UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 000-22283
VIRGINIA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1829288
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
24 South Augusta Street, Staunton, Virginia 24401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (540) 885-1232
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
None None
Securities registered pursuant to section 12 (g) of the Act:
Common Stock, $5.00 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 1, 1999, there were 4,000,000 shares of common stock, $5.00 par
value, outstanding and the aggregate market value of common stock of Virginia
Financial Corporation held by nonaffiliates was approximately $112,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Shareholders - Parts I and II
Notice of Annual Meeting and Proxy Statement dated March 26, 1999 - Part III
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PART I
Item 1. Business
The Company
On November 14, 1996 the shareholders approved an Agreement and Plan of
Reorganization and related Plan of Share Exchange, relating to the adoption of a
bank holding company. Virginia Financial Corporation (hereinafter referred to as
"the Company") serves as the holding company of the Bank. This transaction was
consummated on January 2, 1997.
The Company had no material operations other than the ownership of the Bank
in 1998, therefore, the financial statements and discussions related thereto
included in this annual report relate to operations of Planters Bank & Trust
Company of Virginia and its subsidiary. Planters Bank & Trust Company of
Virginia is the sole bank subsidiary of the Company.
The Bank
Planters Bank & Trust Company of Virginia (hereinafter referred to as "the
Bank") was incorporated under the laws of the Commonwealth of Virginia on
October 29, 1971. It opened for business on September 1, 1972, with its main
office located at U.S. Route 250 and State Route 640 in Augusta County,
Virginia. The name Augusta Bank & Trust Company was changed to Planters Bank &
Trust Company of Virginia as part of a merger of Planters Bank & Trust Company,
Staunton, Virginia, a bank organized under the laws of the Commonwealth of
Virginia, into Augusta Bank & Trust Company as of October 1, 1977.
Planters Bank & Trust Company, Staunton, Virginia, (Planters Bank) had been
incorporated under the laws of the Commonwealth of Virginia on September 13,
1911. It opened for business on November 21, 1911, with its main office located
at 24 South Augusta Street, Staunton, Virginia.
The Bank's main office is located at 24 South Augusta Street, Staunton,
Virginia. Branch offices are located in Staunton, Virginia, at (1) 2307 West
Beverley Street, (2) 2201 North Augusta Street, and (3) 1135 Richmond Road.
Branches are located in Augusta County at (1) 132 Greenville Road, Stuarts
Draft, (2) U.S. Route 11 in Verona, (3) 1480 Greenville Avenue, Staunton and (4)
the intersection of U. S. Route 250 and State Route 640 in Fishersville. A
branch is located in Waynesboro, Virginia, at the intersection of North Poplar
and Ohio Streets. A branch is located in Rockingham County at 106 Sixth Street,
Grottoes, Virginia. A branch is located at 375 North Mason Street, Harrisonburg,
Virginia. The Bank employs one hundred eighty-six (186) full-time employees and
sixteen (16) part-time employees.
The Bank's trade area encompasses the independent cities of Staunton,
Waynesboro, and Harrisonburg and the counties of Augusta and Rockingham. The
population of the trade area is estimated to be 201,100.
The Bank, on April 15, 1994, purchased the Grottoes, Virginia office of
First Union National Bank of Virginia and operates this facility as a branch of
the Bank.
The Bank, in January 1996, formed Planters Insurance Agency, Inc., a
wholly-owned subsidiary of the Bank and is licensed to sell title insurance.
The Bank on April 29, 1997, leased office space consisting of 225 square
feet located at 10 East Washington Street, Lexington, Virginia 24450. This
facility is used for the sole purpose of generating secondary mortgage market
real estate loans.
On September 5, 1997 the Bank purchased a parcel of land with 50 feet
frontage and 171 feet deep fronting on Tinkling Springs Road, Fishersville,
Virginia. Also on this property is an office building consisting of 1400 square
feet. This office is used as an operational area for secondary mortgage
processing.
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On November 14, 1997, the Bank purchased a lot consisting of 1.253 acres at
the intersection of Rosser Avenue and Lucy Lane, Waynesboro, Virginia to
establish a branch at this location. The Bank is constructing a 4,000 square
foot branch at this location to open in April of 1999.
The Bank entered into a lease agreement August 21, 1998 with Steroben
Associates to lease a branch facility consisting of 2,400 square feet located at
375 North Mason Street, Harrisonburg, Virginia. This branch opened effective
October 1, 1998.
The Bank purchased a parcel of land consisting of 0.941 acres fronting on
U.S. Route 11, 1197 North Lee Highway at the entrance of Lexington Crossing
Shopping Center, Lexington, Virginia on August 21, 1998. The Bank is
constructing a 4,000 square foot branch on this property and expects to open
July 30, 1999.
