UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2007
Commission File No. – 000-49787
BOTETOURT BANKSHARES, INC.
(Exact name of the registrant as specified in its charter)
| Virginia | 54-1867438 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
19747 Main Street, Buchanan, VA 24066
(Address of principal executive offices)
(540) 591-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act) (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The number of shares outstanding of the Registrant’s Common Stock, $1 Par Value, as of August 9, 2007 was 1,242,850.
Botetourt Bankshares, Inc.
Form 10-Q
Part I Financial Information
| Item 1. | Financial Statements | |||
The consolidated financial statements of Botetourt Bankshares, Inc. (the “Company”) are set forth in the following pages. | ||||
Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 | 2 | |||
Consolidated Statements of Income for the Six and Three Months Ended June 30, 2007 and 2006 | 3 | |||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 | 4 | |||
| 5-9 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10-13 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 13-14 | ||
| Item 4. | Controls and Procedures | 14 | ||
| Item 4T. | Controls and Procedures | 14 | ||
| Part II Other Information | ||||
| Item 1. | Legal Proceedings | 15 | ||
| Item 1A. | Risk Factors | 15-16 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 | ||
| Item 3. | Defaults Upon Senior Securities | 16 | ||
| Item 4 | Submission of Matters to a Vote of Security Holders | 17 | ||
| Item 5. | Other Information | 17 | ||
| Item 6. | Exhibits | 17 | ||
| Signatures | 18 | |||
| Certifications | 19 | |||
Part I. Financial Information
| Item 1. | Financial Statements |
Botetourt Bankshares, Inc.
Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
| (Unaudited) June 30, 2007 | (Audited) December 31, 2006 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 6,914,128 | $ | 8,258,003 | ||||
Interest-bearing deposits with banks | 200,826 | 163,151 | ||||||
Federal funds sold | 12,123,000 | — | ||||||
Investment securities available for sale | 22,630,264 | 24,798,980 | ||||||
Investment securities held to maturity (fair value approximates $1,436,427 at June 30, 2007 and $1,525,353 at December 31, 2006) | 1,450,000 | 1,539,933 | ||||||
Restricted equity securities | 505,500 | 524,600 | ||||||
Loans, net of allowance for loan losses of $2,387,897 at June 30, 2007 and $2,502,122 at December 31, 2006 | 216,703,340 | 209,541,312 | ||||||
Property and equipment, net | 6,056,023 | 5,625,914 | ||||||
Accrued income | 1,513,734 | 1,513,122 | ||||||
Foreclosed assets | 1,075,000 | — | ||||||
Other assets | 2,585,130 | 2,417,302 | ||||||
Total assets | $ | 271,756,945 | $ | 254,382,317 | ||||
Liabilities and stockholders’ equity | ||||||||
Liabilities | ||||||||
Noninterest-bearing deposits | $ | 33,833,725 | $ | 33,768,568 | ||||
Interest-bearing deposits | 210,410,834 | 193,460,839 | ||||||
Total deposits | 244,244,559 | 227,229,407 | ||||||
Federal funds purchased | — | 1,341,000 | ||||||
Accrued interest payable | 1,275,853 | 943,449 | ||||||
Other liabilities | 1,443,433 | 1,245,669 | ||||||
Total liabilities | 246,963,845 | 230,759,525 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ equity | ||||||||
Common stock, $1.00 par value, 2,500,000 shares authorized, 1,242,850 issued and outstanding at June 30, 2007 and 1,241,750 issued and outstanding at December 31, 2006 | 1,242,850 | 1,241,750 | ||||||
Additional paid-in capital | 1,568,684 | 1,546,984 | ||||||
Retained earnings | 22,771,495 | 21,544,114 | ||||||
Accumulated other comprehensive (loss) | (789,929 | ) | (710,056 | ) | ||||
Total stockholders’ equity | 24,793,100 | 23,622,792 | ||||||
Total liabilities and stockholders’ equity | $ | 271,756,945 | $ | 254,382,317 | ||||
2
Consolidated Statements of Income
For the Six and Three Months ended June 30, 2007 and 2006 (Unaudited)
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Interest income | ||||||||||||
Loans and fees on loans | $ | 8,667,243 | $ | 7,368,557 | $ | 4,378,123 | $ | 3,785,765 | ||||
Federal funds sold | 150,312 | 258,480 | 123,732 | 149,602 | ||||||||
Investment securities: | ||||||||||||
Taxable | 319,443 | 388,504 | 152,929 | 201,423 | ||||||||
Exempt from federal income tax | 177,342 | 186,110 | 88,546 | 93,312 | ||||||||
Dividend income | 23,415 | 19,317 | 11,623 | 10,089 | ||||||||
Deposits with banks | 4,702 | 6,253 | 2,529 | 4,242 | ||||||||
Total interest income | 9,342,457 | 8,227,221 | 4,757,482 | 4,244,433 | ||||||||
Interest expense | ||||||||||||
Deposits | 3,846,983 | 2,824,402 | 1,993,579 | 1,495,017 | ||||||||
Federal funds purchased | 7,224 | — | — | — | ||||||||
Total interest expense | 3,854,207 | 2,824,402 | 1,993,579 | 1,495,017 | ||||||||
