2008 annualreport

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WELCOME HOME bankofva.com Welcome Home 2008 ANNUAL REPORT A Cohesive Vision. Solid Relationships. WELCOME HOM bankofva.com lid Relationshi ps .

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  • 1. 2008 ANNUAL REPORT A Cohesive Vision. Solid Relationships. Welcome Home WELCOME HOME HOM bankofva.com
  • 2. Welcome home.Our mission is to exceed the expectations of every customer, every time!Table of ContentsSelected Financial Data ....................................................................................................................1Letter to Shareholders ......................................................................................................................2Stockholder and Investor Information ...........................................................................................4Managements Report on Internal Control Over Financial Reporting .......................................5Report of Independent Registered Public Accounting Firm .......................................................6Balance Sheets...................................................................................................................................7Statements of Operations ................................................................................................................8Statements of Changes in Stockholders Equity..........................................................................9Statements of Cash Flows............................................................................................................. 10Notes to Financial Statements .....................................................................................................11 WELCOME HOME bankofva.com
  • 3. SELECTED FINANCIAL DATA At December 31, Total Deposits ($ amounts in millions)(Amounts in thousands, except per share data) 2005 2006 2007 2008 200Balance Sheet Summary (at end of period): 171 155Loans, net of unearned income $ 53,543 $ 98,015 $ 132,082 $ 152,962 150Allowance for loans losses 547 931 1,277 2,942 111Securities 19,579 23,924 37,641 41,009 100Total assets 85,698 134,295 184,009 203,711 66 50Deposits 65,955 111,474 154,885 171,011Other indebtedness 2,500 5,000 10,000 15,176 0 2005 20 2006 20 2008 006 2007 20 007 008Total liabilities 68,799 117,233 166,004 187,396Stockholders equity 16,899 17,062 18,004 16,316 Loans Outstanding ($ amounts in millions)Summary of Earnings:Total interest income $ 3,114 $ 7,462 $ 11,381 $ 12,427 200Total interest expense 1,185 3,538 6,189 6,966 153 150 132Provision for loan losses 464 384 346 1,764Non-interest income (loss) (22) 157 220 533 100 98Non-interest expense 3,277 3,598 4,559 5,545 53Income (loss) before income taxes (1,834) 99 506 (1,315) 50Income tax expense _ _ _ _ 0Net income (loss) (1,834) 99 506 (1,315) 2005 20 2006 2007 2008 006 2007 20 008Per Share Data:Basic earnings (loss) per share $ (1.07) $ 0.03 $ 0.17 $ (0.43) Total Assets ($ amounts in millions)Diluted earning (loss) per common share (1.07) 0.03 0.17 (0.43) 204 200Book value at year-end 5.57 5.63 5.94 5.38 184 150 134Selected Ratio:Return on average assets (3.34)% 0.09% 0.32% (0.66)% 100 86Return on average equity (21.99)% 0.59% 2.92% (7.42)% 50Average equity to average assets 15.20% 15.59% 10.80% 8.93%Total risk based capital to risk adjusted assets 27.66% 14.96% 12.15% 10.62% 0 2005 2006 2007 2008 20 006 2007 20 008Leverage ratio 22.66% 13.39% 9.74% 7.94% 1
  • 4. TO OUR SHAREHOLDERS Dear Shareholders, As always, let me begin by sincerely thanking you for your continued support of Bank of Virginia. Your support, with the dedication and commitment of our employees, has been an integral part of the banks growth and success. The economic landscape during 2008 was one of challenge and certainly created issues that the banking community has not seen for many years. I believe that these are unique times and uncharted waters. The frenzy in the media has continued to fuel downward pressure on bank stocks. Unfortunately, the word bank has become a broad brush term that covers everything from well run, solid community banks, to the Wall Street giants that were at the root of many of the problems. Bank of Virginia epitomizes the traditional community bank in its actions and culture. We are an organization that supports the communities we serve nancially when appropriate but most importantly, by being active participants in the communities as volunteers, leaders and neighbors.During 2008, our bank continued to focus on the basics of community banking. We provided nancing for small business growth anddeposit solutions for individuals and businesses and did so with a level of service that is top tier. Additionally, in January of 2008 weopened our fth branch location which took the Bank of Virginia into the near west end of Richmond. Bank of Virginia is a place wherepeople want to work, have the ability to make a difference, and know