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Services
Principal services offered and rendered by the Bank include the following:
Savings Accounts
Statement Savings:
Personal
Business
Passbook Savings:
Personal
Business
Individual Retirement
Accounts
Certificates of Deposit:
7-31 Days
91 Days
182 Days
1 Year
1 1/2 Years
2 Years
2 1/2 Years
3 Years
4 Years
Christmas Clubs
Save-O-Matic
Checking Accounts
Personal
Negotiable Order of
Withdrawal
Money Market
Zero Balance Checking
Business
Organizations and Clubs
Estate
Student
Personalized Checks
Quarterly or Monthly
Statements
Visa Check Card
Investment Products
Discount Brokerage
Full Service:
Money Market Accounts
Stocks
Bonds
Mutual Funds
Annuities
Loans
Personal
Home Improvement
Automobile or Trailer
Business
Student
Mortgage
Agriculture
Vacation
Visa and MasterCard Accounts
Home Equity
Customer Support Department
Stop Payments
Statements on Demand
Photocopies of Checks and
Records
Assistance in Balancing
Checkbooks
Computation of Interest
International Banking
Letters of Credit
Foreign Collection
Bank Transfer Wire Service
Foreign Currency Available
Trust Department
Executor or Administrator
of Estates
Testamentary Trustee
Inter Vivos Trustee
Guardian
Agent Under Agreement
Escrow Agreement
Power of Attorney
Trustee Under Employee Benefit
Agreements
Additional Services
Bank Transfer Wire Service
Bank by Mail
Drive-in Banking, all
locations
Night Depositories
Bank Money Orders
Travelers Checks
Safe Deposit Boxes
Bank Drafts
Cashier's Checks
Savings Bonds
Utility Bill Payments
Applications for Visa and
MasterCard
Notary Public
Certified Checks
Federal Tax Deposits
Electronic Direct Deposit and
Payment of Funds
Automatic Transfers of
Funds Between Accounts
Retail Repurchase
Agreements
Automated Teller Machines
Overdraft Protection
24 Hour Banking by Phone
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In rendering these services, the Bank serves general retail customers and
businesses in the cities of Staunton, Waynesboro, and Harrisonburg and the
counties of Augusta and Rockingham.
Lumbering operations, paving facilities and quarrying concerns are serviced
as well as dairy and beef cattle operations and some sheep operations. Also
served are various manufacturing concerns employing from 10 to 2,000 persons.
Competition
NationsBank, First Virginia Bank-Blue Ridge, Wachovia Bank, Community Bank,
First Union National Bank of Virginia, Crestar Bank, Shenandoah National Bank,
F&M Bank-Massanutten, One Valley Bank, Second Bank, Black Diamond Savings Bank
and First and Citizens Bank maintain offices within the trade area of the Bank.
These banks offer full banking services.
Other institutions compete effectively and aggressively for various types
of business within the Bank's trade area. The several credit unions in the
Bank's trade area aggressively offer commercial bank products. Automobile sales
finance companies compete for automobile financing and dealership floor plans.
Sales finance companies finance small appliances and furniture and personal loan
companies compete effectively. Direct lending by governmental agencies is done
primarily through Staunton Farm Credit, A.C.A. which maintains an office outside
the Staunton city limits. Farmers Home Administration operates within the Bank's
trade area also. Deposits and loans from medium-sized and larger business
organizations are successfully solicited by financial institutions located
outside the Bank's service area. There is also competition from the numerous
insurance companies represented in the area. In offering trust services there is
competition with attorneys as well as other banks.
No material part of the business of the Bank is dependent upon a single or
a few customers and the loss of one or more customers would not have a
materially adverse effect upon the business of the Bank. Management is not aware
of any indications that the business of the Bank or material portion thereof is,
or may be, seasonal.
Item 2. Properties
The Bank owns thirteen (13) parcels of property. Twelve (12) of these
properties are land and buildings used by the Bank in its operation and one (1)
property is held for future bank use. The properties are more fully described as
follows:
1. The Bank owns the land and building at its main office located at 24
South Augusta Street, Staunton, Virginia. The land with buildings was
purchased from various owners at various dates. The Bank has completed
an expansion and renovation program at this location whereby 18
on-site parking spaces were provided, along with entry and exit from
Augusta Street, entry from Johnson Street and exit onto Central
Avenue. Also provided are appropriate entry lanes for three drive-up
windows. The renovated building has a basement area of 6,415 sq. ft.,
a commercial and trust banking area of 11,827 sq. ft., and a second
floor was developed into a customer service area and offices. The Bank
purchased a piece of property, December 1985, located at the corner of
Central Avenue and Johnson Streets. This parcel joins property
presently owned by the Bank. The building, which was gutted by fire,
was torn down and the lot is presently leased to the City of Staunton.
The Bank purchased a piece of property, May 12, 1989, located at 11
West Johnson Street. During 1993, the building was removed and a new
building was incorporated into the present Bank building. This
addition consisting of three floors contain 3,476 square feet. This
building and location are considered ample to accommodate the Bank's
needs for the immediate future.
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2. The Bank owns a 1-3/4 acre parcel of property at 1135 Richmond Road,
Staunton, Virginia. This property fronts 158 feet on U. S. Route 250.
The land was purchased in March 1964, and in March 1966, a 1,650 sq.
ft. one story brick bank building was completed. During 1987, the
drive-up facilities were expanded and the entrance was rerouted for
drive-in traffic. A portion of land on the northeast side consisting
of 0.165 acres was sold in December 1981. The topography of this small
parcel was such as it would have been of no value for future
expansion. This building and location are considered ample to
accommodate the Bank's needs for the immediate future.
3. The Bank owns a parcel of land in Staunton, Virginia, with 175 feet of
frontage on West Beverley Street known as 2307 West Beverley. This
parcel contains approximately 42,800 sq. ft. and was purchased in
1966, and in 1968 a 2,112 sq. ft. one-story brick bank building with
full basement was constructed. The Bank purchased an adjoining piece
of property known as 2301 West Beverley Street on June 25, 1987, which
contains 0.914 acres and a one story brick and block building
containing approximately 1,200 sq. ft. at a cost of $115,000. A
portion of this property is used for a new and expanded drive-in
entrance which was completed at the end of 1987. The building on the
remaining portion of this property is rented on a 5 year lease. The
Bank subject to the lease, plans to market this 0.794 acres of land.
