BOE Financial Services of Virginia (BSXT)

 
Annual Reports

 
Quarterly Reports

  • 10-Q (May 15, 2008)
  • 10-Q (Nov 14, 2007)
  • 10-Q (Aug 14, 2007)
  • 10-Q (May 15, 2007)
  • 10-Q (Nov 13, 2006)
  • 10-Q (Aug 14, 2006)

 
8-K

 
Other

BOE Financial Services of Virginia 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 000-31711

 


BOE FINANCIAL SERVICES OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

 


 

Virginia   54-1980794

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

323 Prince St., Tappahannock, VA   22560
(Address of principal executive offices)   (Zip Code)

(804) 443-4343

(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 Exchange Act during the past 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” 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

State the number of shares outstanding of each of the issuer’s classes of common equity as of August 9, 2006.

 

Class

 

Outstanding at August 9, 2006

Common Stock, $5.00 par value

  1,201,836

 



Table of Contents

BOE Financial Services of Virginia, Inc.

FORM 10-Q

INDEX

 

          Page
   PART I - FINANCIAL INFORMATION   

Item 1.

   Financial Statements    1-5

Consolidated Balance Sheets June 30, 2006 (Unaudited) and December 31, 2005

   1-2

Consolidated Statements of Income Three months ended June 30, 2006 and 2005 (Unaudited)

   3

Consolidated Statements of Income Six months ended June 30, 2006 and 2005 (Unaudited)

   4

Consolidated Statements of Cash Flows Six Months ended June 30, 2006 and 2005 (Unaudited)

   5

Consolidated Statements of Changes in Stockholders’ Equity Six months ended June 30, 2006 and 2005 (Unaudited)

   6

Notes to Consolidated Financial Statements (Unaudited)

   7-10

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    11-15

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    15-16

Item 4.

   Controls and Procedures    17
PART II - OTHER INFORMATION

Item 1.

   Legal Proceedings    17

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    17

Item 3.

   Defaults Upon Senior Securities    17

Item 4.

   Submission of Matters to a Vote of Security Holders    17

Item 5.

   Other Information    17

Item 6.

   Exhibits    18

Signatures

   19


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. – FINANCIAL STATEMENTS

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

Consolidated Balance Sheets

 

(in Thousands except share data)

  

June 30,

2006

   

December 31,

2005

 
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 8,306     $ 7,365  

Securities available for sale, at fair value

     52,679       52,393  

Securities held to maturity (fair value $2,852 in 2006 and $2,933 in 2005)

     3,000       3,000  

Equity Securities, restricted, at cost

     1,553       1,188  

Loans

     188,526       182,456  

Less: Allowance for loan losses

     (2,388 )     (2,249 )
                

Net loans

     186,138       180,207  

Bank premises and equipment, net

     10,601       7,656  

Accrued interest receivable

     1,234       1,191  

Intangible assets, net

     587       650  

Other assets

     6,534       8,281  
                

Total assets

   $ 270,632     $ 261,931  
                

See accompanying notes to consolidated financial statements.

 

Page: 1


Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

Consolidated Balance Sheets

 

              

June 30,

2006

   

December 31,

2005

 
               (Unaudited)        

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Deposits

          

Noninterest bearing deposits

         $ 27,312     $ 30,791  

Interest bearing deposits

           196,284       192,341  
                      

Total deposits

           223,596       223,132  

Federal funds purchased

           2,708       1,810  

Federal Home Loan Bank advances

           12,000       5,000  

Accrued interest payable

           691       526  

Other liabilities

           517       1,105  

Trust preferred capital notes

           4,124       4,124  
                      

Total liabilities

           243,636       235,697  
                      

Commitments and Contingent Liabilities

          

Stockholders’ equity

          

Common stock, $5.00 par value

           6,007       5,990  
     6/30/06    12/31/05             

Shares authorized

   10,000,000    10,000,000     

Shares outstanding

   1,201,492    1,198,059     

Additional paid in capital

           5,340       5,264  

Accumulated other comprehensive (loss), net

           (458 )     (80 )

Retained earnings

           16,107       15,060  
                      

Total stockholders’ equity

           26,996       26,234  
                      

Total liabilities and stockholders’ equity

         $ 270,632     $ 261,931  
                      

See accompanying notes to consolidated financial statements.