that their efforts are appreciated. When ofcers and staff believein what they do, the result will be quality customer service and an excellent banking experience. This is why I feel we have earned theright to say, Welcome Home.Looking specically at 2008, I am proud to tell you that total assets exceeded $200 million, reaching $204 million. Compared toDecember 31, 2007 totals of $184 million, assets grew 10.7%. Loans, net of allowance for loan losses, grew from $130 million at yearend 2007 to $153 million as of year end 2008 representing a 17.6% increase. This growth was the main contributor to the aforementionedasset growth.In order to support our loan growth, we continued to place heavy emphasis on deposit acquistition since deposits serve as the source forour loan portfolio. In 2008, banks focused heavily on liquidity creating a highly competitive landscape. Noninterest-bearing depositsshowed mild contraction of 4% while all interest bearing deposits grew over 11.7%. Midyear concerns over bank failures and FDICstrength precipitated a reallocation of deposits throughout the banking system.Total interest income, the banks primary source of revenue, grew from $11.3 million at December 31, 2007 to $12.1 million as ofDecember 31, 2008, a 6.7% increase. Management is pleased with this increase in light of the 400 basis point reduction in the primelending rate throughout the year. These decreases caused an immediate repricing of the variable rate loan portfolio and created downwardpressure on the overall net margin. The increase in total interest income was largely attributed to the increase in volume. Interestexpense increased 12.6% due to increased volume of interest bearing accounts.In the fourth quarter of the year management elected to increase the allowance for loan loss signicantly due to the continued deteriorationof the economy. Although the bank did not participate in any of the subprime lending, the overall economic slowdown and negativemarket movement is impacting the loan portfolio. The total 2008 provision for loan loss was $1.8 million compared to $346 thousandin 2007. This provision increases total allowance to $2.9MM or 1.9% of net loans.The decision to increase the reserve to this magnitude was not made lightly. Management has increased its monitoring of the creditportfolio due to the economy. We feel comfortable that current reserve levels adequately cover potential losses and that the increasedallowance was a prudent action given the continued uncertainty in the market. As a result of the aforementioned, a net loss of $1.3million is reported for 2008, compared to income of $506 thousand for the year end 2007.Looking ahead to 2009, management feels that the economic horizon remains uncertain. We feel that Bank of Virginia is well positionedto handle a continued recession, and is well poised for when the economy improves. We will continue to utilize the same soundunderwriting standards that have served us well to date. This action should provide for controlled growth with sound returns.In closing, I want to thank our shareholders, as well as our ofcers and staff, for their continued support through 2008. There is adifference between Wall Street and Main Street, a difference that has been claried in 2008. I rmly believe that community banks willplay an integral part in rebuilding our economy and Bank of Virginia will be a part of the process. Finally, if you know us only as ashareholder, I personally invite you to come bank with us. I am comfortable in saying that you will quickly understand why we feel wehave earned the right to say Welcome Home. Sincerely, Frank Bell, III President & CEO2
  • 5. OFFICERS, MANAGERS & BOARD OF DIRECTORS Chairman and Chief Executive Ofcer (left to right) Henry Hank E. Richeson Chairman of the Board Frank Bell, III President and Chief Executive Ofcer Senior Management Team (left to right) Bruce T. Brockwell Senior Vice President and Chief Credit Ofcer Ann-Cabell Williams Senior Vice President and Retail Executive Kenneth P. Mulkey Senior Vice President, Chief Financial Ofcer and Chief Operating Ofcer Frank Bell, III President and Chief Executive Ofcer Board of Directors (left to right) Front Row Frank Bell, III, Henry Hank E. Richeson and Claiborne G. Thomasson Middle Row Vernon E. LaPrade, Jr. and G. Waddy Garrett Back Row Thomas L. Gordon and J. Michael Jarvis 3 WELCOME HOME bankofva.com
