BORT Bank of Botetourt Buchanan Va (PK)

Table of Contents

 

 

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, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨   (Do not check if a smaller reporting company)		Smaller reporting company		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 5, 2008 was 1,244,925.

 

 

 

---

Table of Contents

Botetourt Bankshares, Inc.

Form 10-Q

Index

 

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, 2008 and December 31, 2007				2
Consolidated Statements of Income for the Six and Three Months Ended June 30, 2008 and 2007				3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007				4
Notes to Consolidated Financial Statements				5-10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		11-14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		14
Item 4T.		Controls and Procedures		14
Part II Other Information
Item 1.		Legal Proceedings		15
Item 1A.		Risk Factors		15
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		15
Item 3.		Defaults Upon Senior Securities		15
Item 4		Submission of Matters to a Vote of Security Holders		15
Item 5.		Other Information		15
Item 6.		Exhibits		15-16
Signatures				17
Certifications				18-20

---

Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements

Botetourt Bankshares, Inc.

Consolidated Balance Sheets

June 30, 2008 and December 31, 2007

 

 

 

		(Unaudited) June 30, 2008				(Audited) December 31, 2007
Assets
Cash and due from banks		$	9,723,208			$	7,680,230
Interest-bearing deposits with banks			191,280				219,756
Federal funds sold			1,209,000				—
Investment securities available for sale			19,450,122				20,659,344
Investment securities held to maturity (fair value approximates $1,237,164 at June 30, 2008 and $1,349,603 at December 31, 2007)			1,250,000				1,350,000
Restricted equity securities			550,900				505,500
Loans, net of allowance for loan losses of $2,395,735 at June 30, 2008 and $2,291,617 at December 31, 2007			241,391,720				235,388,641
Property and equipment, net			8,346,202				8,195,018
Accrued income			1,462,407				1,629,754
Foreclosed assets			1,934,766				1,475,000
Other assets			2,735,727				2,528,324
Total assets		$	288,245,332			$	279,631,567
Liabilities and stockholders’ equity
Liabilities
Noninterest-bearing deposits		$	34,786,258			$	32,442,608
Interest-bearing deposits			224,141,414				215,663,359
Total deposits			258,927,672				248,105,967
Federal funds purchased			—				2,134,000
Accrued interest payable			1,431,645				1,400,970
Other liabilities			856,273				1,539,240
Total liabilities			261,215,590				253,180,177
Commitments and contingencies			—				—
Stockholders’ equity
Common stock, $1.00 par value, 2,500,000 shares authorized, 1,244,925 issued and outstanding at June 30, 2008 and 1,243,300 issued and outstanding at December 31, 2007			1,244,925				1,243,300
Additional paid-in capital			1,610,334				1,577,284
Retained earnings			24,625,064				23,909,897
Accumulated other comprehensive loss			(450,581	)			(279,091	)
Total stockholders’ equity			27,029,742				26,451,390
Total liabilities and stockholders’ equity		$	288,245,332			$	279,631,567

 

2

---

Table of Contents

 

Botetourt Bankshares, Inc.

Consolidated Statements of Income

For the Six and Three Months ended June 30, 2008 and 2007 (Unaudited)

 

 

 

		Six Months Ended June 30,						Three Months Ended June 30,
		2008			2007			2008			2007
Interest income
Loans and fees on loans		$	8,527,795		$	8,667,243		$	4,187,623		$	4,378,123
Federal funds sold			43,811			150,312			23,867			123,732
Investment securities:
Taxable			232,386			319,443			117,435			152,929
Exempt from federal income tax			172,567			177,342			85,514			88,546
Dividend income			22,309			23,415			10,010			11,623
Deposits with banks			3,270			4,702			1,142			2,529
Total interest income			9,002,138			9,342,457			4,425,591			4,757,482
Interest expense
Deposits			4,032,281			3,846,983			1,978,741			1,993,579
Federal funds purchased			18,782			7,224			386			—
Total interest expense			4,051,063			3,854,207			1,979,127			1,993,579
Net interest income			4,951,075			5,488,250			2,446,464			2,763,903
Provision for loan losses			145,000			150,000			100,000			75,000
Net interest income after provision for loan losses			4,806,075			5,338,250			2,346,464			2,688,903
Noninterest income
Service charges on deposit accounts			294,278			331,911			154,825			177,445
Mortgage origination fees			108,931			122,049			34,014			55,428
Other income			413,866			409,602			189,451			213,184
Total noninterest income			817,075			863,562			378,290			446,057
Noninterest expense
Salaries and employee benefits			2,072,323			2,156,339			996,682			1,076,057
Occupancy and equipment expense			513,901			452,708			259,339			238,188
Other expense			1,254,633			1,097,503			655,471			563,912
Total noninterest expense			3,840,857			3,706,550			1,911,492			1,878,157
Income before income taxes			1,782,293			2,495,262			813,262			1,256,803
Income tax expense			544,599			770,961			246,372			396,442
Net income		$	1,237,694		$	1,724,301		$	566,890		$	860,361
Basic earnings per share		$	1.00		$	1.39		$	0.46		$	0.69
Diluted earnings per share		$	0.99		$	1.38		$	0.46		$	0.69
Dividends declared per share		$	0.42		$	0.40		$	0.21		$	0.20
Basic weighted average shares outstanding			1,244,336			1,242,461			1,244,925			1,242,850
Diluted average shares outstanding			1,245,779			1,245,735			1,246,257			1,246,181