 

Page: 2


Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

Consolidated Statements of Income

(In Thousands except per share data)

 

     Three Months Ended
    

June 30,

2006

  

June 30,

2005

     (Unaudited)

Interest Income

     

Interest and fees on loans

   $ 3,632    $ 2,911

Interest on federal funds sold

     10      20

Interest on U.S. Treasury securities and U.S. Agency Obligations

     99      102

Interest on obligations of state and political subdivisions

     337      336

Interest on other securities

     123      135

Other interest income

     0      3
             

Total interest income

     4,201      3,507
             

Interest Expense

     

Interest on savings and interest bearing deposits

     101      114

Interest on certificates of deposit

     1,320      803

Interest on federal funds purchased

     24      15

Interest on long – term debt

     136      23

Interest on trust preferred capital notes

     83      77
             

Total interest expense

     1,664      1,032
             

Net interest income

     2,537      2,475

Provision for loan losses

     25      75
             

Net interest income after provision for loan losses

     2,512      2,400
             

Noninterest Income

     

Service charges on deposit accounts

     274      247

Securities gains -net

     3      3

Gains on sale of loans

     33      15

Other fee income

     58      36

All other noninterest income

     124      99
             

Total noninterest income

     492      400
             

Noninterest Expense

     

Salaries and employee benefits

     1,107      1,046

Premises and fixed assets

     269      240

Intangible premium amortization

     32      32

Other expenses

     619      517
             

Total noninterest expense

     2,027      1,835
             

Income before income taxes

     977      965

Income taxes

     211      227
             

Net income

   $ 766    $ 738
             

Earnings per share, basic

   $ 0.64    $ 0.62

Earnings per share, diluted

   $ 0.63    $ 0.61

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

Consolidated Statements of Income

(In Thousands except per share data)

 

     Six Months Ended
    

June 30,

2006

   

June 30,

2005

     (Unaudited)

Interest Income

    

Interest and fees on loans

   $ 7,014     $ 5,642

Interest on federal funds sold

     13       35

Interest on U.S. Treasury securities and U.S. Agency Obligations

     199       205

Interest on obligations of state and political subdivisions

     676       657

Interest on other securities

     246       284

Other interest income

     9       5
              

Total interest income

     8,157       6,828
              

Interest Expense

    

Interest on savings and interest bearing deposits

     202       230

Interest on certificates of deposit

     2,476       1,549

Interest on federal funds purchased

     87       15

Interest on long – term debt

     205       23

Interest on trust preferred capital notes

     161       134
              

Total interest expense

     3,131       1,951
              

Net interest income

     5,026       4,877

Provision for loan losses

     125       155
              

Net interest income after provision for loan losses

     4,901       4,722
              

Noninterest Income

    

Service charges on deposit accounts

     522       468

Securities gains (losses)-net

     (18 )     8

Gains on sale of loans

     49       31

Other fee income

     101       98

All other noninterest income

     240       189
              

Total noninterest income

     894       794
              

Noninterest Expense

    

Salaries and employee benefits

     2,171       2,069

Premises and fixed assets

     485       468

Intangible premium amortization

     63       63

Other expenses

     1,134       1,014
              

Total noninterest expense

     3,853       3,614
              

Income before income taxes

     1,942       1,902

Income taxes

     438       443
              

Net income

   $ 1,504     $ 1,459
              

Earnings per share, basic

   $ 1.25     $ 1.22

Earnings per share, diluted

   $ 1.24     $ 1.21

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, Inc.

Consolidated Statements of Cash Flows

(in Thousands)

 

    

Six Months Ended

June 30,

 
     2006     2005  
     (Unaudited)  

Cash Flows from Operating Activities

    

Net income

   $ 1,504     $ 1,459  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     275       252  

(Gain) on sale of loans

     (49 )     (31 )

Origination of loans held for sale

     (3,806 )     (1,805 )

Proceeds from sale of loans held for sale

     3,855       1,728  

Provision for loan losses

     125       155  

Net amortization on securities

     95       99  

Net (gain) loss on sale of securities

     18       (8 )

(Increase) decrease in accrued interest receivable and other assets

     1,899       (72 )

Increase (decrease) in accrued expenses and other liabilities

     (423 )     126  
                

Net cash provided by operating activities

     3,493       1,903  
                

Cash Flows from Investing Activities

    

Proceeds from sale of securities available-for-sale

     3,699       1,970  

Proceeds from maturities and calls of securities available-for-sale

     1,656       3,320  

Purchase of securities available for sale

     (6,327 )     (6,895 )

Purchase of restricted securities

     (365 )     (235 )

