Bankshares, Inc. and subsidiaries as
of December 31, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 Annual Report of James River Bankshares, Inc.
GOODMAN & COMPANY, L.L.P.
131 Temple Lake Drive, Suite One
Colonial Heights, Virginia 23834
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,268
<INT-BEARING-DEPOSITS> 12,031
<FED-FUNDS-SOLD> 10,809
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,155
<INVESTMENTS-CARRYING> 8,862
<INVESTMENTS-MARKET> 9,090
<LOANS> 275,607
<ALLOWANCE> 3,827
<TOTAL-ASSETS> 419,820
<DEPOSITS> 372,772
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,345
<LONG-TERM> 0
0
0
<COMMON> 18,607
<OTHER-SE> 25,096
<TOTAL-LIABILITIES-AND-EQUITY> 419,820
<INTEREST-LOAN> 24,447
<INTEREST-INVEST> 5,085
<INTEREST-OTHER> 1,109
<INTEREST-TOTAL> 30,641
<INTEREST-DEPOSIT> 14,665
<INTEREST-EXPENSE> 14,712
<INTEREST-INCOME-NET> 15,929
<LOAN-LOSSES> 507
<SECURITIES-GAINS> 457
<EXPENSE-OTHER> 12,262
<INCOME-PRETAX> 5,905
<INCOME-PRE-EXTRAORDINARY> 1,596
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,309
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 10.18
<LOANS-NON> 390
<LOANS-PAST> 427
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,475
<CHARGE-OFFS> 254
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 3,827
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,827
</TABLE>