Net interest income | 5,488,250 | 5,402,819 | 2,763,903 | 2,749,416 | ||||||||
Provision for loan losses | 150,000 | 150,000 | 75,000 | 75,000 | ||||||||
Net interest income after provision | 5,338,250 | 5,252,819 | 2,688,903 | 2,674,416 | ||||||||
Non-interest income | ||||||||||||
Service charges on deposit accounts | 331,911 | 279,398 | 177,445 | 147,959 | ||||||||
Mortgage origination fees | 122,049 | 143,895 | 55,428 | 65,208 | ||||||||
Other income | 409,602 | 485,628 | 213,184 | 243,734 | ||||||||
Total non-interest income | 863,562 | 908,921 | 446,057 | 456,901 | ||||||||
Non-interest expense | ||||||||||||
Salaries and employee benefits | 2,156,339 | 2,141,366 | 1,076,057 | 1,052,919 | ||||||||
Occupancy and equipment expense | 452,708 | 435,006 | 238,188 | 226,621 | ||||||||
Other expense | 1,097,503 | 930,191 | 563,912 | 455,772 | ||||||||
Total non-interest expense | 3,706,550 | 3,506,563 | 1,878,157 | 1,735,312 | ||||||||
Income before income taxes | 2,495,262 | 2,655,177 | 1,256,803 | 1,396,005 | ||||||||
Income tax expense | 770,961 | 822,182 | 396,442 | 441,150 | ||||||||
Net income | $ | 1,724,301 | $ | 1,832,995 | $ | 860,361 | $ | 954,855 | ||||
Basic earnings per share | $ | 1.39 | $ | 1.48 | $ | 0.69 | $ | 0.77 | ||||
Diluted earnings per share | $ | 1.38 | $ | 1.48 | $ | 0.69 | $ | 0.77 | ||||
Dividends declared per share | $ | 0.40 | $ | 0.36 | $ | 0.20 | $ | 0.18 | ||||
Basic weighted average shares outstanding | 1,242,461 | 1,240,395 | 1,242,850 | 1,240,592 | ||||||||
Diluted average shares outstanding | 1,245,735 | 1,242,816 | 1,246,181 | 1,243,266 | ||||||||
3
Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2007 and 2006 (Unaudited)
Six Months Ended June 30, | ||||||||
| 2007 | 2006 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 1,724,301 | $ | 1,832,995 | ||||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||
Depreciation and amortization | 312,135 | 291,368 | ||||||
Accretion of discounts on securities | (2,371 | ) | (3,935 | ) | ||||
Provision for loan losses | 150,000 | 150,000 | ||||||
Deferred income taxes | 60,739 | (30,609 | ) | |||||
Net realized gains on sales of assets | (3,200 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Accrued income | (612 | ) | (222,330 | ) | ||||
Other assets | (289,059 | ) | (199,594 | ) | ||||
Accrued interest payable | 332,404 | 130,881 | ||||||
Other liabilities | 238,912 | 130,217 | ||||||
Net cash provided by operating activities | 2,523,249 | 2,078,993 | ||||||
Cash flows from investing activities | ||||||||
Net increase in federal funds sold | (12,123,000 | ) | (10,472,000 | ) | ||||
Purchases of investment securities – held to maturity | (650,000 | ) | (200,000 | ) | ||||
Purchases of investment securities – available for sale | (1,500,000 | ) | (3,338,359 | ) | ||||
Purchases of restricted equity securities | — | (50,600 | ) | |||||
Maturity of investment securities – held to maturity | 740,000 | 470,000 | ||||||
Maturity of investment securities – available for sale | 3,550,000 | 1,950,000 | ||||||
Redemption of restricted equity securities | 19,100 | — | ||||||
Net (increase) decrease in interest-bearing deposits with banks | (37,675 | ) | 33,752 | |||||
Net increase in loans | (8,512,028 | ) | (9,054,502 | ) | ||||
Purchases of properties and equipment | (678,553 | ) | (106,021 | ) | ||||
Proceeds from sales of foreclosed assets | 125,000 | — | ||||||
Net cash used in investing activities | (19,067,156 | ) | (20,767,730 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase in noninterest-bearing deposits | 65,157 | 5,135,931 | ||||||
Net increase in interest-bearing deposits | 16,949,995 | 12,054,278 | ||||||
Net decrease in federal funds purchased | (1,341,000 | ) | — | |||||
Dividends paid | (496,920 | ) | (446,516 | ) | ||||
Common stock issued | 22,800 | 20,212 | ||||||
Net cash provided by financing activities | 15,200,032 | 16,763,905 | ||||||
Net decrease in cash & cash equivalents | (1,343,875 | ) | (1,924,832 | ) | ||||
Cash and cash equivalents, beginning | 8,258,003 | 8,985,579 | ||||||
Cash and cash equivalents, ending | $ | 6,914,128 | $ | 7,060,747 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | 3,521,803 | $ | 2,693,521 | ||||
Income taxes paid | $ | 603,750 | $ | 773,400 | ||||
Supplemental schedule of noncash investing activities: | ||||||||
Other real estate acquired in settlement of loans | $ | 1,200,000 | $ | 80,000 | ||||
4
Notes to Consolidated Financial Statements
June 30, 2007 (unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Organization
Botetourt Bankshares, Inc., (the Company) was incorporated as a Virginia corporation on January 17, 1997 and is the holding company for Bank of Botetourt (the Bank). The Bank was acquired by the Company on September 30, 1997.