Net (increase) in loans to customers

     (6,056 )     (14,299 )

Decrease in federal funds sold

     0       5,064  

Purchase of Bank Owned Life Insurance

     0       (3,667 )

Capital expenditures

     (3,157 )     (114 )
                

Net cash (used in) investing activities

     (10,550 )     (14,856 )
                

Cash Flows from Financing Activities

    

Net increase in deposits

     464       5,937  

Issuance of Common Stock

     93       106  

Increase in federal funds purchased

     898       4,437  

Increase in FHLB advances

     7,000       5,000  

Dividends paid

     (457 )     (417 )
                

Net cash provided by financing activities

     7,998       15,063  
                

Net increase in cash and cash equivalents

     941       2,110  

Cash and Cash Equivalents

    

Beginning of period

     7,365       4,354  
                

End of period

   $ 8,306     $ 6,464  
                

Supplemental disclosure of cash flow information

    

Cash paid during the year

    

Interest

   $ 2,966     $ 1,895  
                

Income Taxes

   $ 525     $ 200  
                

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BOE Financial Services of Virginia, Inc.

Statement of Changes in Stockholders’ Equity

For the Six Month Periods Ended June 30, 2006 and 2005

(in thousands)

(Unaudited)

 

     Common
Stock
   Additional
Paid-In
Capital
   Retained
Earnings
   

Accumulated

Other
Comprehensive
Income

    Comprehensive
Income
    Total  

Balance, December 31, 2004

   $ 5,945    $ 5,111    $ 12,831     $ 794       $ 24,681  

Comprehensive Income:

              

Net income

           1,459       $ 1,459       1,459  

Other comprehensive (loss), net of tax:

              

Unrealized loss on securities available for sale, net of deferred taxes

               (404 )  

Less: Reclassification adjustment, net of tax

               (5 )  
                    

Other comprehensive (loss), net of tax:

             (409 )     (409 )     (409 )
                                

Total comprehensive income

               1,050    
                    

Cash dividends, $0.35

           (417 )         (417 )

Issuance of common stock

     30      76            106  
                                        

Balance, June 30, 2005

   $ 5,975    $ 5,187    $ 13,873     $ 385       $ 25,420  
                                        
     Common
Stock
   Additional
Paid-In
Capital
   Retained
Earnings
   

Accumulated

Other
Comprehensive
(Loss)

    Comprehensive
Income
    Total  

Balance, December 31, 2005

   $ 5,990    $ 5,264    $ 15,060     $ (80 )     $ 26,234  

Comprehensive Income:

              

Net income

           1,504       $ 1,504       1,504  

Other comprehensive (loss), net of tax:

              

Unrealized loss on securities available for sale, net of deferred taxes

               (390 )  

Add: Reclassification adjustment, net of tax

               12    
                    

Other comprehensive income, net of tax:

             (378 )     (378 )     (378 )
                                

Total comprehensive income

               1,126    
                    

Cash dividends, $0.38

           (457 )         (457 )

Issuance of common stock

     17      76            93  
                                        

Balance, June 30, 2006

   $ 6,007    $ 5,340    $ 16,107     $ (458 )     $ 26,996  
                                        

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. The accounting and reporting policies of BOE Financial Services of Virginia, Inc. (the “Company”) conform to accounting principles generally accepted in the United States of America and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements have been included. Operating results for the three month and six month period ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

These financial statements should be read in conjunction with the financial statements and the footnotes included in the Company’s 2005 Annual Report to Shareholders.

2. At June 30, 2006, the Company had stock-based employee compensation plans more fully described in Note 9 of the financial statements included in Form 10-K for the year ended December 31, 2005. The Company accounted for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation to the periods before January 1, 2006.

 

    

Three months ended

June 30,

2005

   

Three months ended

June 30,

2005

 

Net income, as reported

   $ 738     $ 1,459  

Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effect

     (18 )     (35 )
                

Pro forma net income

   $ 720     $ 1,424  
                

Earnings per share:

    

Basic-as reported

   $ 0.62     $ 1.22  

Basic-pro forma

   $ 0.60     $ 1.20  

Diluted-as reported

   $ 0.61     $ 1.21  

Diluted-pro forma

   $ 0.60     $ 1.18  

Effective January 1, 2006, SFAS No. 123R requires the Company to recognize the cost of employee services received in exchange for awards of equity instruments such as stock options based on the fair value of these awards at the date of grant. For the three and six months ended June 30, 2006, the Company had no stock-based compensation expense as no options were granted and all prior awards were fully vested December 31, 2005.