  • 6. CORPORATE INFORMATIONCORPORATE OFFICE 10-K REPORTBank of Virginia A copy of Bank of Virginias latest annual report on Form 10-KSB will be11730 Hull Street Road provided without charge upon written request to:Midlothian, VA 23112(804) 763-1333 Kenneth P. Mulkey Senior Vice President, CFO and COOAUDITORS Bank of VirginiaYount, Hyde & Barbour, P.C. P.O. Box 565850 South Cameron Street Midlothian, VA 23112Winchester, VA 22601 Access to all Bank of Virginia Securities and Exchange lings can beCOMMON STOCK TRANSFER AGENT AND REGISTRAR obtained through the Investor Relations link on our website at:Computershare Investor Services, LLC www.bankofva.com.730 Peachtree Street, Suite 840Atlanta, GA 30308 SHAREHOLDER INQUIRIES(312) 588-4993 Questions concerning shareholder accounts, stock transfer requirements, consolidation of accounts, lost certicates and name or address changesCOMMON STOCK should be directed to the transfer agent. All other shareholder questionsBank of Virginia common stock is listed on the should be directed to:NASDAQ Stock Market under the symbol BOVA. Kenneth P. MulkeyBRANCH OFFICES Senior Vice President, CFO and COO11730 Hull Street Road Bank of VirginiaMidlothian, VA 23112 P.O. Box 5658(804) 744-7576 Midlothian, VA 23112 (804) 763-13336657 Lake Harbour DriveMidlothian, VA 23112 FINANCIAL INQUIRIES(804) 639-6800 All nancial analysts and professional investment managers should direct their questions and requests for nancial information to:906 Branchway RoadRichmond, VA 23236 Bank of Virginia(804) 560-0660 Chief Financial Ofcer P.O. Box 56584023 West Hundred Road Midlothian, VA 23112Chester, VA 23831 (804) 763-1333(804) 414-020810501 Patterson AvenueRichmond, VA 23238(804) 525-2660Access up-to-date information on Bank of Virginias website at:www.bankofva.com4
  • 7. Managements Report on Internal Control Over Financial ReportingManagement of the Bank is responsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America. Management regularly monitorsits internal control over financial reporting and takes appropriate action to correct any deficiencies that maybe identified.Management assessed the Banks internal control over financial reporting as of December 31, 2008.This assessment was based on criteria established in Internal Control Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,management concluded that the Bank maintained effective internal control over financial reporting as ofDecember 31, 2008.Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Further, because of changes in conditions, internal control effectiveness may vary overtime.This annual report does not include an attestation report of the Banks registered public accounting firmregarding internal control over financial reporting. Managements report was not subject to attestation bythe Banks registered public accounting firm pursuant to temporary rules of the Securities and ExchangeCommission that permit the Bank to provide only managements report in this annual report.Frank Bell, III Kenneth P. MulkeyPresident & Chief Executive Officer Senior Vice President & Chief Financial OfficerMarch 31, 2009 5
  • 8. BANK OF VIRGINIA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Certied Public Accountants and Consultants REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Bank of Virginia Midlothian, Virginia We have audited the accompanying balance sheets of Bank of Virginia as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders equity, and cash flows for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of the Banks management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bank of Virginia as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007, in conformity with U.S. generally accepted accounting principles. We were not engaged to examine managements assessment of the effectiveness of Bank of Virginias internal control over financial reporting as of December 31, 2008, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon. Winchester, Virginia March 30, 20096
  • 9. BANK OF VIRGINIA | FINANCIALSBalance Sheets At December 31,Assets 2008 2007Cash and due from banks $ 2,608,500 $ 4,183,359Federal funds sold and interest-bearing deposits with banks 42,194 4,771,376Total cash and cash equivalents 2,650,694 8,954,735Securities available for sale, at fair market value 39,474,175 36,442,472Restricted securities 1,534,550 1,198,800Loans, net of allowance for loan losses of $2,942,988 and $1,276,726 in 2008 and 2007, respectively 152,962,046 130,805,447Premises and equipment, net 5,688,585 5,532,009Accrued interest receivable 864,630 857,853Other real estate owned 308,019 -Other assets 229,220 217,311 Total assets $203,711,919 $184,008,627Liabilities and Stockholders Equity Deposits Noninterest-bearing $ 12,483,762 $ 13,020,632 Savings and interest-bearing demand 18,770,259 17,122,793 Time, $100,000 and over 55,939,332 46,155,151Other time 83,818,330 78,586,170 Total deposits 171,011,683 154,884,746Accrued expenses and other liabilities 1,208,215 1,119,459FHLB Borrowings 15,000,000 10,000,000Federal funds purchased 176,000 - Total liabilities 187,395,898 166,004,205Stockholders Equity Preferred stock, $5 par value, 5,000,000 shares authorized, none issued - - Common stock, $2.50 par value, 40,000,000 shares authorized, 3,031,866 shares issued and outstanding in 2008 and 2007, respectively 7,579,665 7,579,665 Additional paid-in capital 14,705,508 14,693,218 Retained decit (5,913,941) (4,599,346) Accumulated other comprehensive income (loss) (55,211) 330,885 Total stockholders equity 16,316,021 18,004,422Total liabilities and stockholders equity $203,711,919 $184,008,627See Notes to Financial Statements. 7