The present branch site is considered ample to accommodate the Bank's
needs for the immediate future.
4. The Bank owns a parcel of property at 250 North Poplar Avenue,
Waynesboro, Virginia. This property fronts 202 feet on North Poplar
Avenue and 200 feet on Ohio Street. The land was purchased October
1977, and in November 1978 a one-story brick bank building consisting
of 3,832 sq. ft. was occupied.
5. In Augusta County, the Bank owns a parcel of land at the northeast
corner of the intersection of U. S. Route 250 and Virginia State Route
640 approximately 1.4 miles west of Waynesboro city limits. This
location consists of 3.47 acres of land, improved with a single-story
3,825 sq. ft. building designed for commercial banking functions with
ample ingress, egress and parking. The land was purchased July 18,
1972, and the building completed in December 1973. This building and
location are considered ample to accommodate the Bank's needs for the
foreseeable future.
6. The Bank purchased a parcel of land fronting on State Route 340,
Stuarts Draft, Virginia, in December 1981. This parcel of land is 225
feet by 225 feet. A used preconstructed building containing 1,440 sq.
ft. was placed on the land in April 1982. The construction of a new
building consisting of 3,130 sq. ft. on the ground floor and a
basement consisting of 1,080 sq. ft. was completed in August of 1988
at a cost of approximately $350,000. This building and location are
considered ample to accommodate the Bank's needs for the immediate
future.
7. The Bank purchased a piece of property located on the west side of
U.S. Route 11 in Verona, Virginia, from the Bank of Virginia on April
1, 1984. It contains 36,024 sq. ft. or 0.827 acres of land and has 120
feet frontage on Route 11. Located on the property is a two-story
brick building containing 2,416 sq. ft. on the first floor and 1,794
sq. ft. on the second floor. Due to the widening of U.S. Route 11, it
was necessary to relocate the drive-up windows and the automated
teller machine. An addition was added to the rear of the building
consisting of 441 square ft. for the drive-up facility. This facility
now has three drive-up lanes. This addition was completed in August
1991 at a cost of $135,000.
8. The Bank purchased a parcel of land October 20, 1987, at 1480
Greenville Avenue in Augusta County, just south of the city of
Staunton at a cost of $259,337. The construction of a new building
consisting of 3,130 sq. ft. on the ground floor and a basement
consisting of 1,080 sq. ft. was completed and opened May 8, 1989 at a
cost of approximately $400,000. This property contains 1.269 acres
with a 200 foot road frontage on Greenville Avenue.
9. The Bank purchased a piece of property located at 106 Sixth Street,
Grottoes, Virginia from First Union National Bank of Virginia on April
15, 1994. It contains 52,000 square feet of land with
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twenty parking spaces with ample ingress and egress from Sixth Street
and from Seventh Street as the property extends through the block.
Located on the property is a two-story brick building containing 6,000
square feet. This facility has one drive-up lane. This building and
location are considered ample to accommodate the Bank's needs for the
foreseeable future.
10. The Bank purchased a piece of property located at 113A Tinkling
Springs Road, Fishersville, Virginia, 22939 on September 5, 1997. This
property fronts 50 feet on Tinkling Springs Road and contains 8,566
square feet of land with eleven (11) parking spaces. Located on the
property is a one-story brick building containing 1,400 square feet.
This property is used as a processing center for the secondary
mortgage market function. This property is well located in the areas'
traffic pattern and is able to accommodate the present needs of this
function.
11. The Bank owns a piece of property consisting of land and a two-story
building fronting 23 feet on Johnson Street, Staunton, Virginia. On
May 1, 1998, the Bank purchased the remaining half of this two-story
building fronting on Johnson Street. This property is presently under
lease and is held for future expansion.
12. On November 14, 1997, the Bank purchased a lot at the intersection of
Rosser Avenue and Lucy Lane, Waynesboro, Virginia 22980. This property
contains 1.253 acres and is part of "Coyner Commercial Park". The Bank
is constructing a 4,000 square foot branch on the property with
twenty-nine (29) parking spaces with an entrance from both Rosser
Avenue and Lucy Lane. The anticipated opening date is April 15, 1999.
13. The Bank purchased a parcel of land containing 0.941 acres at 1197
North Lee Highway, Lexington, Virginia. A 4,000 square foot branch is
being constructed on this property with twenty-six (26) parking
spaces. The anticipated opening date of this branch is July 30, 1999.
Leased Properties
The Bank leases its Northside banking facility located in the Terry Court
Shopping Center on North Augusta Street, Staunton, Virginia. In 1986, the Bank
renegotiated its lease with Highway Properties, Inc. to expand the banking
facilities. The facilities at this location now consist of banking quarters of
approximately 1,800 sq. ft. and a two-window drive-up facility with ingress,
egress and right-of-way to and from these premises. The renegotiated lease was
for an initial term of five years, expiring April 30, 1991 with three 5-year
options to renew the lease. The Bank exercised the first and second option April
30, 1991 and April 30, 1996 to renew the lease for an additional five year
period expiring April 30, 2001. The base rental for the first year is $19,190
with an increase of 2 1/2% of the monthly rent each year for the remaining four
years. Lease expense for 1998 was $20,327. The Terry Court Shopping Center was
sold, subject to the lease, to W. J. Perry Corporation, trading as Terry Court
Properties, and subsequently sold to W. Thomas Eavers doing business as Terry
Court Properties.
