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. FCB also opened a new branch bank office in Hopewell, Virginia in May, 1996. FCB assumed the lease on the property and purchased selected equipment from the former tenant.
As a result of the various transactions described above, James River now has four operating bank subsidiaries with a total of 19 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.
Reported financial results in James River's Annual Report and Form 10-K are as of December 31, 1997, and include the results of operations of James River and all of its subsidiaries on a restated consolidated basis.
Operations of James River's Banking Subsidiaries
General. BOS was organized and chartered under the laws of the Commonwealth of Virginia on January 11, 1967, and commenced operations on June 27, 1967. BOS is a member of the Federal Reserve System. BOS's deposits are insured by the Bank Insurance Fund ("BIF"), which is a division of the FDIC. BOS is subject to the supervision, examination and regulation of the Federal Reserve and the Virginia Bureau of Financial Institutions ("BFI"). BOS provides a wide range of financial services principally to individuals and to small and medium-sized businesses, including individual and commercial demand and time deposit accounts, commercial and consumer loans, travelers' checks, safe deposit facilities, sales of United States Saving Bonds, collection items and official checks. While BOS is authorized to provide trust services, it has elected not to provide such services presently. BOS operates six full service banking offices in the city of Suffolk, Virginia.
JRB was organized and chartered under the laws of the Commonwealth of Virginia on June 12, 1933, and commenced operations on that day. JRB is a member of the Federal Reserve System. JRB's deposits are insured by the BIF. JRB is subject to the supervision, examination, and regulation of the Federal Reserve and the BFI. JRB provides a wide range of financial services similar to those provided by BOS. JRB operates one full service banking office and one drive-up facility in the town of Waverly, Virginia, one full service banking office in Sussex, Virginia, one full service banking office in the city of Franklin, Virginia, and one full service banking office and one drive-up facility in the town of Courtland, Virginia.
BIW was organized and chartered under the laws of the Commonwealth of Virginia on August 10, 1971, and commenced operations on November 28, 1973. BIW is a member of the Federal Reserve System. BIW's deposits are insured by the BIF. BIW is subject to the supervision, examination, and regulation of the Federal Reserve and the BFI. BIW provides a wide range of financial services similar to those provided by BOS and JRB. BIW is authorized to provide trust services, but does not currently do so. BIW operates one full service banking office in the town of Smithfield, Virginia.
FCB is a stock corporation that was incorporated under the laws of the Commonwealth of Virginia in 1972. FCB commenced operations in 1975 as First Colonial Savings and Loan Association and converted from a state chartered association to a federal savings bank in 1990. FCB is a member of the Federal Home Loan Bank of Atlanta. FCB's deposits are insured by the Savings Association Insurance Fund ("SAIF") which is a division of the FDIC. FCB is subject to the supervision, examination, and regulation of the Office of Thrift Supervision ("OTS"). FCB provides a wide range of financial services similar to those provided by BOS, JRB and BIW. FCB operates in the Southside Virginia area from a main office located in Hopewell, Virginia. Including the main office, FCB has six full service branches located primarily in the tri-city area in Hopewell, Colonial Heights, Chester, Dinwiddie, Petersburg and a mortgage division in Prince George, Virginia. FCB has filed applications with regulatory authorities to convert from a federal savings bank to a Virginia state chartered bank. If these applications are approved, FCB will become subject to regulation by the Federal Reserve and BFI to the same extent as James River's other banking subsidiaries.
Credit Policies. James River's banking subsidiaries employ extensive written policies and procedures to enhance management of 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.
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, 1997. Prior to 1995, amounts reported below include FCB's applicable balances as of June 30 for the periods indicated.
Loan Portfolio by Percentage
James River's service area provides lending opportunities to small businesses, farmers, and a wide range of consumers. Most of the small business are either retail or agribusiness companies. The loan portfolio set forth above for James River's banking subsidiaries is 75.3% 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 32.3% of James River's total loan portfolio on December 31, 1997. $36.9 million, or 43.5%, of these loans were secured by first and second deeds of trust on commercial real estate. 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, 1997, agricultural loans totaled $4.8 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 $19.7 million or 7.5% of the loan portfolio at December 31, 1997. 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.