  • 10. BANK OF VIRGINIA | FINANCIALS Statements of Operations Years ended December 31, 2008 and 2007 2008 2007 Interest income Interest and fees on loans $10,220,810 $9,526,583 Investment securities 2,141,546 1,494,000 Federal funds sold and deposits with banks 65,115 359,886 Total interest income 12,147,471 11,380,469 Interest expense Interest on deposits 6,432,811 5,868,301 Interest on federal funds purchased 22,435 5,052 Interest on FHLB borrowings 510,623 315,609 Total interest expense 6,965,869 6,188,962 Net interest income 5,461,602 5,191,507 Provision for loan losses 1,764,325 345,534 Net interest income after provision for loan losses 3,697,277 4,845,973 Noninterest income Service charges on deposit accounts 206,456 121,619 Net gain on available for sale securities 186,697 11,776 Other fee income 140,318 86,057 Total noninterest income 533,471 219,452 Noninterest expense Salaries and employee benets 3,110,236 2,709,305 Occupancy expense 410,422 319,740 Equipment expense 318,098 208,382 Data processing 457,809 351,517 Marketing expense 171,093 144,876 Legal and professional 239,444 146,791 Bank franchise tax 150,090 131,393 Other operating expenses 688,051 546,925 Total noninterest expense 5,545,243 4,558,929 Net income $(1,314,495) $ 506,496 Basic earnings per share $ (0.43) $ 0.17 Diluted earnings per share $ (0.43) $ 0.17 Weighted average shares outstanding, basic 3,031,866 3,031,866 Weighted average shares outstanding, diluted 3,031,866 3,032,355 See Notes to Financial Statements.8
  • 11. BANK OF VIRGINIA | FINANCIALSStatements of Changes in Stockholders EquityYears ended December 31, 2008 and 2007 Accumulated Other Additional Compre- Common Paid-in Retained hensive Stock Capital Decit Income (Loss) TotalBalance, December 31, 2006 $ 7,579,665 $ 14,630,698 $ (5,105,842) $ (42,402) $ 17,062,119Stock-based compensation expense - 62,520 - - 62,520Comprehensive Income: Net income - - 506,496 - 506,496Unrealized gain on securities available for sale - - - 385,063 385,063Reclassication adjustment - - - (11,776) (6,235) (11,776)Other comprehensive income - - - 373,287 373,287 Total comprehensive income - - - - 879,783Balance, December 31, 2007 $ 7,579,665 $ 14,693,218 $ (4,599,346) $ (330,885) $ 18,004,422Stock-based compensation expense - 12,290 - - 12,290Comprehensive income: Net income - - (1,314,595) - (1,314,595)Unrealized gain on securities available for sale - - - (199,399) (199,399) -Reclassication adjustment - - - (186,697) (186,697)Other comprehensive income (386,096) (386,096) 373,287 Total comprehensive income - - - - 879,783 (1,700,691)Balance, December 31, 2008 $ 7,579,665 $ 14,705,508 $ (5,913,941) $ (55,211) 16,316,021 $(16,316,021)See Notes to Financial Statements. 9
  • 12. BANK OF VIRGINIA | FINANCIALS Statements of Cash Flows Years ended December 31, 2008 and 2007 2008 2007 Cash Flows From Operating Activities: Reconciliation of net income to net cash provided by operating activities: Net (loss) income $ (1,314,595) $ 506,496 Net amortization (accretion) of discount on investment securities 43,826 (97,248) (116,582) Depreciation and amortization 341,937 225,830 Provision for loan losses 1,764,325 345,534 Net gain on available for sale securities (186,697) (6,235) (11,776) Stock-based compensation expense 12,290 62,520 Increase in accrued interest receivable (6,777) (159,117) (291,583) Increase in other assets (319,928) (20,475) (20,475) Increase in accrued expense other liabilities 88,756 359,711 Net cash provided by operating activities 423,137 1,211,475 Cash Flows from Investing Activities: Purchases of securities available for sale (43,080,078) (27,905,758) Net change in restricted securities (335,750) (205,400) (205,400) Sales of available for sale securities 34,519,557 1,236,485 Maturities and calls of available for sales securities - 11,945,000 Payments on mortgage-backed securities 5,285,593 1,694,777 1,694,777 Net increase in loans (23,920,924) (34,067,667) Purchases of premises and equipment (498,513) (1,906,630) Net cash (used in) investing activities (28,030,115) (49,209,193) Cash Flows from Financing Activities: Net increase (decrease) in demand, savings, interest-bearing checking and money market deposits 1,110,596 5,416,534 Net increase in time deposits 15,016,341 37,994,730 Net proceeds from FHLB borrowings 5,176,000 5,000,000 Net cash provided by nancing activities 21,302,937 48,411,264 Net increase (decrease) in cash and cash equivalents (6,304,041) 413,546 Cash and cash equivalents at beginning of year 8,954,735 8,541,189 Cash and cash equivalents at end of year $ 2,650,694 $ 8,954,735 Supplemental Disclosures of Cash Flow Information Cash payments for interest $ 6,951,209 $ 5,991,716 Supplemental Disclosures of Noncash Investing Activities Fair value adjustment for securities $ (386,096) $ 373,287 Other real estate owned transferred from loans $ 308,019 -10 See Notes to Financial Statements.