 

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Table of Contents

Stock option plan activity for the six months ended June 30, 2006 is summarized below:

 

     Shares     Weighted Average
Exercise Price
   Weighted Average
Remaining Contractual
Life (in years)
   Instrinsic Value of
Unexercised In-The-
Money Options

Outstanding, January 1

   37,589     $ 23.87      

Exercised

   (3,433 )     27.09      
                  

Outstanding, June 30,

   34,156       23.55    7.25    $ 284,000
                        

Exercisable, June 30,

   34,156       23.55    7.25    $ 284,000
                        

The intrinsic value of options exercised during the six months ended June 30, 2006 was approximately $21,750.

3. Earnings per share are based on the weighted average number of common shares and common stock equivalents outstanding during the applicable periods. Potential dilutive common stock had no effect on income available to common shareholders. No shares were excluded from the calculation because the effect would be anti-dilutive.

 

     Six months ended
     June 30, 2006    June 30, 2005
     Shares    Per Share    Shares    Per Share

Basic earnings per share

   1,199,776    $ 1.25    1,191,458    $ 1.22

Effect of dilutive stock options

   11,249       11,474   
               

Diluted earnings per share

   1,211,025    $ 1.24    1,202,932    $ 1.21
               
     Three months ended
     June 30, 2006    June 30, 2005
     Shares    Per Share    Shares    Per Share

Basic earnings per share

   1,200,315    $ 0.64    1,192,803    $ 0.62

Effect of dilutive stock options

   10,091       9,675   
               

Diluted earnings per share

   1,210,406    $ 0.63    1,202,478    $ 0.61
               

4. The unrealized losses in the investment portfolio as of June 30, 2006 are generally a result of market fluctuations that occur daily. The unrealized losses are from securities that are all of investment grade, backed by insurance, U.S. government agency guarantees, or the full faith and credit of local municipalities throughout the United States. The Corporation has the ability and intent to hold these securities to maturity. Market prices are affected by conditions beyond the control of the Corporation. Investment decisions are made by the management group of the Corporation and reflect the overall liquidity and strategic asset/liability objectives of the Corporation. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Corporation’s income statement and balance sheet.

 

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Table of Contents

5. Defined Benefit Pension Plan

Components of Net Periodic Benefit Cost

(In Thousands)

 

     Pension Benefits  
    

Six Months Ended

June 30,

   

Three Months Ended

June 30,

 
     2006     2005     2005     2004  

Service cost

   $ 182     $ 154     $ 91     $ 77  

Interest cost

     122       106       61       53  

Expected return on plan assets

     (130 )     (108 )     (65 )     (54 )

Amortization of prior service cost

     2       2       1       1  

Amortization of net obligation at transition

     (2 )     (2 )     (1 )     (1 )

Amortization of net (gain) loss

     28       28       14       14  
                                

Net periodic benefit cost

   $ 202     $ 180     $ 101     $ 90  
                                

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute $177,000 to its pension plan in 2006. As of June 30, 2006, no contributions have been made.

6. Loans are shown on the balance sheets net of unearned discounts and the allowance for loan losses. Interest is computed by methods which result in level rates of return on principal. Loans are charged off when in the opinion of management they are deemed to be uncollectable after taking into consideration such factors as the current financial condition of the customer and the underlying collateral and guarantees. Loan fees and origination costs are deferred and the net amount amortized as an adjustment of the related loans yield using the level yield method. Bank of Essex (the “Bank”), a wholly owned subsidiary of the Company, is amortizing these amounts over the contractual life of the related loans.

 

(Dollars in thousands)

   (unaudited)
June 30,
2006
    December
2005
    (unaudited)
June 30,
2005
 

Loans:

      

Commercial

   $ 22,672     $ 22,873     $ 22,336  

Real Estate

     128,318       121,296       119,225  

Real Estate—construction

     31,185       32,084       26,174  

Installment & other loans

     6,351       6,203       6,115  
                        

Total loans

     188,526       182,456       173,850  

Less allowance for loan losses

     (2,388 )     (2,249 )     (2,235 )
                        

Net loans

   $ 186,138     $ 180,207     $ 171,615  
                        

 

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Table of Contents

7. The Company’s allowance for loan losses was as follows at the dates indicated:

 

(Dollars in thousands)

   (unaudited)
June 30,
2006
    December
2005
    (unaudited)
June 30,
2005
 

Balance January 1

   $ 2,249     $ 2,088     $ 2,088  

Provision charged against income

     125       240       155  

Recoveries of loans charged off

     63       80       78  

Loans charged off

     (49 )     (159 )     (86 )
                        

Balance at end of period

   $ 2,388     $ 2,249     $ 2,235  
                        

 

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Table of Contents

Item 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

CRITICAL ACCOUNTING POLICIES

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the Company’s loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The use of these values is inherently subjective and actual losses could be greater or less than the estimates.