Real Estate Mortgage. At December 31, 1997, 91.8% 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. Loan to value ratios are consistently 75%. $12.4 million were real estate loans to individuals used for farm purchases and multifamily residential properties. These loans are generally handled by a loan specialist whose expertise is in the area of real estate lending.
Installment. On December 31, 1997, 9.0% 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 $260.5 million at December 31, 1997, 8.1% more than net loans of $240.9 million at December 31, 1996. The average balance of total loans as a percentage of average earning assets was 72.1%, 67.4%, 66.0%, 61.0% and 59.3% for 1997, 1996, 1995, 1994 and 1993, respectively. James River's banking subsidiaries had no loans outstanding to foreign countries or for highly leveraged transactions as of December 31, 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, 1997, commitments for standby letters of credit totaled $1.6 million and commitments to extend credit were $40.1 million. At December 31, 1996, commitments for standby letters of credit totaled $1.0 million and commitments to extend credit totaled $34.2 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. Prior to 1995, amounts reported below include FCB's applicable balances as of June 30 for the periods indicated.
Set forth below is information regarding the maturity of loans for James River's banking subsidiaries at December 31, 1997:
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.
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 and 1993 include FCB's applicable balances as of June 30 for the periods indicated.
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 and 1993 include FCB's applicable balances as of June 30 for the periods indicated.
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, 1997. The amounts reported below for 1994 and 1993 include FCB's applicable balances as of June 30 for the periods indicated.
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 and 1993 include FCB's applicable balances as of June 30 for the periods indicated.
As of December 31, 1997, loans 30 days or more delinquent for James River's banking subsidiaries totaled $7.7 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, $6.7 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 was $2,017,000, $3,137,000 and $1,600,000 at December 31, 1997, 1996 and 1995, respectively. The impaired loans at December 31, 1997, consist 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. The impaired loans at December 31, 1995, consisted of $76,000 of commercial and $1,524,000 real estate-commercial loans. All of the impaired loans at December 31, 1997, 1996 and 1995, were measured using the fair value of collateral method. The portion of the allowance for loan losses allocated to the impaired loan balance was $423,000, $558,000 and $170,000 at December 31, 1997, 1996 and 1995, respectively.
Investments
The carrying value of the investment portfolio of James River and its subsidiaries was $83.0 million at December 31, 1997, compared to $103.5 million at December 31, 1996. The average balance of the investment portfolio decreased $10.3 million or 10.1% in 1997 compared to 1996. The average balance of the portfolio increased 14.1%, or $12.6 million, in 1996.
Since 1992, management of BOS, JRB, BIW and FCB has made adjustments in the mix of the investment portfolio by moving investments from U.S. Treasury and federal agencies to tax-exempt state and political subdivisions. U.S. Treasury and federal agency securities now account for 52.4% of the investments compared to 31.1% in state and political subdivisions.
At December 31, 1997, 1996, and 1995, 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 101.5% and 100.2% of carrying value at years ended December 31, 1997 and 1996, respectively.
The following table summarizes the carrying values of securities for James River and its subsidiaries for the dates indicated.
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, 1997. 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%.
Deposits
James River's banking subsidiaries primarily use deposits to fund their loans and investments portfolio. Since the end of 1995, 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 $259.3 million in 1994 to $268.1 million in 1995, a growth of $8.8 million or 3.4%. For the comparable period ending December 31, 1996, average total deposits increased $52.9 million or 19.7%. 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 period ending December 31, 1997, average total deposits increased $22.2 million, or 6.9%.
James River's banking subsidiaries offer individuals and small-to-medium-sized businesses a variety of deposit services. These accounts, including checking, savings, money market, and certificates of deposit, are obtained primarily from the communities which James River's banking subsidiaries service. Management believes that this provides a stable core deposit base. 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. Prior to 1996, amounts reported below include FCB's applicable balances as of June 30 for the periods indicated.