Bank of Botetourt was founded in 1899 and currently serves Botetourt, Roanoke, and Rockbridge Counties, Virginia and surrounding areas through eight banking offices. As an FDIC-insured, state-chartered bank, the Bank is subject to regulation by the Commonwealth of Virginia’s Bureau of Financial Institutions and the Federal Deposit Insurance Corporation. The Company is regulated by the Federal Reserve.
The consolidated financial statements as of June 30, 2007 and for the periods ended June 30, 2007 and 2006 included herein, have been prepared by Botetourt Bankshares, Inc., without audit pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s consolidated financial position, results of operations, and cash flows for such interim periods. Management believes that all interim period adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2006, included in the Company’s Form 10-KSB for the fiscal year ended December 31, 2006. The balance sheet as of December 31, 2006 was extracted from the Form 10-KSB for the year ended December 31, 2006.
Interim financial performance is not necessarily indicative of performance for the full year.
The accounting and reporting policies of the Company and its subsidiaries follow generally accepted accounting principles and general practices within the financial services industry.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
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.
Reclassification
Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and stockholders’ equity previously reported were not affected by these reclassifications.
Accounting Change
In December 1986, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” (SFAS No. 91). SFAS No. 91 amends SFAS No. 13, 60, 65 and rescinds SFAS No. 17. As permitted, the Company adopted and prospectively applied the provisions of SFAS No. 91 for lending transactions entered into and commitments granted on or after June 22, 2007. Accordingly, loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. The Company is generally amortizing these amounts over the contractual life of the loan using the effective interest method. Certain loan categories with no stated maturity date are amortized over the estimated life of the loan. Fees related to stand-by letters of credit are recognized on a straight-line basis over the commitment period.
5
Before adoption of SFAS No. 91, the Company recognized loan origination and commitment fees as income in the period the loan or commitment was granted. The related costs associated with originating those and commitments were recognized in noninterest expense in the period incurred. As a result of adopting SFAS No. 91, at June 30, 2007, the Company deferred net loan costs of $4,275 that would have otherwise been reflected as expense, thereby increasing 2007 net income by $2,822. As of June 30, 2007, approximately $215,551,656 or 99.5% of loans included in the Company’s financial statements were accounted for under the prior policy. The initial application of SFAS No. 91 did not have a material impact on the Company’s financial position, results of operations, or cash flows.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 with no impact to its financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS No. 157 is effective for the Company on January 1, 2008 and is not expected to have a material impact on the Company’s financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected must be reported in earnings at each subsequent reporting date. The fair value option can be applied instrument by instrument, however the election is irrevocable. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently analyzing the effect of the adoption of SFAS No. 159, but does not expect the statement to have a material impact on its financial position, results of operations or cash flows.
On May 2, 2007, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”. The issuance provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The guidance should be applied upon the initial adoption of Interpretation 48 or retrospectively if the enterprise has already adopted Interpretation 48. The position will have no material impact on the Company’s financial position, results of operations or cash flows.
On June 14, 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” to provide guidance on how an entity should recognize the income tax benefit received on dividends that are (a) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options and (b) charged to retained earnings under Statement 123(R). This Issue should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Early application is permitted as of the beginning of a fiscal year for which interim or annual financial statements have not yet been issued. Retrospective application to previously issued financial statements is prohibited. The Company does not expect this issue to have a material impact on its financial position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
6
Note 2. Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks.” As a condition of our correspondent bank agreement, the Bank is also required to maintain a target balance. The target balance as of June 30, 2007 was $1,800,000.