The bank leases its Harrisonburg banking facility located at 375 North
Mason Street, Harrisonburg, Virginia. This facility consists of a 2,400 square
foot building with drive-up window. The lease was negotiated August 21, 1998 at
$1,500.00 per month for two years and will increase by five percent for each two
year period thereafter. The lease is for a period of ten years with one ten year
option or two five year options.
The Bank leases office space consisting of 225 square feet at 10 East
Washington Street, Lexington, Virginia 24450. This office space is used for the
sole purpose of generating secondary mortgage market real estate loans. The
negotiated lease is for a term of one year expiring April 29, 1998 with options
to renew on a year to year basis expiring at the option of the lessor January 1,
2000. The initial rental is $360.00 per month and any renewal term shall be
increased based on the prior twelve (12) months Consumer Price Index.
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Item 3. Legal Proceedings
The Bank is party to various legal proceedings originating from the
ordinary course of business. Management and counsel are of the opinion that
settlement of these items should not have a material effect on the financial
position of the Bank.
Item 4. Submission of Matters To a Vote of Security Holders
There were no matters submitted, during the fourth quarter of the fiscal
year covered by this report, to a vote of security holders.
PART II
Item 5. Market For The Registrant's Common Equity And Related Security Holder
Matters
The portions of the 1998 Annual Report to Shareholders (Annual Report)
captioned, "Comments by Management," page 2, and Table 1 of Item 7 "Selected
Consolidated Financial Data" on page 8, for market and dividend information is
hereby incorporated by reference. Management currently anticipates payment of
future dividends consistent with past practices.
The number of holders of the Company's Common Stock (the only class of
equity security of the Company) of record was 1,160 as of the end of the
Company's fiscal year, December 31, 1998.
Based upon sales prices furnished the Company by the Staunton, Virginia
office of a Virginia headquartered brokerage firm, the low and high sales prices
of the Company's stock during 1998 and 1997 by quarter, were as shown below.
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
1st quarter $ 25.00 $ 27.00 $ 23.00 $ 23.38
2nd quarter $ 25.00 $ 26.75 $ 23.00 $ 24.00
3rd quarter $ 26.25 $ 28.50 $ 23.00 $ 24.50
4th quarter $ 27.50 $ 29.50 $ 24.00 $ 25.06
</TABLE>
Item 6. Selected Financial Data
The Annual Report, page 1, item titled "Selected Financial Data" and Table
1 of Item 7 of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on Page 8 hereof are incorporated by reference.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The Annual Report, Pages 3 through 11, "Management's Discussion and
Analysis of Operations" and year-end balances is hereby incorporated by
reference.
Earnings Performance:
Net income for 1998 was $6,248,230 compared to $5,735,112 for 1997 for an
increase of 8.95%. On a per share basis, 1998 earnings were $1.56 per share. Net
income for 1997 was $5,735,112 compared to $5,541,801 for 1996 for an increase
of 3.49%. On a per share basis, 1997 earnings were $1.43 per share.
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<TABLE>
<CAPTION>
Table 1 - Selected Consolidated Financial Data
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except ratios and per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest Income $ 31,060 $ 29,068 $ 27,321 $ 26,073 $ 22,902
Interest Expense $ 14,188 $ 13,292 $ 12,684 $ 12,343 $ 9,748
Net Interest Income $ 16,872 $ 15,776 $ 14,637 $ 13,730 $ 13,154
Provision for Loan Losses $ 1,327 $ 831 $ 450 $ 309 $ 421
Net Interest Income After
Provision for Loan Losses $ 15,545 $ 14,945 $ 14,187 $ 13,421 $ 12,733
Non-interest Income $ 3,955 $ 2,885 $ 2,542 $ 2,126 $ 2,206
Security Gains (Losses) 0 0 $ 6 $ 1 $ 1
Non-interest Expense $ 10,431 $ 9,475 $ 8,679 $ 8,235 $ 8,082
Income Before Income Taxes $ 9,069 $ 8,355 $ 8,056 $ 7,313 $ 6,858
Income Taxes $ 2,821 $ 2,620 $ 2,514 $ 2,278 $ 2,105
Net Income $ 6,248 $ 5,735 $ 5,542 $ 5,035 $ 4,753
Per Share Data:
Net Income Basic and Diluted* $ 1.56 $ 1.43 $ 1.39 $ 1.26 $ 1.19
Cash Dividends* ** $ 0.61 $ 0.56 $ 0.48 $ 0.42 $ 0.36
Book Value at Period End* $ 11.37 $ 10.33 $ 9.39 $ 8.54 $ 7.51
Balance Sheet Data:
Assets $434,140 $403,999 $377,113 $356,068 $344,473
Loans, Net of Unearned Income $278,569 $269,581 $235,952 $212,327 $196,579
Securities $130,292 $113,409 $118,800 $125,398 $129,332
Deposits $370,432 $352,167 $330,375 $319,578 $297,006
Stockholders' Equity $ 45,464 $ 41,335 $ 37,574 $ 34,154 $ 30,046
Average Shares Outstanding * 4,000 4,000 4,000 4,000 4,000
Performance Ratios:
Return on Average Assets 1.50% 1.48% 1.51% 1.45% 1.43%
Return on Average Equity 14.37% 14.48% 15.34% 15.48% 16.30%
Dividend Payout* 39.05% 38.71% 34.65% 32.97% 29.87%
Capital and Liquidity Ratios
Leverage 10.78% 10.34% 9.98% 9.53% 8.91%
Risk-based Capital Ratios:
Tier 1 Capital 17.02% 16.97% 17.20% 16.74% 16.10%
Total Capital 18.24% 18.22% 18.45% 17.99% 17.35%
</TABLE>
* Adjusted for 100 percent stock dividend, December 1993 and December 1997
** Cash dividends are paid quarterly
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Interest Income:
Interest income, on a tax equivalent basis, increased in 1998 compared to
1997 by $2,090,000 or 7.10%. The tax equivalent yield on earning assets in 1998
was 8.05% compared to 8.02% in 1997. This increase in the yield along with an
increase of $24,719,000 in average earning assets produced the overall increase.