The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management’s periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

The following discussion is intended to assist readers in understanding and evaluating the financial condition and results of operations of the Company and the Bank. This section should be read in conjunction with BOE’s consolidated financial statements and accompanying notes included elsewhere in this report.

Overview

On June 30, 2006 the Company had total assets of $270.6 million, an increase of $8.7 million, or 3.3%, from $261.9 million at December 31, 2005. Total assets at June 30, 2005 were $253.2 million. The June 30, 2006 total assets figure represents an increase of 6.9%, or $17.5 million, over one year ago. Total loans amounted to $188.5 million on June 30, 2006, an increase of $6.1 million, or 3.3%, over December 31, 2005 total loans of $182.5 million. The June 30, 2006 figure represents an increase of $14.7 million, or 8.4%, over total loans of $173.9 million on June 30, 2005. The Company’s securities portfolio increased $286,000, or 0.5%, from $55.4 million at December 31, 2005 to $55.7 million at June 30, 2006. Total securities were $58.8 million on June 30, 2005. The company had Federal Funds purchased of $2.7 million on June 30, 2006, $1.8 million on December 31, 2005 and Federal Funds purchased of $4.4 million on June 30, 2005.

 

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The Company is required to account for the effect of market changes in the value of securities available-for-sale (AFS) under SFAS 115. The market value of the June 30, 2006 securities AFS portfolio was $52.7 million compared to $52.4 million at December 31, 2005 and $55.8 million at June 30, 2005. The impact of the change in market value of AFS securities, net of deferred income taxes, is reflected in the Statement of Changes in Stockholder’s Equity under Accumulated Other Comprehensive Income (Loss). On June 30, 2006, $695,000 represented the Company’s net unrealized loss on AFS securities compared to $121,000 at December 31, 2005 and a net unrealized gain of $584,000 at June 30, 2005.

Total deposits at June 30, 2006 were $223.6 million. This $464,000 decrease is 0.2% less than total deposits of $223.1 million at December 31, 2005 and $10.7 million, or 5.0% greater than total deposits of $212.9 million at June 30, 2005.

Stockholder’s equity at June 30, 2006 was $27.0 million and represented 10.0% of total assets. Stockholder’s equity was $26.2 million, or 10.0% of total assets at December 31, 2005 and $25.4 million, or 10.0% of total assets at June 30, 2005.

On June 30, 2005 the company purchased $3,666,666 in Bank – Owned Life Insurance (BOLI). An Additional $1,333,333 was added on September 21, 2005. The Company does not foresee adding any additional BOLI in the near future. The Board of Directors is using this investment to fund a Supplemental Executive Retirement Program for certain of the Company’s Executive Officers.

Results of Operations

Net Income

Net income for the second quarter of 2006 was $766,000, a 3.8% increase from 2005 second quarter income of $738,000. Fully diluted earnings per common share were $0.63 in the second quarter of 2006 compared to $0.61 in the second quarter of 2005. Tangible book value increased $1.28 to $21.98 per common share on June 30, 2006 compared to $20.70 on June 30, 2005.

This increase in quarterly earnings was primarily attributable to a $92,000 increase in noninterest income and a $62,000 increase in net interest income. Noninterest income was $492,000 in the second quarter of 2006 compared to $400,000 in the same period in 2005. Net interest income increased 2.5%, from $2,475,000 in the second quarter of 2005, to $2,537,000 in the second quarter of 2006. Additionally, the expense provision for loan losses decreased $50,000 for the second quarter of 2006 compared to the same period in 2005. Provision for loan losses was $25,000 for the second quarter of 2006 compared to $75,000 for the same period in 2005. Income tax expense was $211,000 for the second quarter of 2006 compared to $227,000 for the same period in 2005, a decrease of 7.0%, or $16,000. Offsetting these increases to net income was an increase of $192,000, or 10.5%, in noninterest expenses. Noninterest expenses were $2,027,000 in the second quarter of 2006 compared to $1,835,000 in the same period in 2005.