Note 3. Allowance for Loan Losses
The following is an analysis of the allowance for loan losses for the six months ended June 30:
| 2007 | 2006 | |||||||
Balance, beginning | $ | 2,502,122 | $ | 2,271,074 | ||||
Provision charged to expense | 150,000 | 150,000 | ||||||
Recoveries of amounts charged off | 85,052 | 20,762 | ||||||
Amounts charged off | (349,277 | ) | (93,121 | ) | ||||
Balance, ending | $ | 2,387,897 | $ | 2,348,715 | ||||
Note 4. Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share 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 Company. The following is a reconciliation of basic and diluted earnings per share for the six months ended June 30:
| 2007 | 2006 | |||||||||
| Shares | Per Share | Shares | Per Share | |||||||
Basic earnings per share | 1,242,461 | $ | 1.39 | 1,240,395 | $ | 1.48 | ||||
Effect of dilutive securities | 3,274 | n/a | 2,421 | n/a | ||||||
Diluted earnings per share | 1,245,735 | $ | 1.38 | 1,242,816 | $ | 1.48 | ||||
Note 5. Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’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 amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Bank’s commitments at June 30, 2007 and 2006 is as follows:
| 2007 | 2006 | |||||
Commitments to extend credit | $ | 34,864,470 | $ | 37,570,232 | ||
Standby letters of credit | 5,094,395 | 2,681,162 | ||||
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. 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 Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s evaluation of the party’s creditworthiness. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.
7
Stand-by letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.
Commitment for Land Purchase
On May 30, 2007, the Bank signed a contract with Team Hollins Investments, LLC, for the purchase of a parcel of land in Roanoke County, Virginia. The contract purchase price is $700,000. A deposit of $20,000 was made at contract signing with the remaining $680,000 balance due at closing. The anticipated closing is fourth quarter of 2007. The project will be funded through the Bank’s retained earnings. The Company has no plans to issue additional capital stock to fund the project. The intended purpose of the land purchase is for the future location of a full-service branch facility. No construction plans or commencement date has been established.
Note 6. Benefit Plans
Stock-Based Compensation
The Company adopted the 1999 Incentive Stock Option Plan (Incentive Plan) for certain employees which reserves up to 10,000 shares. Under the terms of the plan, option exercise price shall be set by the Board of Directors at the date of grant, but shall not be less than 100% of the fair market value of the stock on the date of the grant. Options granted under the plan expire no more than 10 years from date of grant and may not be exercised for six months after the date of the grant.
The weighted average fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. No options were granted during the first six months of 2007 or 2006. A summary of option activity under the Incentive Plan as of June 30, 2007 is as follows:
| Options Outstanding | Weighted Average Exercise Price | Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||
Outstanding, January 1, 2007 | 8,250 | $ | 22.33 | ||||||||
Granted | — | n/a | |||||||||
Forfeited | — | n/a | |||||||||
Exercised | (1,100 | ) | 20.73 | ||||||||
Outstanding, June 30, 2007 | 7,150 | $ | 22.58 | 30 months | $ | 136,351 | |||||
Exercisable, June 30, 2007 | 7,150 | $ | 22.58 | 30 months | $ | 136,351 | |||||
All outstanding options vested prior to January 1, 2006 therefore, consistent with the prospective application methodology, no compensation expense was recognized in the first six months of 2007 or 2006.
The intrinsic value of options outstanding during the first six months of 2007 was $146,003. Cash received during the first six months of 2007 for options exercised was $22,800.
Defined Benefit Pension Plan
The Company has a qualified noncontributory, Defined Benefit Pension Plan, which covers substantially all of its employees. For additional information related to the plan, refer to the Company’s Form 10-KSB for the year ended December 31, 2006.
8
Components of Net Periodic Benefit Cost
Six Months Ended June 30, | ||||||||
| 2006 | 2007 | |||||||
Service cost | $ | 139,074 | $ | 136,364 | ||||
Interest cost | 117,414 | 99,613 | ||||||
Expected return on plan assets | (117,952 | ) | (102,287 | ) | ||||
Amortization of net obligation at transition | (480 | ) | (479 | ) | ||||
Amortization of prior service cost | 764 | 765 | ||||||
Amortization of net loss | 15,228 | 18,156 | ||||||
Net periodic benefit cost | $ | 154,048 | $ | 152,132 | ||||
Employer Contributions
The Company previously disclosed in its financial statements for the year ended December 31, 2006, that no contributions were expected to be paid prior to September 30, 2007. No contributions were made in the first six months of 2007.
Note 7. Property and Equipment
During the second quarter the Bank settled two transactions for the purchases of land. On June 6, 2007, Bank of Botetourt acquired 0.013 acres of land, adjacent to the Loan Administration Center, in Botetourt County, Virginia for the amount of $5,071. On June 14, 2007, Bank of Botetourt closed on its land purchase contract, in the amount of $401,845, with LakeWatch Plantation, LLC for the establishment of a branch office in Franklin County, Virginia, near Smith Mountain Lake. Including the land purchase, the total estimated project cost is $1,041,838. The Bank has received approval for the branch from our regulators, the Virginia Bureau of Financial Institutions and the Federal Deposit Insurance Corporation.
Note 8. Subsequent Events
Declaration of Cash Dividend
On July 25, 2007, the Company declared a second quarter $0.20 cash dividend per common share payable on August 10, 2007 to shareholders of record on July 25, 2007.
9
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
The following discussion provides information about the major components of the results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.
Critical Accounting Policy
For a discussion of the Company’s critical accounting policy, including allowance for loan losses, see the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.