 

3

---

Table of Contents

 

Botetourt Bankshares, Inc.

Consolidated Statements of Cash Flows

For the Six Months ended June 30, 2008 and 2007 (Unaudited)

 

 

 

		Six Months Ended June 30,
		2008				2007
Cash flows from operating activities
Net income		$	1,237,694			$	1,724,301
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			371,012				312,135
Net amortization of securities premiums / (accretion) discounts			818				(2,371	)
Provision for loan losses			145,000				150,000
Deferred income taxes			(64,691	)			60,739
Net realized gains on sales of assets			(948	)			(3,200	)
Changes in assets and liabilities:
Accrued income			167,347				(612	)
Other assets			(211,872	)			(289,059	)
Accrued interest payable			30,675				332,404
Other liabilities			(594,623	)			238,912
Net cash provided by operating activities			1,080,412				2,523,249
Cash flows from investing activities
Net increase in federal funds sold			(1,209,000	)			(12,123,000	)
Purchases of investment securities – held to maturity			(950,000	)			(650,000	)
Purchases of investment securities – available for sale			(4,996,430	)			(1,500,000	)
Purchases of restricted equity securities			(45,400	)			—
Maturity of investment securities – held to maturity			1,050,000				740,000
Maturity of investment securities – available for sale			5,945,000				3,550,000
Redemption of restricted equity securities			—				19,100
Net (increase) decrease in interest-bearing deposits with banks			28,476				(37,675	)
Net increase in loans			(6,642,845	)			(8,512,028	)
Purchases of properties and equipment			(471,138	)			(678,553	)
Proceeds from sales of properties and equipment			19,050				—
Proceeds from sales of foreclosed assets			35,000				125,000
Net cash used in investing activities			(7,237,287	)			(19,067,156	)
Cash flows from financing activities
Net increase in noninterest-bearing deposits			2,343,650				65,157
Net increase in interest-bearing deposits			8,478,055				16,949,995
Net decrease in federal funds purchased			(2,134,000	)			(1,341,000	)
Dividends paid			(522,527	)			(496,920	)
Common stock issued			34,675				22,800
Net cash provided by financing activities			8,199,853				15,200,032
Net increase (decrease) in cash & cash equivalents			2,042,978				(1,343,875	)
Cash and cash equivalents, beginning			7,680,230				8,258,003
Cash and cash equivalents, ending		$	9,723,208			$	6,914,128
Supplemental disclosures of cash flow information:
Interest paid		$	4,020,388			$	3,521,803
Income taxes paid		$	796,000			$	603,750
Supplemental schedule of noncash investing activities:
Other real estate acquired in settlement of loans		$	494,766			$	1,200,000

 

4

---

Table of Contents

Botetourt Bankshares, Inc.

Notes to Consolidated Financial Statements

June 30, 2008 (Unaudited)

Note 1. Organization and Basis of Presentation

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, Rockbridge, and Franklin Counties, Virginia and surrounding areas through ten 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 subject to supervision by the Federal Reserve.

The consolidated financial statements as of June 30, 2008 and for the periods ended June 30, 2008 and 2007 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, 2007, included in the Company’s Form 10-K for the fiscal year ended December 31, 2007. The balance sheet as of December 31, 2007 was extracted from the Form 10-K for the year ended December 31, 2007.