  • 13. BANK OF VIRGINIA | FINANCIALSNotes to Financial StatementsNote 1. Organization and Summary of Signicant Accounting PoliciesOrganization Bank of Virginia (the Bank) was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the communities in and around Chestereld County, Virginia. The Bank was in organization during the period from November 1, 2002, through January 11, 2004. The Bank commenced regular operations on January 12, 2004, and is a member of the Federal Reserve System, Federal Deposit Insurance Corporation and the Federal Home Loan Bank of Atlanta. The Bank is subject to the regulations of the Federal Reserve System and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.Summary of Signicant Accounting Policies The accounting and reporting policies of the Bank are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The more signicant of these policies are summarized below. (a) Use of Estimates In preparing nancial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to signicant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets. (b) Cash and Cash Equivalents For purposes of the statement of cash ows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one day periods. (c) Securities Debt securities that management has the positive intent and ability to hold to maturity are classied as held to maturity and recorded at amortized cost. Securities not classied as held to maturity, including equity securities with readily determinable fair values, are classied as available for sale and recorded at estimated fair value. The Bank classies all securities as available for sale. Other restricted securities, such as Federal Reserve Bank stock, are carried at cost. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reected in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the nancial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufcient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specic identication method. (d) Loans The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial loans throughout the greater Richmond, Virginia metropolitan area. The ability of the Banks debtors to honor their contracts is dependent upon numerous factors including the collateral performance, general economic conditions, as well as the underlying strength of borrowers and guarantors. 11
  • 14. BANK OF VIRGINIA | FINANCIALS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees and certain direct costs are deferred and the net amount is amortized as an adjustment of the related loans yield. The Bank is amortizing these amounts over the loans contractual life or to the pay-off date if the balance is repaid prior to maturity. The accrual of interest on loans is discontinued at the time the loan becomes 90 days delinquent unless the credit is well-secured and in process of collection. Non-performing loans are placed either in nonaccrual status pending further collection efforts or charged off if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on loans in nonaccrual status is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. (e) Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is conrmed. Subsequent recoveries, if any, are credited back to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to signicant revision as more information becomes available. The allowance consists of specic, general and unallocated components. The specic component relates to loans that are classied as either doubtful, substandard or special mention. For such loans that are also classied as impaired, an allowance is established when the discounted cash ows (or collateral value or observed market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassied loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses. The unallocated component of the allowance reects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the specic and general losses in the portfolio. The above referenced review may indicate that a loan is impaired. The impairment of a loan occurs when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured as the difference between the recorded investment in the loan and the evaluation of the present value of expected future cash ows or the observable market price of the loan. Loans that are collateral dependent, that is, loans where repayment is expected to be provided solely by the underlying collateral, and for which management has determined foreclosure is probable, are measured for impairment based on the fair value of the collateral. (f) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the assets estimated useful lives. Estimated useful lives range from 10 to 39 years for buildings and 3 to 7 years for autos, furniture, xtures and equipment. The value of land is carried at cost. (g) Foreclosed Properties Assets acquired through, or in lieu of, loan foreclosure are held for sale. They are initially recorded at the lower of the Banks cost or the assets fair market value at the date of foreclosure, less estimated selling costs thus establishing a new cost basis. Subsequent to foreclosure, valuations of the assets are periodically performed by management. Adjustments are made to the lower of the carrying amount or fair market value of the assets less selling costs. Revenue and expenses from operations and valuation changes are included in net expenses from foreclosed assets. The Bank had one foreclosed asset at December 31, 2008 totaling $308,000 and none at December 31, 2007.12
  • 15. BANK OF VIRGINIA | FINANCIALS (h) Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, the recognition of the asset is less than probable. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. When tax returns are led, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amount of the position that would be ultimately sustained. The benet of a tax position is recognized in the nancial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benet that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benets associated with tax positions taken that exceeds the amount measured as described above is recognized as a liability for unrecognized tax benets in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with the unrecognized tax benets are classied as additional income taxes in the statement of income. (i) Advertising Costs The Bank follows the policy of charging the production costs of advertising to expense as incurred unless the advertising campaign extends for a signicant time period, in which case, such costs will be amortized to expense over the duration of the advertising campaign. (j) Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. (k) Earnings (Loss) Per Share Basic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. At December 31, 2008, there were 179,500 option shares outstanding. Of the option shares outstanding none were dilutive and, as a result, had no impact on the calculation of computing diluted earnings per common share for the year ended December 31, 2008. (l) Stock Option Plan Effective January 1, 2006, the Bank adopted SFAS No. 123R (Revised 2004), Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25). SFAS 123R requires the costs resulting from all share-based payments to employees be recognized in the nancial statements. Stock-based compensation is estimated at the date of grant, using the Black-Scholes option valuation model for determining fair value. Under APB Opinion No. 25, compensation expense was generally not recognized if the exercise price of the option equaled or exceeded the market price of the stock on the date of grant. For the year ended December 31, 2008 and 2007, the Bank recognized stock-based compensation expense of $12,000 and $63,000, respectively or less than $.01 per share in 2008 and approximately $.02 per share in 2007. 13