Results of Operations
Net income for the six months ended June 30, 2007 was $1,724,301 compared to $1,832,995 for the same period last year, representing a decrease of $108,694 or 5.93%. Basic earnings per share decreased $0.09 from $1.48 at June 30, 2006 to $1.39 at June 30, 2007. Diluted earnings per share decreased $0.10 from $1.48 at June 30, 2006 to $1.38 at June 30, 2007. The decrease in net income is primarily due to lower mortgage loan origination fees, lower title insurance commissions, and higher non-interest expense. Additionally, with the current interest rate environment and prolonged inverted to flat yield curve, whereby the markets are predicting long-term interest rates to be below or equal to short-term rates, the Company is realizing earnings pressures from the narrowing of its net interest margin.
Interest-earning assets increased $12,827,590 from $243,173,237 at June 30, 2006 to $256,000,827 at June 30, 2007. Total interest income increased in the first six months of 2007 as compared to the first six months of 2006 due primarily to an increase in interest earning assets. Additionally, interest-bearing liabilities increased $13,878,827 to $210,410,834 at June 30, 2007 from $196,532,007 at June 30, 2006. Interest expense increased due to an increase in interest bearing deposits and deposit liabilities repricing at higher interest rates. The increases in total interest income and interest expense resulted in a net increase of $85,431 to net interest income for the six months ended June 30, 2007 compared to the same time period in 2006. The Company is experiencing a compression in net interest margin due primarily to a relatively flat yield curve and intense competition for deposits. The FOMC ended a period of seventeen consecutive interest rate increases in May 2006 causing a leveling of interest income in our rate sensitive loan portfolio while interest expense on deposits has continued to increase due to significant competition in our markets. The combination of these factors has resulted in a lower net interest margin.
Bank management has a comprehensive loan review program, which includes a risk rating system for all loans. The allowance for loan losses is evaluated on a regular basis and represents management’s estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. The allowance consists of specific, general, and unallocated components. The adequacy for loan losses is determined by analyses of different loan categories. The related provision is based upon management’s evaluation of the risk characteristics of the loan portfolio under current economic conditions with consideration to such factors as financial condition of the borrowers, collateral values, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, and delinquency trends. Management believes the provision and the resulting allowance for loan losses are adequate and appropriate. The provision for credit losses was $150,000 for the six months ended June 30, 2007 and the six months ended June 30, 2006. The consistency in the provision was due to the overall strength of asset quality in the loan portfolio. While charge-offs have increased the first six months of 2007 compared to the same time period of 2006, the increase is primarily attributable to one foreclosed credit. The Bank had previously allocated a specific reserve in anticipation of the loss. A partial recovery was recognized during the second quarter on this credit from the proceeds of the sale of a portion of collateral securing the loan.
Non-interest income decreased by 4.99% to $863,562 for the six months ended June 30, 2007 compared to $908,921 for the six months ended June 30, 2006. The decrease is attributed to a decrease in mortgage origination fees, a decrease in income from title insurance commissions from the bank’s subsidiary, and reduced income from the sales of mutual funds and annuities. The bank’s subsidiary has an investment in two title insurance companies whose commissions are dependent on the mortgage lending function, which has experienced a slowdown in the first six months of 2007. Also, continued competition from additional title insurance agencies in the Company’s market has reduced income from title insurance commissions. For the six months ended June 30, 2007, non-interest expense increased by $199,987, or 5.70% which is primarily a result of an increase in audit and other professional services associated with the normal course of business, expenses associated with the foreclosed property discussed in the non-performing assets section, as well as an increase in salaries, employee benefits, and occupancy expense associated with continuing growth of the Company.
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Net income for the three months ended June 30, 2007 was $860,361 compared to $954,855 for the same period last year, representing a decrease of $94,494 or 9.90%. Both basic and diluted earnings per share decreased $0.08 from $0.77 at June 30, 2006 to $0.69 at June 30, 2007. The decrease in net income is attributable to the adverse impact of a narrowing net interest margin and a decrease in non-interest income.Total interest income increased during the three month period compared to the same three month period in 2006 due primarily to an increase in earning assets. Interest expense increased during the three month period compared to the same three month period of 2006 due to interest bearing deposit growth and deposit liabilities repricing at higher interest rates. Net interest income increased by $14,487 in the three months ended June 30, 2007 as compared to the same period in 2006.
The provision for credit losses was $75,000 for the quarter ended June 30, 2007 and the quarter ended June 30, 2006. Management evaluates the reasonableness of the allowance for loan losses on a quarterly basis and believes the provision and the resulting allowance for loan losses are adequate.
Non-interest income decreased by $10,844 or 2.37% for the three months ended June 30, 2007 compared to the same quarter in the previous year. The decrease is primarily attributed to a decrease in mortgage origination fees, a decrease in income from title insurance commissions from the bank’s subsidiary, and reduced income from the sales of mutual funds and annuities. Non-interest expense for the three months ended June 30, 2007 increased by $142,845 or 8.23% over the same quarter in the previous year. The increase is primarily a result of an increase in other operating expenses, including audit and other professional services, combined with an increase in personnel expense and occupancy expense associated with the continuing growth of the Company.