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.

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 to cover its services provided, the Bank is also required to maintain a target balance. The target balance as of June 30, 2008 was $2,725,000.

Note 3. Allowance for Loan Losses

The following is an analysis of the allowance for loan losses for the six months ended June 30:

 

		2008				2007
Balance, beginning		$	2,291,617			$	2,502,122
Provision charged to expense			145,000				150,000
Recoveries of amounts charged off			8,931				85,052
Amounts charged off			(49,813	)			(349,277	)
Balance, ending		$	2,395,735			$	2,387,897

 

5

---

Table of Contents

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 options 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:

 

		2008						2007
		Shares		Per Share				Shares		Per Share
Basic earnings per share		1,244,336		$	1.00			1,242,461		$	1.39
Effect of dilutive options		1,443			(0.01	)		3,274			(0.01	)
Diluted earnings per share		1,245,779		$	0.99			1,245,735		$	1.38

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, 2008 and December 31, 2007 is as follows:

 

		2008			2007
Commitments to extend credit		$	36,293,000		$	36,875,000
Standby letters of credit			6,534,000			6,268,000

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.

Commitment for Renovation

On May 9, 2008, the Bank signed a contract with Structures Design/Build, LLC for the renovation of its bank building located at 58 Railroad Avenue in Eagle Rock, Virginia. The estimated renovation cost is $170,000. The project will be funded through the Bank’s retained earnings.

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 2008 or 2007. A summary of option activity under the Incentive Plan as of June 30, 2008 is as follows:

 

		Options Outstanding			Weighted Average Exercise Price			Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding, January 1, 2008		6,700			$	22.75
Granted		—				n/a
Forfeited		—				n/a
Exercised		(1,625	)			21.34
Outstanding, June 30, 2008		5,075			$	23.20		18 months		$	44,660
Exercisable, June 30, 2008		5,075			$	23.20		18 months		$	44,660

 

6

---

Table of Contents

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 2008 or 2007.

The intrinsic value of options exercised during the first six months of 2008 was $15,781. For the first six months of 2007, the intrinsic value of options exercised was $19,000. Cash received during the first six months of 2008 for options exercised was $34,675. For the first six months of 2007, cash received 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-K for the year ended December 31, 2007.

Components of Net Periodic Benefit Cost

 

		Pension Benefits								Pension Benefits
		Six Months Ended June 30,								Three Months Ended June 30,
		2008				2007				2008				2007
Service cost		$	134,816			$	139,074			$	67,408			$	69,537
Interest cost			128,764				117,414				64,382				58,707
Expected return on plan assets			(167,890	)			(117,952	)			(83,945	)			(58,976	)
Amortization of net obligation at transition			—				(480	)			—				(240	)
Amortization of prior service cost			766				764				383				382
Amortization of net loss			4,668				15,228				2,334				7,614
Net periodic benefit cost		$	101,124			$	154,048			$	50,562			$	77,024

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2007, that no contributions were expected to be paid prior to September 30, 2008. No contributions were made in the first six months of 2008.

Note 7. Fair Value

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

 

7

---

Table of Contents

Fair Value Hierarchy

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active or over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-back securities in less liquid markets. The Company’s available for sale investment securities, totaling $19,450,122 at June 30, 2008, and $20,659,344 at December 31, 2007, are the only assets whose fair values are measured on a recurring basis using Level 1 and Level 2 inputs. We expect no material change in our disclosure of available for sale investment securities as a result of this method of calculating fair value.

Loans

The Company does not record loans at fair value on a recurring basis. The Company is predominantly an asset based lender with real estate serving as collateral on a majority of loans. From time to time, a loan is considered impaired and an allowance for loan losses is established. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans was $1,533,993 at June 30, 2008 and $1,360,834 at December 31, 2007.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral, which the Company considers to be level 2 inputs. The aggregate carrying amount of foreclosed assets was $1,934,766 at June 30, 2008 and $1,475,000 at December 31, 2007.

 

8

---

Table of Contents

General

The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

The Company has no assets or liabilities whose fair values are measured using level 3 inputs.

FASB Staff Position No. FAS 157-2 delays the implementation of SFAS 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, real estate and other assets acquired through foreclosure and other non-financial assets measured at fair value on a nonrecurring basis.