  • 16. BANK OF VIRGINIA | FINANCIALS Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (FASB) reached a consensus on Emerging Issues Task Force (EITF) Issue 06-4, Accounting for Deferred Compensation and Postretirement Benet Aspects of Endorsement Split-Dollar Life Insurance Arrangements, (EITF Issue 06-4). In March 2007, the FASB reached a consensus on EITF Issue 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements, (EITF Issue 06-10). Both of these standards require a company to recognize an obligation over an employees service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death benet postretirement. The Bank adopted the provisions of these standards effective January 1, 2008. The adoption of these standards was not material to the Banks nancial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 denes fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but rather provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for nancial statements issued for scal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonnancial assets and nonnancial liabilities that are recognized or disclosed at fair value in the nancial statements on a nonrecurring basis. The Bank adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 was not material to the Banks nancial statements. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This Statement permits entities to choose to measure many nancial instruments and certain other items at fair value. The objective of this Statement is to improve nancial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specied election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entitys rst scal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Bank adopted SFAS 159 effective January 1, 2008. The Bank decided not to report any existing nancial assets or liabilities at fair value that are not already reported, thus the adoption of this statement did not have a material impact on the Banks nancial statements. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (SFAS 141(R)). The Standard will signicantly change the nancial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the nancial statements to evaluate the nature and nancial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entitys rst year that begins after December 15, 2008. The Bank does not expect the implementation of SFAS 141(R) to have a material impact on it nancial statements, at this time. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51 (SFAS 160). The Standard will signicantly change the nancial accounting and reporting of noncontrolling (or minority) interests in consolidated nancial statements. SFAS 160 is effective as of the beginning of an entitys rst scal year that begins after December 15, 2008, with early adoption prohibited. The Bank does not expect the implementation of SFAS 160 to have a material impact on its nancial statements, at this time. In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash ows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modied in scal quarters beginning after December 15, 2007. Implementation of SAB 109 did not have a material impact on the Banks nancial statements.14
  • 17. BANK OF VIRGINIA | FINANCIALS In December 2007, the SEC issued Staff Accounting Bulletin No. 110, Use of a Simplied Method in Developing Expected Term of Share Options (SAB 110). SAB 110 expresses the current view of the staff that it will accept a companys election to use the simplied method discussed in SAB 107 for estimating the expected term of plain vanilla share options regardless of whether the company has sufcient information to make more rened estimates. The staff noted that it understands that detailed information about employee exercise patterns may not have been widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplied method beyond December 31, 2007. Implementation of SAB 110 did not have a material impact on the Banks nancial statements. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of SFAS No. 133, (SFAS No. 161). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the Bank on January 1, 2009. In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of Intangible Assets (FSP No. 142-3). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The intent of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash ows used to measure the fair value of the assets under SFAS No. 141(R). FSP No. 142-3 is effective for the Company on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The adoption of FSP No. 142-3 is not expected to have a material impact on the Banks nancial statements. In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (SFAS No. 162). SFAS No. 162 identies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of nancial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SECs 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. Management does not expect the adoption of the provision of SFAS No. 162 to have any impact on the Banks nancial statements. In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarication of the Effective Date of FASB Statement No. 161, (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of nancial statements to assess their potential effect on its nancial position, nancial performance and cash ows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for the Bank on December 31, 2008 and is not expected to have a material impact on the nancial statements. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, (FSP 157-3). FSP 157-3 claries the application of SFAS No. 157 in determining the fair value of a nancial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the Banks nancial statements. In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. FSP No. FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of nancial assets and interests in variable interest entities. The FSP is effective for interim and annual periods ending after December 15, 2008. Since the FSP requires only additional disclosures concerning transfers of nancial assets and interest in variable interest entities, adoption of the FSP will not affect the Banks nancial condition, results of operations or cash ows. In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Benecial Interests and Benecial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as of December 31, 2008 and did not have a material impact on the Banks nancial statements. 15