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, 1997:
Maturities of CDs of $100,000 or More at December 31, 1997
Amount Percent ------- ------- (Dollars in thousands) Three months or less $ 6,776 20.6% Over three months to twelve months 14,003 42.6% Over twelve months 12,089 36.8% -------------- ------ Total $ 32,868 100.0% ============== ======
Certificates of deposit in amounts of $100,000 or more at December 31, 1997 and 1996 were $32.9 million and $26.1 million, respectively. The balance of $32.9 million at December 31, 1997, represented 16.9% of total certificates of deposit. The December 31, 1996 amount represents 13.9% of the total certificates of deposit balance of $187.9 million at that date.
James River's banking subsidiaries do not accept brokered deposits, and all large certificates of deposit are community based.
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. The only borrowings of James River's banking subsidiaries involve the purchase and sale of federal funds, and is often an intercompany borrowing. Set forth below are short term borrowings for James River's banking subsidiaries at the periods indicated. Prior to 1996, amounts reported below include FCB's applicable balances for the periods indicated.
Short-Term Borrowings
The following tables illustrate average balances of total interest-earning assets and total 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. Amounts reported below for 1995 include FCB's applicable balances for the year ended June 30.
RATE AND VOLUME ANALYSIS
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.
Average Balances, Interest Income and Expenses, and Average Yields and Rates
(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 securities is computed using the amortized cost basis.
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, 1997, James River and it subsidiaries had $59.1 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, $110.6 million of the loan portfolio of James River's banking subsidiaries at December 31, 1997, had a repricing frequency of less than one year. Moreover, as of December 31, 1997, James River and its banking subsidiaries collectively held $72.0 million in investments held as "Available for Sale" which could be sold quickly to meet any special funding needs.
The following table illustrates the interest sensitivity gap position of James River and its subsidiaries as of December 31, 1997. 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
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, ------------------------------------------ 1997 1996 1995 ---- ---- ----
Return on average assets 0.99% 0.67% 1.01% Return on average equity 9.82% 6.71% 8.97% Dividend payout ratio 36.05% 52.80% 33.40% Average equity to average asset ratio 10.04% 9.98% 11.27%
Market Area and Competition
James River has four operating bank subsidiaries with a total of 19 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. The following is a brief summary of certain statutes and regulations affecting James River's banking subsidiaries. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below, and it is not intended to be an exhaustive description of all laws applicable to the business of James River's subsidiaries. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of James River.
State Chartered Banks. BOS, JRB, and BIW (the "Bank Subsidiaries") are all state-chartered banks organized under Virginia law. They are also members of the Federal Reserve System and, therefore, are supervised and examined by the Federal Reserve, their primary federal regulator. The Federal Reserve and BFI conduct regular examinations of the Bank Subsidiaries, reviewing the adequacy of their allowance for loan losses, quality of loans and investments, propriety of management practices, compliance with laws and regulations and other aspects of their operations. In addition to these regular examinations, the Bank Subsidiaries must furnish the Federal Reserve with quarterly reports containing detailed financial statements and schedules. The Federal Deposit Insurance Corporation ("FDIC"), which provides deposit insurance, also has authority to examine and regulate the Bank Subsidiaries.
Federal and state banking laws and regulations govern all areas of the operations of the Bank 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. See "Supervision and Regulation of James River - Capital Requirements" below.
Federal Savings Banks. As a federally chartered savings bank, FCB is subject to regulation, supervision, and periodic examination by the Office of Thrift Supervision ("OTS") and the FDIC. The regulations of these agencies govern most aspects of FCB's business and operations. FCB's deposits are insured by the SAIF and administered by the FDIC to the maximum amount permitted by law, which is currently $100,000 per depositor in most cases. See "Supervision and Regulation of James River - Deposit Insurance" below.