Note 8: Recent Accounting Pronouncements and Future Accounting Considerations

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs, although no impact is expected.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for the Company on January 1, 2009. Earlier adoption is prohibited. The Company is currently evaluating the impact, if any, the adoption of SFAS 160 will have on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”). This FSP provides guidance on accounting for a transfer of a financial asset and the transferor’s repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under Statement 140. FSP 140-3 will be effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years and earlier application is not permitted. Accordingly, this FSP is effective for the Company on January 1, 2009. The Company is currently evaluating the impact, if any, the adoption of FSP 140-3 will have on its financial position, results of operations and cash flows.

In May 2008, the FASB issued SFAS No. 162 , “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The Board believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. This Statement is effective 60 days following the Securities and Exchange Commission’s (“SEC”) approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The FASB does not expect that this Statement will result in a change in current practice and the Company does not anticipate any impact on its financial position, results of operations and cash flow.

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.

 

9

---

Table of Contents

Note 9. Subsequent Events

Declaration of Cash Dividend

On July 23, 2008, the Company declared a second quarter $0.21 cash dividend per common share payable on August 10, 2008 to shareholders of record on July 23, 2008.

Subsidiary Operating Agreement

On August 1, 2008, Rockbridge Title Services, LLC, a subsidiary of Buchanan Service Corporation, executed a new operating agreement whereby admitting an additional member, Heslep & Kearney, PC, with a 25% capital contribution, or $2,500, to the entity. Buchanan Service Corporation’s ownership interest was reduced to 75% or $7,500. Rockbridge Title Services, LLC’s future earnings distributions will be based on the new equity ownership interests. The ownership structure is similar to Buchanan Service Corporation’s ownership of Mountain Valley Title Insurance Agency, LLC, which also shares ownership with two individual local attorneys who are involved in real estate loan settlements and the related title insurance services for the company.

 

10

---

Table of Contents

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 related to the allowance for loan losses, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Net income for the six months ended June 30, 2008 was $1,237,694 compared to $1,724,301 for the same period last year, representing a decrease of $486,607 or 28.22%. Basic earnings per share decreased $0.39 from $1.39 at June 30, 2007 to $1.00 at June 30, 2008. Diluted earnings per share decreased $0.39 from $1.38 at June 30, 2007 to $0.99 at June 30, 2008. The decrease in net income is primarily due to lower interest income and higher interest expense, resulting in lower net interest income. The Company is realizing earnings pressures from the compression of its net interest margin resulting from the effects of easing monetary policy actions by the Federal Open Market Committee (“FOMC”) during 2008. As the FOMC lowers its target rates, the Bank’s assets, such as variable rate loans, reprice more quickly than its liabilities, such as deposits, reducing our net interest margin, reflective of an asset-sensitive balance sheet position. Additionally, the Company experienced higher noninterest expense during the first six months of 2008, attributable primarily to increased occupancy expense related to the recent branch footprint expansion of two new retail offices along with other operating expenses.

Interest-earning assets increased $10,437,930 from $256,000,827 at June 30, 2007 to $266,438,757 at June 30, 2008. Total interest income decreased in the first six months of 2008 as compared to the first six months of 2007 due primarily to a decrease in interest rates on variable rate loans, a decrease in investment income resulting from lower interest rates earned on a smaller investment portfolio, and lower interest earned on federal funds sold. Interest-bearing liabilities increased $13,730,580 to $224,141,414 at June 30, 2008 from $210,410,834 at June 30, 2007. Interest expense increased during the period due to the increase in interest-bearing deposits, competitively premium interest rates paid on the deposits, and interest expense related to the purchase of federal funds. As a result, net interest income decreased by $537,175 for the six months ended June 30, 2008 compared to the same time period in 2007.

The provision for credit losses was $145,000 for the six months ended June 30, 2008 and $150,000 for the six months ended June 30, 2007. The consistency in the provision was due to the overall strength of asset quality in the loan portfolio. Additionally, charge-offs decreased during the first six months of 2008 compared to the same time period in 2007. The allowance for loan losses consists of specific, general, and unallocated components. The adequacy for loan losses is determined by analysis of the different components. The allowance for loan losses represents management’s estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. We regularly review and re-evaluate the allowance for loan losses. The review includes assessing the quality of our loan portfolio, prevailing and expected market and economic conditions, industry analysis, and other qualitative or environmental factors. Management believes the provision and the resulting allowance for loan losses are adequate and appropriate.