Interest income, on a tax equivalent basis, increased in 1997 compared to
1996 by $1,715,000 or 6.19%. The tax equivalent yield on earning assets in 1997
was 8.02% compared to 7.96% in 1996. This increase in the yield along with an
increase of $18,540,000 in average earning assets produced the over-all
increase.
Interest income in 1996 increased $1,266,000 compared to 1995, on a
tax-equivalent basis, for an increase of 4.78%. This increase was due to average
earning assets increasing by $17,890,000. The tax-equivalent yield decreased
from 8.02% in 1995 to 7.97% in 1996.
Interest Expense:
Interest expense increased during 1998 by $896,000 or 6.74% compared to
1997. This increase was due to average interest-bearing liabilities increasing
during 1998 compared to 1997 by $17,731,000 and the average interest rate paid
during 1998 of 4.52% compared to 4.49% during 1997.
Interest expense increased during 1997 by $608,000 or 4.80% compared to
1996. This increase was due to average interest-bearing liabilities increasing
during 1997 compared to 1996 by $11,942,000 and the average interest rate paid
during 1997 of 4.49% compared to 4.47% during 1996.
Interest expense increased during 1996 by $341,000 compared to 1995. This
represents an increase of 2.76%. The increase was due to average
interest-bearing liabilities increasing by $10,242,000 as the average rate paid
on these liabilities decreased from 4.51% in 1995 to 4.47% in 1996.
Net interest income and the net interest margin along with the average
yield of the individual categories for the years 1996 through 1998 is shown on
Table 2. Table 3 summarizes the effect on net interest income of changes in
interest rates earned and paid as well as changes in volume.
The presentation appears on a fully tax-equivalent basis to adjust for the
tax exempt status of income earned on certain loans and investment securities
using statutory rates of 34% in 1998, 1997 and 1996.
Non-interest income:
Non-interest income increased $1,070,614 or 37.11% when compared to 1997.
The major components making up this increase are the following areas: Fiduciary
income from the Trust department increased $153,921 or 14.89%. This increase was
due to increases in business volume and a modest increase in the fee schedule
for services. Service charges on deposit accounts increased $393,413 or 58.34%.
This increase is due to a uniform program of accessing and collecting fees.
Secondary mortgage fees increased $406,529 or 92.51%. This increase is due to
the expansion of the department and the volume of business. The volume of
business was affected by the level of interest rates creating opportunities to
refinance. Fees generated from the investment department offering non-FDIC
insured investment products increased $44,963 or 19.80%. This increase is due to
increased volume and the level of interest rates of FDIC insured deposit
accounts.
Non-interest income increased $342,817 or 13.49% during 1997 when compared
to 1996. Trust department income increased by $48,457 or 4.92% during 1997 when
compared to 1996. This increase in Trust department income is due primarily to
increases in the volume of fee generating activity and to increases in the
market values. Other non-interest income and fee income increased about $257,000
in the following areas: fees on ATM foreign transactions, Visa debit cards,
printed check commissions and fees from the sale of non-FDIC insured investment
products.
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Non-interest income increased during 1996 compared to 1995 by $417,108 or
19.63%. Trust department income increased by $163,283 or 19.87% during 1996
compared to 1995. This increase was due to the number and asset size of estates
closed and under administration and the overall volume of fee generating
activity during the year. Income from the secondary mortgage market area
increased $110,523 or 32.75%. The increase in this area was the result of a
greater number of loans being closed and the dollar amount of these loans.
During 1996 the Bank began offering non-FDIC insured investment products which
produced income of $86,648. Also during 1996, the Bank began operating Planters
Insurance Agency, Inc., a wholly-owned subsidiary of the Bank, which markets
title insurance, provided income of $17,408. Service charges on deposit
accounts, safe deposit box rent and other non-interest income experienced a very
modest increase due to the volume of business only, as the pricing of these
services and fees have not changed.
Non-Interest Expense:
Non-interest expense increased during 1998 by $955,737 or 10.09% compared
to 1997. Salaries and employee benefits increased by $523,829 or 9.47%. This
increase is due to increases in individual salaries, the staffing of a new
branch in Harrisonburg, Virginia, and additional employees in select areas.
Premise and fixed asset expense increased by $97,052 or 8.59% due to the new
Harrisonburg office, updating teller stations in all offices to on-line system
and the refurbishing of the Grottoes, Virginia office. Computer services
increased by $154,222 or 25.64% due to updating the teller stations, and the
equipment and communications to support these updates. Other areas of
non-interest expense which increased during 1998 were advertising by $45,649 or
30.91%, consultant fees by $21,054 or 103.67%, legal fees by $16,055 or 34.20%,
state bank exam fees by $17,583 or 33.12% and telephone expenses by $29,019 or
24.37%. The expansion by branching, new products and increased volume of
business increased most areas of non-interest expense.