For the six month period ended June 30, 2006, BOE Financial Services of Virginia reported a 3.1%, or $45,000, increase in net income over the same period in 2005. Net income for the six months ended June 30, 2006 was $1,504,000 compared to six month earnings of $1,459,000 in 2005. This increase was primarily the result of a $149,000, or 3.1%, increase in net interest income. Net interest income was $5,026,000 for the first six months of 2006 compared to $4,877,000 for the same period in 2005. This was the result of higher loan volumes and rate increases by the Federal Reserve Board of Governors which, in turn, increased rates on loans tied to the prime rate. Also, noninterest income increased $100,000, or 12.6%, from $794,000 for the six month period ended June 30, 2005 to $894,000 for the six month period ended June 30, 2005. Additionally, income tax expense was $5,000 less for the six month period ended June 30, 2006 compared to the same period in 2005.

 

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Net Interest Income

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest-earning assets and interest-bearing liabilities. At June 30, 2006, the Company’s interest-earning assets exceeded its interest-bearing liabilities by approximately $28.3 million, compared with a $33.5 million excess one year ago. Net interest margins on a fully tax equivalent basis were 4.28% through June 30, 2006 compared to 4.47% through June 30, 2005. The decrease in net interest margin was the result of an increase 64 basis points in yield on total earning assets coupled with an decrease of 83 basis points in the cost of total sources of funds. The Company’s yield on average earning assets, on a fully tax equivalent and annualized basis, was 6.72% for the first six months of 2006 compared to 6.08% for the first six months of 2005. Total sources of funds were 2.44% for the first six months of 2006 compared to 1.61% for the same period in 2005.

The Company’s loan-to-deposit ratio was 84.4%, on average, through the first six months of 2006 compared to 79.0% for the same period in 2005. On June 30, 2006, the Company’s loan-to-deposit ratio was 84.3% compared to 81.8% on December 31, 2005 and 81.7% on June 30, 2005.

Provision for Credit Losses

The Company’s provision for credit losses decreased $50,000 to $25,000 for the second quarter of 2006 compared to $75,000 in the second quarter of 2005. Net charge-offs of $17,000 in the second quarter of 2006 compared to net charge-offs on loans of $32,000 in the second quarter of 2005. For the six month period ended June 30, 2006 provision for credit losses was $125,000, a decrease of 19.4%, or $30,000, from provision for credit losses of $155,000 through six months in 2005. Through six months in 2006 net recoveries were $14,000, represented by charge-offs of $49,000 and recoveries of $63,000.

Noninterest Income

Noninterest income, including net gains and losses on securities, was $492,000 in the second quarter of 2006 compared to $400,000 in the same period of 2005. This represents an increase of 23.0%, or $92,000. Service charges on deposit accounts were $274,000 in the second quarter of 2006 and $247,000 in the second quarter of 2005. This is an increase of 10.9%, or $27,000. The increase was the result of higher levels of demand deposit accounts utilizing the Company’s automated program for overdrafts, which provides fee income. Securities gains/(losses) was $3,000 in both the second quarter of 2005 and 2006. All other noninterest income increased 25.3% or $25,000, from $99,000 in the second quarter of 2005 to $124,000 in the second quarter of 2006. Other fee income increased 61.1%, or $22,000, from $36,000 in the second quarter of 2005 to $58,000 in the second quarter of 2006. Gains on sale of loans increased $18,000, or 120.0%, from $15,000 in the second quarter of 2005 to $33,000 in the second quarter of 2006.

For the six month period ended June 30, 2006 noninterest income of $894,000 was an increase of $100,000, or 12.6%, from noninterest income of $794,000 for the first six months of 2005. Service charges on deposit accounts were $522,000 for the period compared to $468,000 in 2005. This is an increase 11.5%, or $54,000. All other noninterest increased $51,000, or 27.0% and was $240,000 for the first six months of 2006 compared to $189,000 for the same period in 2005. Gains on sales of loans was $49,000 for the first six months of 2006 compared to $31,000 for the same period in 2005, representing an increase of 58.1%, or $18,000. Other fee income increased 3.1%, or $3,000, and was $101,000 for the first six months of 2006 compared to $98,000 for the same period in 2005. Offsetting these increases to total noninterest income was a decrease of $26,000, or 325.0%, in securities gains/(losses) which were a loss of $18,000 in the first six months of 2006 compared to a gain of $8,000 for the first six months of 2005.