Noninterest income decreased by 5.38% to $817,075 for the six months ended June 30, 2008 compared to $863,562 for the six months ended June 30, 2007. The decrease is attributable to a decrease in mortgage origination fees, and a decrease in income generated by service charges on deposit accounts such as overdraft fees. For the six months ended June 30, 2008, noninterest expense increased by $134,307, or 3.62% which is primarily a result of an increase in other operating expenses such as professional services and software maintenance services associated with the normal course of business and an increase in occupancy expense associated with continuing growth of the Company from the two new retail offices.

 

11

---

Table of Contents

Net income for the three months ended June 30, 2008 was $566,890 compared to $860,361 for the same period last year, representing a decrease of $293,471 or 34.11%. Both basic and diluted earnings per share decreased $0.23 from $0.69 at June 30, 2007 to $0.46 at June 30, 2008. The decrease in net income is attributable to the adverse impact of a narrowing net interest margin caused by a reduction in short-term interest rates, a decrease in noninterest income, and an increase in noninterest expense. Total interest income decreased during the three month period compared to the same three month period in 2007 due primarily to a decrease in income generated from earning assets. Interest expense slightly decreased during the three month period compared to the same three month period of 2007 due to interest-bearing deposit liabilities repricing at lower interest rates. The combined effect resulted in net interest income decreasing by $317,439 in the three months ended June 30, 2008 as compared to the same period in 2007.

Following management’s second quarter evaluation of the reasonableness of the allowance for loan losses, we recorded a provision for credit losses of $100,000 for the quarter ended June 30, 2008 compared with $75,000 for the quarter ended June 30, 2007. The slight increase was primarily attributable to a specific reserve allocation related to the impaired loans discussed in the non-performing assets section. Management believes the provision and the resulting allowance for loan losses are adequate.

Noninterest income decreased by $67,767 or 15.19% for the three months ended June 30, 2008 compared to the same quarter in the previous year. The decrease is primarily attributable to a decrease in mortgage origination fees, a decrease in service charges on deposit accounts, and reduced income from the sales of mutual funds and annuities. Additionally, during the second quarter of 2008, Buchanan Service Corporation’s, a subsidiary of Bank of Botetourt, investment in Bankers Investment Group, LLC was merged into Infinex Financial Group via a combined stock exchange and cash transaction. The one-time merger transaction resulted in an immaterial loss which contributed to Buchanan Service Corporation’s quarterly net loss of $12,868, which adversely impacted the Bank’s noninterest income for the period. Noninterest expense for the three months ended June 30, 2008 increased by $33,335 or 1.77% over the same quarter in the previous year. The increase is primarily a result of an increase in other operating expenses associated with the normal course of business and occupancy expense resulting from the continuing growth of the Company.

Financial Condition

As a result of continued overall loan demand in our operating markets, total loans increased $6,107,197 during the six months ended June 30, 2008. We funded these new loans through increased deposits. Deposits increased by $10,821,705 due to competitive pricing and successful deposit campaigns. As a result of this deposit growth, the Company transitioned from a federal funds purchaser of $2,134,000 at December 31, 2007 to a federal funds seller during the first six months of 2008. Federal funds sold at June 30, 2008 was $1,209,000. Investment securities, including restricted equity securities decreased $1,263,822 as a result of maturing and called investment securities. Given the current interest rate environment, management elected to invest primarily in overnight and short-to-medium term investments. Total assets increased by $8,613,765 to $288,245,332 from December 31, 2007 to June 30, 2008.

Stockholders’ equity totaled $27,029,742 at June 30, 2008 compared to $26,451,390 at December 31, 2007. The $578,352 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 $1,987,171 at June 30, 2008 and $1,643,806 at December 31, 2007. Foreclosed assets consisted of three properties totaling $1,934,766 at June 30, 2008. The Bank, at December 31, 2007, had foreclosed properties in the amount of $1,475,000. All foreclosed properties are currently being marketed for sale. Nonaccrual loans were $52,405 at June 30, 2008 and $168,806 at December 31, 2007. 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 $1,360,834 at December 31, 2007. Following identification of additional impaired credits in the first quarter of 2008, the trend reversed in the second quarter 2008 as prior impaired credits were paid off or reduced as a result of the sale of collateral securing the loans. As a result, impaired loan balances decreased from $3,564,866 at March 31, 2008 to $1,533,993 at June 30, 2008. Specific reserve amounts were deemed necessary on two credits at June 30, 2008 and approximately $28,000 was allocated to the reserve for these identified loans.