The primary regulator for federal and state savings institutions is now the OTS, an office in the United States Department of the Treasury. The Director of the OTS is responsible for the examination and supervision of all savings institutions. The OTS has authority to issue regulations, conduct examinations and supervise the operation of savings institutions. The OTS regulatory scheme is comprehensive and governs, among other things, capital requirements, equity investments, affordable housing, liquidity, securities issuances, the form of savings instruments issued by savings institutions, certain aspects of a savings association's lending activities, including appraisal requirements, maximum loan amounts, private mortgage insurance coverage, lending authority and nondiscriminatory lending practices. OTS regulations also restrict transactions between savings institutions and affiliated parties which are deemed to be a conflict of interest under the regulations. In addition, the OTS' consent is required prior to any major corporate reorganization, including a merger.
FCB has filed applications with regulatory authorities to convert from a federal savings bank to a Virginia state chartered bank. If these applications are approved, FCB will become subject to regulation by the Federal Reserve and BFI to the same extent as James River's other banking subsidiaries.
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 Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("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 is registered under the bank holding company laws of Virginia. Accordingly, James River and its subsidiaries are also subject to regulation and supervision by the BFI.
Savings and Loan Holding Companies. Since James River's acquisition of FCB, James River has been a savings and loan holding company under federal law in addition to being a bank holding company. For a discussion of the supervision and regulation of FCB as a federal savings bank, see "Supervision and Regulation of James River's Banking Subsidiaries - Federal Savings Banks" above. As also discussed above, FCB has filed applications with regulatory authorities to convert from a federal savings bank to a Virginia state chartered bank. If these applications are approved, James River will no longer be a savings and loan holding company.
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 intangibles 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 asset ratios of James River as of December 31, 1997 were 14.7% and 16.0%, 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, 1997, was 9.7%. 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, ---------------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in thousands)
Tier 1 Capital: Common stock $ 18,363 $ 12,290 $ 12,243 Additional Paid Capital 3,572 3,521 3,447 Retained earnings 17,663 21,629 20,487 Less: Goodwill (2,504) (2,750) (160) ------- ------- ------- Total Tier 1 capital $ 37,094 $ 34,690 $ 36,017 ======= ======= ======= Tier 2 Capital: Allowance for loan losses 3,151 2,702 2,030 Allowable long-term debt - - - ------- ------- ------- Total Tier 2 capital $ 3,151 $ 2,702 $ 2,030 ======= ======= ======= Total Risk-Based Capital $ 40,245 $ 37,392 $ 38,047 ======= ======= ======= Risk-weighted assets $ 252,115 $ 216,158 $ 162,438
Capital Ratios: Tier 1 risk-based capital ratio 14.71% 16.05% 22.17% Total risk-based capital ratio 15.96% 17.30% 23.42% Tier 1 capital to average adjusted total assets 9.68% 9.68% 11.78%
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. The FDIC also has the authority to initiate enforcement actions against savings institutions, after first giving the OTS an opportunity to take such action.
Through the SAIF, the FDIC insures deposits at savings institutions such as FCB, and through the BIF, the FDIC insures deposits at other financial institutions (principally commercial banks, state-chartered banks such as BOS, JRB and BIW, and certain federally chartered savings banks).
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, 1997, James River and its subsidiaries had the equivalent of 182 full time employees. None of its employees is represented by any collective bargaining unit. James River considers relations with its employees to be good.
Certain Executive Officers
Information regarding certain executive officers is contained in the 1998 Proxy Statement. Set forth below is information regarding Donald W. Fulton, Jr., James River's Senior Vice President and Chief Financial Officer.
Name Age Business Experience - ---- --- ------------------- Donald W. Fulton, Jr. 51 For the preceding five years, Mr. Fulton was 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, 1998. From that date through December 31, 1998, Mr. Fulton was employed by Wachovia on merger transition activities pertaining to financial reporting, corporate communications, and corporate securities matters.