Non-interest expense increased during 1997 by $795,704 or 9.17% compared to
1996. Salaries and employee benefits increased by $252,437 or 4.78% comparing
1997 to 1996. This increase was due to an increase in the number of employees
and to increases in individual salaries. Expense of premises and fixed assets
increased by $190,992 or 20.34%. This increase is due to installing an image
item processing system and image statement system along with two additional ATM
and two cash machines. Computer expense increased $44,487 due to additional
volume. Other non-interest expenses which increased in 1997 were advertising
which increased by $49,757, ATM operating expenses which increased by $22,955,
FDIC Insurance expense which increased $39,185, and supplies in the ongoing day
to day operations which increased $75,293. This increase was also due to an
increased volume of business activity.
Non-interest expense increased during 1996 compared to 1995 by $444,218 or
5.39%. Salaries and employee benefits increased by $579,717 or 12.34%. This
increase was due to increases in individual salaries, employee benefits and the
expansion of the officer staff. These additions were in preparation of pending
retirements of executive and other officers. Most other operating expenses
continue to increase due to increased prices and the increase in volume of
business. Technological changes taking place in the financial industry at a
rapid pace must be dealt with, and though over a period of time result in
savings, have impact on other operating expenses, i.e. research, installation,
educational training and equipment costs. Two areas of non-interest expenses
which had a rather significant decrease which are advertising and FDIC
insurance. Advertising decreased about $61,000 and FDIC Insurance decreased
about $347,000 due to premium decreases.
10
<PAGE>
<TABLE>
<CAPTION>
Table 2 - Virginia Financial Corporation
Average Balances, Income and Expense, Yields and Rates (1)
Twelve Months Ended December 31, 1998, 1997 and 1996
1998 1997
--------------------------------- --------------------------------
Annual Annual
Assets Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Taxable $ 96,688 $ 5,831 6.03% $ 100,215 $ 5,990 5.98%
Tax exempt(1) 19,916 1,351 6.78% 15,666 1,051 6.71%
--------- --------- --------- ---------
Total securities $ 116,604 $ 7,182 6.16% $ 115,881 $ 7,041 6.08%
Loans (net of unearned income):
Taxable $ 269,037 $ 24,013 8.93% $ 248,143 $ 22,229 8.96%
Tax exempt(1) 261 16 6.13% 471 28 5.94%
--------- --------- --------- ---------
Total loans $ 269,298 $ 24,029 8.92% $ 248,614 $ 22,257 8.95%
Federal funds sold and repurchase agreements 5,781 314 5.44% 2,469 137 5.55%
--------- --------- --------- ---------
Total earning assets $ 391,683 $ 31,525 8.05% $ 366,964 $ 29,435 8.02%
Less: allowance for loan losses (3,633) (3,312)
Total nonearning assets 27,455 23,589
--------- ---------
Total assets $ 415,505 $ 387,241
========= =========
Liabilities and Shareholder's Equity
Interest-bearing deposits:
Checking $ 101,067 3,385 3.35% $ 97,421 3,320 3.41%
Regular savings 35,359 1,052 2.98% 35,644 1,060 2.97%
Certificates of deposit:
Less than $100,000 146,169 8,030 5.49% 135,168 7,438 5.50%
$100,000 and more 23,137 1,302 5.63% 21,474 1,139 5.30%
--------- --------- --------- ---------
Total interest-bearing deposits $ 305,732 13,769 4.50% $ 289,707 $ 12,957 4.47%
Short-term borrowings 7,991 419 5.24% 6,285 335 5.33%
--------- --------- --------- ---------
Total interest-bearing liabilities $ 313,723 14,188 4.52% $ 295,992 $ 13,292 4.49%
Noninterest-bearing liabilities:
Demand deposits 55,967 50,109
Other liabilities 2,338 1,543
--------- ---------
Total liabilitie $ 372,028 $ 347,644
Stockholders' equity 43,477 39,597
--------- ---------
Total liabilities and shareholders' equity $ 415,505 $ 387,241
========= =========
Net interest income $ 17,337 $ 16,143
Interest rate spread 3.53% 3.53%
Interest expense as a percent of average earning assets 3.62% 3.62%
Net interest margin 4.43% 4.40%
</TABLE>
- ----------------
(1) Income and yields are reported on a taxable-equivalent basis.
11
<PAGE>
<TABLE>
<CAPTION>
Table 2
Average Balances, Income and Expense,
Yields and Rates(1)
Continued
1996
---------------------------------
Annual
Assets Average Income/ Yield/
Balance Expense Rate
------- ------- ----
(In Thousands)
<S> <C> <C> <C>
Securities
Taxable $ 107,399 $ 6,232 5.80%
Tax exempt(1) 16,285 1,133 6.96%
--------- ---------
Total securities $ 123,684 $ 7,365 5.95%
Loans (net of unearned income):
Taxable 222,348 20,223 9.10%
Tax exempt(1) 679 41 6.04%
--------- ---------
Total loans $ 223,027 $ 20,264 9.09%
Federal funds sold and repurchase agreements 1,713 91 5.31%
--------- ---------
Total earning assets $ 348,424 $ 27,720 7.96%
Less: allowance for loan losses (2,881)
Total nonearning assets 21,262
---------
Total assets $ 366,805
=========
Liabilities and Shareholder's Equity
Interest-bearing deposits:
Checking $ 99,981 $ 3,436 3.44%
Regular savings 38,562 1,154 2.99%
Certificates of deposit:
Less than $100,000 119,745 6,565 5.48%
$100,000 and more 20,457 1,251 6.12%
--------- ---------
Total interest-bearing deposits $ 278,745 $ 12,406 4.45%
Short-term borrowings 5,305 278 5.24%
--------- ---------
Total interest-bearing liabilities $ 284,050 $ 12,684 4.47%
Noninterest-bearing liabilities:
Demand deposits 44,711
Other liabilities 1,907
---------
Total liabilities $ 330,668
Stockholders' equity 36,137
---------
Total liabilities and shareholders' equity $ 366,805
=========
Net interest income $ 15,036
Interest rate spread 3.49%
Interest expense as a percent of average earning assets 3.64%
Net interest margin 4.32%
</TABLE>
- ----------
(1) Income and yields are reported on a taxable-equivalent basis.