 

12

---

Table of Contents

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, 2008, the Bank’s Tier 1 risk-based capital ratio (Tier 1 capital divided by risk-weighted average assets) was 10.65% compared to 10.83% at December 31, 2007. The Company’s risk-based ratio (Tier 1 capital divided by risk-weighted average assets) was 11.21% at June 30, 2008 and 11.42% at December 31, 2007. Each of these ratios exceeded the required minimum ratio of 4.0%. At June 30, 2008, the Bank’s leverage ratio (Tier 1 capital divided by quarterly average assets) was 9.06% compared to 9.40% at December 31, 2007. At June 30, 2008, the Company’s leverage ratio (Tier 1 capital divided by quarterly average assets) was 9.50% compared to 9.87% at December 31, 2007. Each of these ratios exceeded the required minimum leverage ratio of 4.0%. Management believes, as of June 30, 2008, 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, 2008. Federal fund lines available from correspondent banks totaled $21,500,000 at June 30, 2008 and $17,000,000 at December 31, 2007. No balances were outstanding on these lines at June 30, 2008 as compared to an outstanding balance of $2,134,000 at December 31, 2007. 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, 2008 and December 31, 2007. 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. 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 management of liquidity in the steps described above, we believe that our Company maintains overall liquidity sufficient to satisfy depositors’ requirements and meet customers’ credit needs.

 

13

---

Table of Contents

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 contain the Company’s expectations, plans, future financial performance, and other statements that are not historical facts. 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 reasonable 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

Not applicable.

Item 4T. Controls and Procedures

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).

The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, there can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. 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.

Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report effectively and in a timely manner the information required to be disclosed in reports we file under the Exchange Act. 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.

 

14

---

Table of Contents

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

None.

 

Item 1A.

Risk Factors

Not applicable.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

Item 4.

Submission of Matters to a Vote of Security Holders

Botetourt Bankshares, Inc. held its annual shareholders’ meeting on Wednesday, May 14, 2008, at 2:30 p.m. at the Buchanan Theatre on Main Street in Buchanan, Virginia. The matters voted upon were the election of Class II directors for a three year term, and any other business that properly came before the meeting, or any adjournment thereof. A total of 975,264 votes were cast. The vote is summarized as follows.

 

1.

Election of directors

 

Class II Director Name		Shares Voted FOR		Shares WITHHELD
G. Lyn Hayth, III		965,151		10,113
Gerald A. Marshall		975,040		224
Tommy L. Moore		975,151		113

 

2.

No other business came before the meeting requiring a vote.

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

The following is a list of all exhibits filed or incorporated by reference as part of this Report on Form 10-Q.

 

3(i). 1		Restated Articles of Incorporation filed on Schedule 14 A on March 30, 2007 and confirmed on Form 8-K on June 7, 2007
3(ii). 1		Bylaws filed on the Form 10-SB 12G on April 30, 2002
10. 1,2		Change In Control Agreement filed as Exhibit 10.4 on the Form 10-SB 12G on April 30, 2002
10. 1		Defined Benefit Plan filed as Exhibit 10.5 on the Form 10-SB 12G on April 30, 2002

 

15

---

Table of Contents

13. 1		Annual Report to Shareholders on the Form 10-K on March 27, 2008
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 1		Code of Ethics/Conflict of Interest Policy For Board of Directors Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 23, 2006
99.3 1		Code of Ethics & Professional Conduct For All Employees Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 23, 2006
99.4 1		Code of Ethics for Chief Executive Officer and Senior Financial Officers Relating To Bank Bribery Act Of 1985 (18 U.S.C. #215) As Amended In 1986 on Form 10-KSB on March 23, 2006

 

1	Incorporated by Reference

2	Designates a Management Contract

 

16

---

Table of Contents

SIGNATURES

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 5, 2008		By:		/s/ H. Watts Steger, III
				H. Watts Steger, III
				Chief Executive Officer
Date: August 5, 2008		By:		/s/ Michelle A. Alexander
				Michelle A. Alexander
				Chief Financial Officer

 

17