As discussed in the notes to the consolidated financial statements, the Company adopted SFAS No. 91 as of June 22, 2007, which requires loan origination fees and costs to be deferred and recognized over the life of the loan as an adjustment to yield. The initial adoption resulted in deferred net loan costs of $4,275 thereby increasing net income by $2,822, an immaterial impact on the Company’s results from operations.
Financial Condition
As a result of continued overall loan demand in our operating markets, total loans increased $7,047,803 during the six months ended June 30, 2007. We funded these new loans through increased deposits. Deposits increased by $17,015,152 due to competitive pricing and successful deposit campaigns. As a result of this deposit growth, the Company transitioned from a federal funds purchaser of $1,341,000 at December 31, 2006 to a federal funds seller during the first six months of 2007. Federal funds sold at June 30, 2007 was $12,123,000. Investment securities, including restricted equity securities decreased $2,277,749 as a result of maturing investment securities and a required redemption of Federal Home Loan Bank stock. Given the current interest rate environment, management elected to invest primarily in overnight and shorter-term investments. Total assets increased by $17,374,628 to $271,756,945 from December 31, 2006 to June 30, 2007.
Stockholders’ equity totaled $24,793,100 at June 30, 2007 compared to $23,622,792 at December 31, 2006. The $1,170,308 increase during the period was the result of earnings for the six months combined with capital stock issued from the exercise of employee stock options, offset by a decrease in the market value of securities that are classified as available for sale and by dividends paid for the period.
Non-Performing Assets
Non-performing assets, which consist of nonaccrual loans and foreclosed properties, were $1,255,842 at June 30, 2007 and $1,556,790 at December 31, 2006. Foreclosed assets consisted of one property totaling $1,075,000 at June 30, 2007. During the first quarter of 2007, the Bank recognized a charge-off on this credit in the amount of $276,000 at the time of foreclosure. The Bank had previously allocated an adequate specific reserve in the loan loss allowance in anticipation of the foreclosure. During the second quarter 2007, a fixture on the property was sold reducing the foreclosed asset by $125,000. Additionally, a partial recovery was recognized during the period from the proceeds of the sale of a portion of additional collateral securing the loan. The foreclosed property is being marketed for sale actively, and no additional loss is anticipated. The Bank had no foreclosed properties as of December 31, 2006. Non-accrual loans were $180,842 at June 30, 2007 and $1,556,790 at December 31, 2006. Loans are generally placed in nonaccrual status when the collection of principal and interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. A loan is considered impaired if it is probable that the Bank will be unable to collect all amounts due under the contractual terms of the loan agreement. Impaired loans amounted to $406,991 at June 30, 2007 compared to $1,914,440 at December 31, 2006. The reduction in the impaired loans balance is due to the foreclosure of the aforementioned property.
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Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by 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 and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also 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 the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, as all those terms are defined in the regulations. By definition, Tier 1 capital is comprised of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles.
At June 30, 2007, the Bank’s Tier 1 risk-based capital ratio (Tier 1 capital divided by risk-weighted average assets) was 11.36% compared to 11.23% at December 31, 2006. At June 30, 2007, the Company’s risk-based ratio (Tier 1 capital divided by risk-weighted average assets) was 12.00% compared to 11.90% at December 31, 2006. Each of these ratios exceeded the required minimum leverage ratio of 4.0%. At June 30, 2007, the Bank’s leverage ratio (Tier 1 capital divided by quarterly average assets) was 9.10% compared to 9.30% at December 31, 2006. At June 30, 2007, the Company’s leverage ratio (Tier 1 capital divided by quarterly average assets) was 9.57% compared to 9.82% at December 31, 2006. Each of these ratios exceeded the required minimum leverage ratio of 4.0%. Management believes, as of June 30, 2007, that the Company and the Bank met all capital adequacy requirements to which we are subject.
Liquidity
Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss. There were no material changes in the Company’s liquidity position at June 30, 2007. Federal fund lines available from correspondent banks totaled $17,000,000 at June 30, 2007 and December 31, 2006. No balances were outstanding on these lines at June 30, 2007 compared to $1,341,000 at December 31, 2006. The secondary liquidity source for both short-term and long-term borrowings consists of a $9,900,000 secured line of credit from the Federal Home Loan Bank. No balance was outstanding on this line at June 30, 2007 or December 31, 2006. Any borrowings from the Federal Home Loan Bank are secured by a blanket collateral agreement on the Bank’s 1-to-4 family residential real estate loans.
The Bank uses cash and federal funds sold to meet its daily funding needs. If funding needs are met through holdings of excess cash and federal funds, then profits might be sacrificed as higher-yielding investments are foregone in the interest of liquidity. However, the current flat yield curve interest rate environment provides minimal profit incentive for purchasing longer-term investments. Therefore management determines, based on such items as loan demand and deposit activity, an appropriate level of cash and federal funds sold and seeks to maintain that level.