12
<PAGE>
The following table describes the impact on the interest income of the
Corporation resulting from changes in average balances and average rates for the
periods indicated. The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
Table 3 - Volume and Rate Analysis
Years Ended December 31,
------------------------------------------------------------------------
1998 compared to 1997 1997 compared to 1996
Change Due To: Change Due To:
-------------- --------------
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans: taxable 1,865 (81) 1,784 2,313 (307) 2,006
Loans: tax-exempt (13) 1 (12) (12) (1) (13)
Securities: taxable (213) 54 (159) (429) 187 (242)
Securities: tax-exempt 288 12 300 (42) (40) (82)
Federal Funds Sold 180 (3) 177 42 4 46
------ ------ ------ ------ ------ ------
Total Interest Income 2,107 (17) 2,090 1,872 (157) 1,715
------ ------ ------ ------ ------ ------
INTEREST EXPENSE
Interest checking accounts 122 (57) 65 (87) (29) (116)
Savings accounts (8) -- (8) (86) (8) (94)
Certificates of Deposit $100,000 and over 93 70 163 66 (178) (112)
Certificates of Deposit under $100,000 605 (13) 592 849 24 873
Federal Funds purchased 89 (5) 84 52 5 57
------ ------ ------ ------ ------ ------
Total Interest Expense 901 (5) 896 794 (186) 608
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Net Interest Income 1,206 (12) 1,194 1,078 29 1,107
====== ====== ====== ====== ====== ======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Table 4 - Loan Portfolio
Loans at December 31
(In Thousands)
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real Estate Loans:
Construction $ 20,065 $ 20,183 $ 14,205 $ 12,924 $ 8,993
Secured by Farm Land 1,284 1,316 933 1,056 649
Secured by 1-4 Family
Residential 113,477 128,130 106,693 91,125 86,487
Other Real Estate Loans 59,752 39,037 38,965 40,022 37,394
Loans to Farmers 2,598 2,725 2,879 2,988 3,116
Commercial and Industrial 37,693 34,434 34,313 34,626 33,930
Loans to Individuals for
Household, Family and
other Consumer Expenses 43,676 43,364 37,542 29,056 25,221
All Other Loans 368 799 774 908 1,205
--------- --------- --------- --------- ---------
Total Loans $ 278,913 $ 269,988 $ 236,304 $ 212,705 $ 196,995
Less Unearned Income 344 406 352 378 416
--------- --------- --------- --------- ---------
Net Loans $ 278,569 $ 269,582 $ 235,952 $ 212,327 $ 196,579
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Over One
One Year Through Over
or Less Five Yrs Five Yrs Total
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Loans secured by real estate 96,396 86,537 11,645 194,578
Agricultural production loans 2,172 402 24 2,598
Commercial and industrial loans 33,528 3,966 199 37,693
Consumer loans 12,003 31,238 435 43,676
All other loans 204 164 0 368
-------- -------- -------- --------
$144,303 $122,307 $ 12,303 $278,913
======== ======== ======== ========
For maturities over one year:
Fixed Rates 77,827
Variable Rates 56,783
--------
$134,610
========
</TABLE>
14
<PAGE>
Allowance for Loan Losses:
The allowance for loan losses is an estimate of an amount, by management,
to provide for potential losses in the loan portfolio. Various factors,
including charge-off experience, change in the mix and volume of loans, the
level of underperforming loans, the ratio of outstanding loan balances to total
loans and the perceived economic conditions in the primary trade area are taken
into consideration in determining the amount of the provision for loan losses
and the total amount of the loan loss reserve.
The reserve for loan losses was 1.15% of outstanding loans as of December
31, 1998, 1.39% as of December 31, 1997 and 1.29% as of December 31, 1996. Net
charge-offs were $1,868,177 during 1998, $117,293 during 1997 and $196,833
during 1996. The percentage of net charge-offs to year-end loans was 0.67% for
1998, 0.04% for 1997 and 0.08% for 1996. The balance of the reserve for loan
losses was $3,211,782 as of December 31, 1998, $3,752,500 as of December 31,
1997, and $3,038,958 as of December 31, 1996. Several large lending
relationships significantly deteriorated during the year ended December 31, 1998
and resulted in charge-offs to the allowance for loan losses.