  • 18. BANK OF VIRGINIA | FINANCIALS Note 2. Securities Amortized cost and fair values of securities available for sale are as follows: December 31, 2008 Amortized Gross Unrealized Fair Cost Gain (Losses) Value Mortgage-backed securities $ 37,047,497 $ 333,866 $ (313,179) $ 37,068,184 Securities of U.S. government agencies 1,500,818 8,450 - 1,509,268 Corporate bonds 981,071 - (84,348) 896,723 Total $ 39,529,386 $ 342,316 $ (397,527) $ 39,474,175 December 31, 2007 Amortized Gross Unrealized Fair Cost Gain (Losses) Value Mortgage-backed securities $ 27,876,268 $ 257,311 $ (11,245) $ 28,122,334 Securities of U.S. government agencies 7,257,960 88,152 - 7,346,112 Corporate bonds 977,359 7,416 (10,749) 974,026 Total $ 36,111,587 $ 352,879 $ (21,994) $ 36,442,472 The amortized cost and fair value of securities available for sale as of December 31, 2008, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties. Amortized Fair Cost Value 1 year or less $ 1,500,818 $ 1,509,268 Over 1 year through 5 years 495,285 441,804 Over 5 years through 10 years 485,786 454,919 Mortgage-backed securities 37,047,497 37,068,184 Total $39,529,386 $39,474,175 As of December 31, 2008, the portfolio continues to be largely concentrated in average maturities of ve years or less. The portfolio is available to support liquidity needs of the Bank, but lines with correspondents and the FHLB have been opened as an alternate source of funds in addition to the deposit base. There were $35.7 million ($34.5 million of available for sale and $1.2 million in restricted securities) in securities sales during 2008 and $1.2 million in proceeds from sales of securities available for sale during 2007. Gross realized gains were approximately $268,000 in 2008 with $81,000 in corresponding losses recorded in 2008. This compares to $12,000 in gross gains realized in 2007 along with no losses realized for the comparable period. At December 31, 2008, the combined depreciation in value of the individual securities in an unrealized loss position for less than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of December 31, 2008 represents an other-than-temporary impairment. The Bank has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the change in value is entirely attributable to changes in market interest rates and not the credit quality of the issuer.16
  • 19. BANK OF VIRGINIA | FINANCIALS The following tables reects those investments in a continuous unrealized loss position for less than 12 months and for 12 months or longer. December 31, 2008 Less than 12 Months 12 Months or longer TotalDescription of Securities Fair Value Unrealized Fair Value Unrealized Fair Value Unrealized Losses Losses LossesMortgage-backed securities 14,323,112 (313,179) - - 14,323,112 (313,179)Corporate bonds 896,733 (84,348) - - 896,733 (84,348) Total $15,219,845 $(397,527) $ - $ - $15,219,845 $(397,527) December 31, 2007 Less than 12 Months 12 Months or longer Total Fair Value Unrealized Fair Value Unrealized Fair Value UnrealizedDescription of Securities Losses Losses LossesMortgage-backed securities 1,650,663 (11,245) - - 1,650,663 (11,245)Corporate bonds 473,676 (10,749) - - 473,676 (10,749) Total $ 2,124,339 $ (21,994) $ - $ - $ 2,124,339 (21,994) There were no held to maturity securities at December 31, 2008 or 2007. At December 31, 2008, U.S. Government agency obligations with a combined carrying value of $3.4 million were pledged to secure public funds with the State of Virginia. Note 3. Loans A summary of the balances of loans outstanding as of December 31 was as follows: 2008 2007 Real Estate: Construction $33,134,434 $ 31,146,841 Commercial 55,224,028 50,877,451 Residential 10,345,371 8,458,330 Home Equity 14,532,842 11,130,446 Commercial 39,090,641 27,331,431 Consumer 3,577,736 3,137,674 $155,905,034 $132,082,173 Less: Allowance for loan losses 2,942,988 1,276,726 Loans, net $152,962,046 $130,805,447 Overdrafts totaling $4,000 and $5,000 were reclassied from deposits to loans at December 31, 2008 and 2007, respectively. 17
  • 20. BANK OF VIRGINIA | FINANCIALS An analysis of the allowance for loan losses follows: December 31, 2008 2007 Beginning Balance $1,276,726 $931,192 Provision for loan losses 1,764,325 345,534 Loans charged off (98,063) - Recoveries on loans previously charged off - - Balance, December 31, $2,942,988 $1,276,726 There were two loans evaluated for impairment at December 31, 2008. One of the loans, as discussed below, was not deemed impaired due to the sufciency of cash ows from the collateral while a specic provision for loan loss of $1 million has been recorded for the other deemed impairment. In addition, there were two loans 90 days past due totaling $940,000 at December 31, 2008. One of these loans is still accruing interest at December 31, 2008 and the collateral position is sufcient to allow for collection of all interest due on the note. At December 31, 2007, there were no loans 90 days past due. The following information is a summary pertaining to impaired and nonaccrual loans: Update for interest earned December 31, 2008 2007 (in thousands) Impaired loans without a valuation allowance 940 - Impaired loans with a valuation allowance 2,500 - Total impaired loans 3,440 Valuation allowance related to impaired loans 1,000 - Total nonaccrual loans 244 - Total past-due 90 days or more and still accruing 696 - Average investment in impaired loans 3,018 - Interest income recognized on impaired loans 55 - Note 4. Premises and Equipment A summary of the cost and accumulated depreciation of premises and equipment follows: 2008 2007 Fixed assets in process and construction $ 59,260 $2,933,193 Buildings and improvements 3,253,979 1,679,708 Land 2,006,083 754,542 Furniture, xtures and equipment 1,060,057 665,581 Leasehold improvements 491,520 366,902 Automobiles 86,684 77,535 $6,957,583 $6,477,461 Less accumulated depreciation 1,268,998 945,452 $5,668,585 $5,532,00918