The Bank’s investment portfolio also serves as a source of liquidity. The primary objectives of the investment portfolio are to satisfy liquidity requirements, maximize income on portfolio assets, and supply collateral required to secure public funds deposits. As investment securities mature, the proceeds are either reinvested in federal funds sold to fund loan demand or deposit withdrawal fluctuations or the proceeds are reinvested in similar investment securities. The majority of investment security transactions consist of replacing securities that have been called or matured. The Bank keeps a portion of its investment portfolio in unpledged assets that are less than 24 months to maturity. These investments are a source of liquid funds as they can be sold in any interest rate environment without causing significant harm to the current period’s results of operations.
As a result of the steps described above, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.
New Branch
During the second quarter of 2007, the Bank received regulatory approval from the Virginia Bureau of Financial Institutions and the Federal Deposit Insurance Corporation to establish a branch office in Franklin County, Virginia at the 15000 block of Booker T. Washington Highway in Moneta, Virginia. The construction of the facility has commenced with the expected completion and opening in the fourth quarter of 2007.
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Forward-Looking Statements
Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The principal goals of the Company’s Asset/Liability Management Committee are to establish strategies that maintain adequate liquidity and to manage interest rate risk. Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loan demand. Interest rate risk is the exposure to the bank’s current and future earnings and to the bank’s equity capital which can occur from dramatic and adverse movements in interest rates. This risk potential results from the possibility that rapid fluctuations in interest rates may have an adverse impact on the bank’s net earnings and its underlying net economic value.
Management must ensure that adequate funds are available at all times to meet the needs of its customers. On the asset side of the balance sheet, in addition to cash and due from banks, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, primary liquidity sources include core deposits, the ability to increase large denomination certificates, and federal funds lines from correspondent banks. Secondary sources of liquidity include borrowings from the Federal Reserve Bank and the Federal Home Loan Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.
Interest rate risk management seeks to balance the effects of exposure from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specified time period as a result of schedule maturities, repayment, and contractual interest rate changes. To the extent practical, management attempts to protect the Company from wide fluctuations in its net interest income and erosion of net interest margin by creating repricing opportunities for its rate sensitive assets and liabilities portfolios.
The Company uses a number of tools to manage its interest rate risk, including static gap analysis, earnings simulation analysis, and economic value of equity (net present value estimation). Each of the models measure changes in a variety of interest rate scenarios. While each of the interest rate risk measures have limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate exposure of the Company.
The earnings simulation model forecasts annual net income under a variety of scenarios that incorporate changes in absolute level of interest rates, changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effect on net interest income from gradual changes in the Prime Rate of up to 300 basis points up or down over a 12-month period. The current model indicates that an increase in rates of 300 basis points over the next twelve months would result in an increase in net interest income of $819,000, or 18.63%, while a similar decrease in rates would result in a decrease in net interest income of $1.24 million, or 28.20%. The model also incorporates management’s forecasts for balance sheet growth, noninterest income and noninterest expense. The interest rate scenarios are used for analytical purposes and do not represent management’s view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may apply to the earnings of the Company. Modeling the sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the simulation model. While the earnings sensitivity analysis incorporates management’s best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact likely will differ materially from projected.
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The economic value of equity simulation is used to calculate the estimated fair value of assets and liabilities in different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet. The same assumptions are used in the economic value of equity simulation as in the earnings simulation. Management evaluates the effect on the economic value of equity from gradual changes in the Prime Rate of up to 300 basis points up or down over a 12-month period. The current model indicates that an increase in rates of 300 basis points over the next twelve months would result in an increase in the adjusted leverage capital ratio of 10.06%, while a similar decrease in rates would result in a decrease in adjusted leverage capital ratio of 6.39%.
| Item 4. | Controls and Procedures |
Not applicable.
| Item 4T. | Controls and Procedures |
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, including internal controls and procedures for financial reporting. Our chief executive officer and chief financial officer supervised this evaluation and concluded that our disclosure controls and procedures are effective. There have not been any changes in our internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls and procedures is dependent upon the employees responsible for executing it. While we have evaluated the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance to achieve their objective.
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PART II.
OTHER INFORMATION
| Item 1. | Legal Proceedings |
There are no matters pending legal proceedings to which the Company or its subsidiaries is a party or of which any of their property is subject.
| Item 1A. | Risk Factors |
The Company’s risk factors are described below. There are no material changes to the risk factors previously disclosed by the Company’s on Form 10-Q for the quarter ended March 31, 2007, as filed with the Commission on May 11, 2007.
We may be affected adversely by economic conditions in our market area.
Our Company’s business is subject to fluctuations due to economic conditions generally and in its market area especially, particularly economic slowdowns that may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would impact these local economic conditions and the demand for banking products and services generally, which could negatively affect our financial condition and performance. This is particularly true in the area of commercial loans to small businesses, which make up a growing part of our loan portfolio. Our Company cannot be certain when fluctuations in the economy may occur or the overall impact of the fluctuations on the profitability to the Company.