 

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Noninterest Expenses

Noninterest expenses were $2.0 million and increased $192,000, or 10.5%, in the second quarter of 2006 compared to 2005. Other expenses increased, $102,000, from $517,000 in the second quarter of 2005 to $619,000 in the second quarter of 2006. Salaries and employee benefits increased $61,000, or 5.8%, from $1.0 million in the second quarter of 2005 to $1.1 million in the second quarter of 2006. Premises and fixed assets increased $29,000, or 12.1%, from $240,000 in the second quarter of 2005 to $269,000 in the second quarter of 2006.

For the six month period ended June 30, 2006 noninterest expenses were $3,853,000, a $239,000, or 6.6%, increase over noninterest expenses of $3,614,000 for the first six months of 2005. Other expenses increased $120,000, or 11.8%, from $1,134,000 for the first six months of 2006 compared to $1,014,000 for the same period in 2005.

Income Taxes

Income tax expense was $211,000 in the second quarter of 2006. This represents a decrease of $16,000, or 7.0%, compared to $227,000 of income tax expense in the second quarter of 2005. Income tax expense for the six month period ended June 30, 2006 was $438,000 compared to $443,000 for the same period in 2005. This represents a decrease of $5,000, of 1.1%.

Asset Quality

The Company’s allowance for credit losses totaled $2,388,000 on June 30, 2006 or 1.27% of total loans. On December 31, 2005, the allowance for credit losses totaled $2.2 million and was 1.23% of total loans. On June 30, 2005, the allowance for credit losses was $2,235,000 and was 1.29% of total loans.

On June 30, 2006, the Company had nonaccruing assets of $54,000 compared to $222,000 on June 30, 2005. Loans past due and still accruing interest totaled $928,000 on June 30, 2006 compared to $44,000 on June 30, 2005.

Capital Requirements

The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company.

The federal banking regulators have defined three tests for assessing the capital strength and adequacy of banks, based on two definitions of capital. “Tier 1 Capital” is defined as a combination of common and qualifying preferred stockholders’ equity less goodwill. “Tier 2 Capital” is defined as qualifying subordinated debt and a portion of the allowance for loan losses. “Total Capital” is defined as Tier 1 Capital plus Tier 2 Capital.

Three risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets and are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Tier 1 Risk-based Capital” is Tier 1 Capital divided by risk-weighted assets. “Total Risk-based Capital” is Total Capital divided by risk-weighted assets. The Leverage ratio is Tier 1 Capital divided by total average assets.

 

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The Company’s ratio of total capital to risk-weighted assets was 13.64%% on June 30, 2006 compared to 15.79 on June 30, 2005. Its ratio of Tier 1 Capital to risk-weighted assets was 12.71% on June 30, 2006 and 14.80% on June 30, 2005. The Company’s leverage ratio (Tier I capital to average adjusted total assets) was 10.00% on June 30, 2006 and 11.73% on June 30, 2005. These ratios exceed regulatory minimums. The Company issued trust preferred subordinated debt that qualifies as regulatory capital in the fourth quarter of 2003. This trust preferred debt has a 30-year maturity with a 5-year call option and was issued at a rate of three month LIBOR plus 3.00% and was priced at 7.97938% in the second quarter of 2006.

RECENT ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards Board issued Statement No. 123R (revised 2004), “Share-Based Payment,” (FAS 123R) that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual periods beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Company’s results of operations at the present time.

In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staff’s view regarding the valuation of share-based payment arrangements for public companies. SAB 107 does not impact the Company’s results of operations at the present time.

In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement 140” (Statement 156). Statement 156 amends Statement 140 with respect to separately recognized servicing assets and liabilities. Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and liabilities to be initially measured at fair value, if practicable. Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method. Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing. Under the fair value measurement method, servicing assets are measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs.

Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequent to September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements.

The Corporation does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company’s market risk is composed primarily of interest rate risk. The Company’s Asset and Liability Management Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk. The Board of Directors reviews and approves the guidelines established by ALCO.

Earnings Simulation Analysis

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company’s market risk is composed primarily of interest rate risk. The Company’s Asset and Liability Management Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk. The Board of Directors reviews and approves the guidelines established by ALCO.

Interest rate risk is monitored through the use of two complimentary modeling tools: earnings simulation modeling and economic value simulation (net present value estimation). Each of these models measure changes in a variety of interest rate scenarios. While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.