  • 21. BANK OF VIRGINIA | FINANCIALS The balance in xed assets in process and construction in the table above in 2007 relates to the Banks 5th branch located on Patterson Avenue in Richmond, VA, and subsequently opened in early January 2008. The branch-in- process total for 2007 enumerated above includes $83,000 in capitalized interest on the branch project. Fixed assets in process in 2008 relate to assets acquired that will be deployed in 2009. As of December 31, 2008, the Bank has lease agreements for three branch banking facilities. All such leases qualify as operating leases. One of the leases expired in August 2008 and was renewed for one year to allow time for a replacement branch to be built. Following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2008: Year ended December 31: 2009 $ 116,233 2010 121,260 2011 124,467 2012 127,761 2013 131,144 Later Years 626,066 Total minimum payments required: $1,246,931 For the years ended December 31, 2008 and 2007, respectively, depreciation expense was $342,000 and $226,000, respectively. Total rent expense for the years ended December 31, 2008 and 2007 amounted to $125,000 and $122,000, respectively.Note 5. Borrowings The Bank has unsecured lines of credit with correspondent banks totaling approximately $12 million available for overnight borrowing. These lines are subject to annual renewal and $176,000 was being utilized at December 31, 2008. In addition, the Bank is a member of the FHLB which provides for additional lines of credit and other products offered by the FHLB. These borrowings are largely secured by the Banks loan portfolio and pledged securities. The FHLB maintains a blanket security agreement on qualifying collateral while pledged securities are held by the FHLB. As of December 31, 2008, the Bank is entitled to borrow up to 30% of total assets or approximately $61 million at December 31, 2008. At December 31, 2008, the Bank had two structured borrowings of $5.0 million each maturing in October 2011 and August 2012, respectively from the FHLB which are xed for a period of time and then callable at various increments over the life of the borrowing. The rst borrowing of $5.0 million bears an interest rate of 4.375% while the second bears a rate of 4.40%. Should either of the borrowings be repaid prior to maturity, the Bank may have to pay a termination fee to unwind the obligation. These structured borrowings from the FHLB are subject to conversion by the FHLB to a oating rate advances based upon the contract terms. If converted, the advance may be repaid and the transaction terminated. In addition, at December 31, 2008, the Bank was borrowing overnight funds of $5 million. Overnight funds are priced daily and at December 31, 2008, they were priced at .46%. The average rate paid for borrowings (including the above referenced FHLB borrowings) in 2008 was 3.70%. 19
  • 22. BANK OF VIRGINIA | FINANCIALS Note 6. Related Party Transactions Executive ofcers, directors and their afliates had borrowings of $7.8 million and $3.6 million and unfunded commitments of $2.5 million and $2.8 million with the Bank at December 31, 2008 and 2007, respectively. During the year ended December 31, 2008, total principal additions were $9.4 million and total principal payments were $5.2 million. In addition, executive ofcers, directors and their afliates maintained deposits of $1.4 million at December 31, 2008 and $3.7 million at December 31, 2007. These transactions occurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons. Note 7. Time Deposits Remaining maturities on time deposits are as follows: 2009 $ 94,199,428 2010 19,642,276 2011 8,619,746 2012 12,154,322 Later Years 5,141,890 $139,757,662 The maturities of time deposits $100,000 and over and other time deposits at December 31, 2008 and 2007 are as follows: 2008 Time deposits Other time $100,000 and over deposits Three months or less $12,857,400 $16,890,804 Over 3 through 6 months 7,413,315 16,532,338 Over 6 through 12 months 16,228,396 24,227,175 Over 12 months 19,440,221 26,118,013 $55,939,332 $83,818,330 2007 Time deposits Other time $100,000 and over deposits Three months or less $ 9,266,938 $17,240,573 Over 3 through 6 months 10,169,028 17,097,002 Over 6 through 12 months 12,637,699 20,183,935 Over 12 months 14,081,486 24,064,660 $46,155,151 $78,586,17020
  • 23. BANK OF VIRGINIA | FINANCIALSNote 8. Income Taxes The Bank les income tax returns in the U.S. federal jurisdiction. With few exceptions, the Bank is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2004. The Bank adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 with no impact on the nancial statements. The tax effects of temporary differences that give rise to signicant portions of the deferred tax assets and de- ferred tax liabilities at December 31, 2008 and 2007, respectively, are presented below: December 31, 2008 2007Deferred Tax Assets:Allowance for loan losses $ 954,100 $382,708Organizational and start-up expenses - 53,663Bank premises and equipment 86,544 71,323Unrealized loss on securities available for sale 18,772 -Unrealized asset losses 9,056 11,707Accrued vacation 34,119 27,993Deferred compensation 71,978 53,308Other, net 1,161 - $1,175,730 $600,702Unrealized gain on securities available for sale - (112,501)Deferred Tax Liabilities - (112,501) $1,175,730 $488,201Less: Valuation Allowance (1,175,730) (488,201) Net Deferred Tax Assets $ - $ - The provision for income taxes charged to operations as of December 31, 2008 and 2007 consists of the following: 2008 2007Current tax expense - -Deferred tax (benet) (556,256) (89,730)Change in valuation allowance 556,256 89,730 - - The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the periods due to the following as of December 31, 2008 and 2007: 2008 2007Computed expected tax expense (benet) (446,962) 172,209Increase (decrease) in income taxes resulting from: Nondeductible expenses 9,455 22,643 Net operating loss carryforward (utilized) 437,507 (194, 852) - - Under the provisions of the Internal Revenue Code, the Bank has approximately $2.3 million of taxable net operating loss carryforwards which can be offset against future taxable income. The carryforwards expire in varying amounts between December 31, 2024 and December 31, 2025. The full realization of the tax benets associated with the carryforwards depends predominately upon the recognition of ordinary income during the carryforward period. 21
  • 24. BANK OF VIRGINIA | FINANCIALS Note 9. Financial Instruments With Off-Balance Sheet Risk The Bank is party to credit-related nancial instruments with off-balance sheet risk in the normal course of business to meet the nancing needs of its customers. These nancial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Banks exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments. At December 31, 2008 and 2007 the following nancial instruments were outstanding whose contract amounts represent credit risk: December 31, 2008 2007 Unfunded commitments under lines of credit $27,127,481 $30,141,605 Commercial and standby letters of credit 2,422,508 4,033,933 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 xed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on managements credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually contain a specied maturity date and may not be drawn upon to the total extent to which the Bank is committed. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on managements credit evaluation of the customer. Commercial and standby letters of credit are conditional commitm