We may incur losses if we are unable to manage interest rate risk successfully.
Our Company’s profitability will depend in substantial part upon the spread between the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits and the volume of loan originations in our mortgage loan centers. We attempt to minimize our exposure to interest rate risk, but we will be unable to eliminate it. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. Our Company cannot predict with certainty or control changes in interest rates but believes that the Company’s current interest rate exposure is manageable and does not indicate any significant exposure to interest rate changes.
If our allowance for loan losses becomes inadequate, our results of operations may be affected adversely.
Our Company maintains an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed our current estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or that our loan loss allowance will be adequate in the future. Excessive loan losses could have a material impact on our financial performance.
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Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results.
Our Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market area. A major change in the real estate market, such as a deterioration in the value of this collateral, or in the local or national economy, could adversely affect our customers’ ability to repay these loans, which in turn could impact us. Risk of loan defaults and foreclosures are unavoidable in the banking industry. We try to limit our exposure to this risk by practicing good loan underwriting and carefully monitoring our loan commitments. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
Our Company faces intense competition for both loans and deposits among banks in our market area. We also compete with non-bank financial institutions such as credit unions, insurance companies, and investment brokerage firms, some of which are subject to less extensive regulation and lower income tax rates than the Company. As a result, these non-bank competitors have advantages over us in providing certain services. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. The overall competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.
Our profitability and the value of your investment may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.
Our Company is subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. Banking laws and regulations have had, and will continue to have, a significant impact on the financial services industry. These regulations are intended to protect consumers, depositors, and the banking system, not our shareholders. The interpretation and application of legislation by federal and state regulators are beyond our control and may affect the Company’s lending practices, capital structure, investment practices, dividend policy, and many other aspects of our business. The rapid and unpredictable change in legislation can be expected to influence our earnings and growth. Our success depends on our continued ability to maintain compliance with these regulations.
Some of these regulations may increase our costs and thus place other financial institutions that are not subject to similar regulation in stronger, more favorable competitive positions. For example, the cost associated with being a public company is proportionately higher for small companies like us due to the requirements of the Sarbanes-Oxley Act and other securities law. We expect to experience increasing compliance costs, including costs related to internal controls and auditor costs, as a result of the Sarbanes-Oxley Act. The regulations are expected to be applicable to us for our fiscal year ending December 31, 2007. These necessary costs are proportionately higher for a company of our size and will affect our profitability more than that of some of our larger competitors.
Changes in accounting standards could materially impact the Company’s financial statements
From time to time, the Financial Accounting Standards Board (“the FASB”) and the Public Company Accounting Oversight Board (“the PCAOB”) change the accounting and reporting standards that govern the preparation of the Company’s financial statements. The changes in accounting principles, policies and guidelines are hard to predict, as is the impact of adopting such changes on the Company’s financial statements.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable
| Item 3. | Defaults Upon Senior Securities |
Not applicable
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| Item 4. | Submission of Matters to a Vote of Security Holders |
Botetourt Bankshares, Inc. held its annual shareholders’ meeting on Wednesday, May 16, 2007, at 2:30 p.m. at the Buchanan Theatre on Main Street in Buchanan, Virginia. The matters voted upon were an amendment to the Company’s Articles of Incorporation to increase indemnification of directors, eliminate preemptive rights, and provide for supermajority voting in certain circumstances, the election of Class I directors for a three year term, and any other business that properly came before the meeting, or any adjournment thereof. The vote is summarized as follows.
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| 1. | The vote on an amendment to the Company’s Articles of Incorporation to increase indemnification of directors, eliminate preemptive rights, and provide for supermajority voting in certain circumstances passed with 81.3% affirmative vote. |
| Share Vote | ||
In favor of the amendment | 1,010,285 | |
Opposed the amendment | 16,245 | |
Abstained from voting | 23,531 | |
Absent/Non-Affirmative | 192,789 |
| 2. | Election of directors |
Class I Director Name | Shares Voted FOR | Shares WITHHELD | ||
D. Bruce Patterson | 1,085,194 | 1,000 | ||
F. Lindsey Stinnett | 1,085,994 | 200 | ||
John B. Williamson, III | 1,085,994 | 200 |
| 3. | No other business came before the meeting requiring a vote. |
| Item 5. | Other Information |
None
| Item 6. | Exhibits |
| 31.1 | Rule 13(a)-14(a) Certification of Chief Executive Officer. | |
| 31.2 | Rule 13(a)-14(a) Certification of Chief Financial Officer. | |
| 32.1 | Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. | |
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Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Botetourt Bankshares, Inc. | ||||||||
| Date: | August 9, 2007 | By: | /s/ H. Watts Steger, III | |||||
| H. Watts Steger, III | ||||||||
| Chief Executive Officer | ||||||||
| Date: | August 9, 2007 | By: | /s/ Michelle A. Alexander | |||||
| Michelle A. Alexander | ||||||||
| Chief Financial Officer | ||||||||
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