 

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Earnings Simulation Analysis

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that management has input, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other potential analyses.

Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. Such assumptions are monitored and periodically adjusted as appropriate. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.

The Company uses its simulation model to estimate earnings in rate environments where rates ramp up or down around a “most likely” rate scenario, based on implied forward rates. The analysis assesses the impact on net interest income over a 12 month time horizon by applying 12-month shock versus the implied forward rates of 200 basis points up and down. The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled as of June 30, 2006:

 

     Change in Net Interest Income  

Change in Yield Curve

   (Percent)     ($ in thousands)  

+200 basis points

   -1.32 %   $ (145 )

Most likely rate scenario

   0.00 %   $ —    

-200 basis points

   -0.99 %   $ (109 )

Economic Value Simulation

Economic value simulation is used to determine the estimated fair value of assets and liabilities over different interest rate scenarios. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate scenarios is an indication of the longer term earnings sensitivity capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses simultaneous rate shocks to the balance sheet, whereas the earnings simulation uses rate shock over 12 months. The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation as of June 30, 2006:

 

     Change in Economic Value of Equity  

Change in Yield Curve

   (Percent)     ($ in thousands)  

+200 basis points

   -13.22 %   $ (4,541 )

Most likely rate scenario

   0.00 %   $ —    

-200 basis points

   7.34 %   $ 2,523  

 

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Item 4. Controls and Procedures

Based on their most recent review, which was completed as of the last day of the period covered by this report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company’s in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its annual shareholders meeting on May 12, 2006.

Alexander F. Dillard, Jr., Frances H. Ellis and Philip T. Minor, all of the directors nominated for election, were elected to the Board of Directors of the Company to serve until the Annual Meeting to be held in 2009 and until their successors are duly elected.

Votes were cast in the election of directors as follows:

 

     FOR    AGAINST    ABSTAIN

Alexander F. Dillard, Jr.

   918,712    34,638    1,000

Frances H. Ellis

   952,369    981    1,000

Philip T. Minor

   953,350    0    1,000

Yount, Hyde & Barbour, P.C., Certified Public Accountants, were ratified as the independent auditors of the Company for 2006.

Item 5. Other Information

None

 

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Item 6. Exhibits

The information furnished herein, including Exhibit 99.1, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

 

  (a) Exhibit Listing

 

Exhibit
Number
 

Description

2   Agreement and Plan of Reorganization (the “Reorganization Agreement”) dated as of March 20, 2000 between the Corporation and Bank. (Exhibit A of the Proxy Statement included in Form S-4 Registration Statement (No. 333-33260) filed March 24, 2000, incorporated by reference).
3(a)   Articles of Incorporation of the Corporation (Appendix 1 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement (No. 333-33260) filed March 24, 2000, incorporated by reference).
3(b)   Bylaws (Appendix 2 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement (No. 333-33260) filed March 24, 2000, incorporated by reference).
10(a)   The Corporation’s Stock Incentive Plan (Appendix 3 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement (No. 333-33260) filed March 24, 2000, incorporated by reference).
10(b)   First Amendment to the Corporation’s Stock Incentive Plan (Exhibit 99(b) to Form S-8 Registration Statement (No. 333-49538) filed November 8, 2000, incorporated by reference).
10(c)   The Corporation’s Stock Option Plan for Outside Directors (Appendix 4 to Exhibit A of the Proxy Statement included in Form S-4 Registration Statement (No. 333-33260) filed March 24, 2000, incorporated by reference).
10(d)   First Amendment to the Corporation’s Stock Option Plan for Outside Directors (Exhibit 99(d) to Form S-8 Registration Statement (No. 333-49538) filed November 8, 2000, incorporated by reference).
31.1   Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act.
31.2   Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act
32   Certification of Chief Executive Officer and Chief Financial Officer.
99.1   BOE Financial Services Dividend Reinvestment Plan (Incorporated by reference to the Registrant’s Registration Statement on Form S-3D filed November 8, 2000)

 

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Signatures

In accordance with to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BOE Financial Services of Virginia, Inc.
  (Registrant)
8/14/06   By:  

/s/ George M. Longest, Jr.

(Date)     (Signature)
    George M. Longest, Jr.
    President and Chief Executive Officer
8/14/06   By:  

/s/ Bruce E. Thomas

(Date)     (Signature)
    Bruce E. Thomas
    Secretary, Senior Vice President & Chief Financial Officer

 

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