Year 2000 Issue
James River and its subsidiaries have undertaken a variety of measures to ensure that hardware and software systems will be century date compliant. James River has established a project plan, completed a hardware and software inventory, and developed a preliminary impact assessment. James River has initiated contacts with vendors for specific product compliance confirmation. The Company also has outlined a plan for testing each system. Testing of primary software applications will be conducted in conjunction with regularly scheduled testing and is not expected to result in material additional costs. The testing phase is expected to be completed by year-end 1998. In addition to efforts to ensure readiness of internal systems, the Company's bank subsidiaries have informed all retail and commercial customers of the need to address the Year 2000 issue. In 1997, the Company's plan and its progress in implementing that plan were reviewed by the Federal Reserve in its regular examination process. Based upon the results of the preliminary impact assessment and information provided by vendors, management believes that its plan for determining century date compliance is adequate and that the Company will not incur significant incremental costs to achieve compliance.
Item 2.
Item 2. Properties
James River's headquarters are located at 1512 Holland Road, Suffolk, Virginia. The headquarters are owned by BOS. 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 16 of their 19 branch banking offices and lease the land for three offices.
Item 3.
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.
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, 1997.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The information included under "Market Price for Common Stock" appearing on page 44 of the Annual Report is incorporated herein by reference.
Item 6.
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.
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 8 through 13 of the Annual Report is incorporated herein by reference.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information captioned "Liquidity and Market Risk" appearing on pages 11 and 12 of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
(a) The Financial Statements and the notes thereto appearing on pages 16 through 41 of the Annual Report are incorporated herein by reference.
(b) Unaudited quarterly financial information for the Company is contained in Note 16 on page 41 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 BIW for the periods presented.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
The information required by Part III, Items 10, 11, 12 and 13 has been incorporated herein by reference to the Company's 1998 Proxy Statement as set forth below in accordance with General Instruction G(3) of Form 10-K.
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information relating to directors and executive officers of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth in the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1998 Proxy Statement and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information regarding compensation of officers and directors of the Company is set forth in the sections entitled "Election of Directors" and "Executive Compensation" in the Company's 1998 Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding ownership of the Company's Common Stock is set forth in the section entitled "Security Ownership of Management and Certain Beneficial Owners" in the Company's 1998 Proxy Statement and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions with the Company is set forth in the section entitled "Certain Relationships and Related Transactions" in the Company's 1998 Proxy Statement and is incorporated herein by reference.
PART IV
Item 14.
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, 1997 and 1996 and for the three years ending December 31, 1997, 1996 and 1995, 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.
(b) Reports on Form 8-K - 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 in 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 27, 1998.
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 Glenn T. McCall 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.
Signature Title Date
/s/ G. P. Jackson Chairman of The Board March 26, 1998 - -------------------------- G. P. Jackson Director
/s/ Bruce B. Gray Vice Chairman of The March 26, 1998 - -------------------------- Bruce B. Gray Board and Director
/s/ Harold U. Blythe President and Chief Executive March 26, 1998 - -------------------------- Harold U. Blythe Officer, Director
/s/ Donald W. Fulton, Jr. Senior Vice President and March 26, 1998 - -------------------------- Donald W. Fulton, Jr. Chief Financial Officer
/s/ Glenn T. McCall Senior Vice President and March 26, 1998 - -------------------------- Glenn T. McCall Director
/s/ James E. Butler, Jr. Director March 26, 1998 - -------------------------- James E. Butler, Jr.
/s/ Elmon T. Gray Director March 26, 1998 - -------------------------- Elmon T. Gray
/s/ Ben P. Kanak Director March 26, 1998 - -------------------------- Ben P. Kanak
/s/ John A. Ramsey, Jr. Director March 26, 1998 - -------------------------- John A. Ramsey, Jr.
/s/ Robert E. Spencer, Jr. Director March 26, 1998 - -------------------------- Robert E. Spencer, Jr.
/s/ E. V. Stephenson, Jr. Director March 26, 1998 - -------------------------- E. V. Stephenson, Jr.
/s/ James C. Stewart Director March 26, 1998 - -------------------------- James C. Stewart
EXHIBIT INDEX
* (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.