15
<PAGE>
<TABLE>
<CAPTION>
Table 6 - Allowance for Loan Losses
(In Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance, Beginning of Period 3,753 3,039 2,786 2,524 2,217
Loans Charged Off
Real Estate:
Construction -- -- -- 5 --
Secured by Farm Land -- -- -- -- --
Secured by 1-4 Family
Residential 639 19 42 -- 13
Secured by Nonfarm
Nonresidential properties 67 -- -- -- --
Loans to Farmers -- -- -- 19 --
Commercial and Industrial 687 -- 14 -- 24
Consumer Loans 550 139 212 119 102
All Other Loans -- -- -- -- --
-------------------------------------------------------------
Total Loans Charged Off 1,943 158 268 143 139
-------------------------------------------------------------
Recoveries
Real Estate: -- -- -- -- --
Construction -- -- -- -- --
Secured Farm Land -- -- -- -- --
Secured by 1-4 Family
Residential 2 1 -- -- --
Secured by Nonfarm
Nonresidential properties -- -- -- -- --
Loans to Farmers -- -- 14 70 --
Commercial and Industrial 8 7 34 -- 6
Consumer Loans 65 33 23 22 19
All Other Loans -- -- -- 4 --
-------------------------------------------------------------
Total Recoveries 75 41 71 96 25
-------------------------------------------------------------
Net Charge-Offs 1,868 117 197 47 114
Provision for Loan Losses 1,327 831 450 309 421
-------------------------------------------------------------
Balance, End of Period 3,212 3,753 3,039 2,786 2,524
=============================================================
Ratio of net charge-offs
during the period to average loans
outstanding during the period 0.69% 0.05% 0.09% 0.02% 0.06%
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Table 7 - Allocation of Allowance for Loan Losses
(In Thousands)
1998 1997 1996
---- ---- ----
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Allowance Total Loans Allowance Total Loans Allowance Total Loans
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Construction $ 150 7.19% $ 150 7.47% $ 100 6.01%
Secured by Farm Land 72 0.46% 170 0.49% 75 0.39%
Secured by 1-4 Family
Residential 957 40.69% 770 47.46% 650 45.15%
Other Real Estate 638 21.42% 620 14.46% 550 16.49%
Loans to Farmers 26 0.93% 270 1.01% 275 1.22%
Commercial and Industrial 391 13.51% 595 12.75% 450 14.52%
Consumer Loans 330 15.66% 610 16.06% 500 15.89%
All Other Loans 12 0.14% 25 0.30% 25 0.33%
Unallocated 396 -- 543 -- 414 --
Off balance sheet items 240 -- -- -- -- --
------ ------ ------ ------ ------ -------
$3,212 100.00% $3,753 100.00% $3,039 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---- ----
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Allowance Total Loans Allowance Total Loans
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Real Estate:
Construction $ 100 6.08% $ 100 4.57%
Secured by Farm Land 56 0.50% 50 0.33%
Secured by 1-4 Family
Residential 400 42.84% 400 43.90%
Other Real Estate 300 18.81% 324 18.98%
Loans to Farmers 200 1.40% 200 1.58%
Commercial and Industrial 750 16.28% 500 17.23%
Consumer Loans 525 13.66% 500 12.80%
All Other Loans 30 0.43% 50 0.61%
Unallocated 425 -- 400 --
------ ------ ------ ------
$2,786 100.00% $2,524 100.00%
====== ====== ====== ======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Table 8 - Nonperforming Assets and Loans
Contractually Past Due
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual Loans $1,973 $1,193 $ 194 $ 140 $ 219
Other Real Estate 279 258 -- -- --
------ ------ ------ ------ ------
Total Nonperforming Assets $2,252 $1,451 $ 194 $ 140 $ 219
Loans Past Due as to
Principal or Interest
for 90 Days or More
Accruing Interest $ 897 $ 359 $ 248 $ 147 $ 489
Nonperforming Assets to
Total Assets 0.52% 0.36% 0.05% 0.04% 0.06%
Nonperforming Assets to
Year-end Loans and
Other Property 0.81% 0.54% 0.08% 0.07% 0.11%
</TABLE>
Potential Problem Loans:
At December 31, 1998 Management is not aware of any significant problem
loans not included in Table 8.
18
<PAGE>
<TABLE>
<CAPTION>
Table 9 - Investment Securities
Maturity Distribution and Average Yield
December 31, 1998
(In Thousands)
Weighted
Average Weighted
Book Market Maturity Average
Value Value In Yrs Mos TE Yield
----- ----- -------------- --------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities
Within One Year $ 8,141 $ 8,185 0 4.6 6.17%
After One But Within Five Years 2,998 3,069 1 6.8 6.31%
After Five But Within Ten Years 0 0 0 0.0 0.00%
After Ten Years 0 0 0 0.0 0.00%
-------- --------
Total U.S. Treasury Securities $ 11,139 $ 11,254 0 8.4 6.21%
-------- --------
Federal Agencies:
Within One Year $ 6,669 $ 6,690 0 3.4 6.00%
After One But Within Five Years 69,633 70,043 3 9.6 6.05%
After Five But Within Ten Years 4,051 4,044 6 10.0 5.45%
After Ten Years 0 0 0 0.0 0.00%
-------- --------
Total Federal Agencies $ 80,353 $ 80,777 3 7.9 6.02
-------- --------
Obligations of State and Political
Subdivisions:
Within One Year $ 1,486 $ 1,494 0 6.1 6.17%
After One But Within Five Years 12,898 13,165 2 8.2 6.63%
After Five But Within Ten Years 4,839 4,937 7 10.4 6.66%
After Ten Years 10,485 10,615 11 1.7 6.62%
-------- --------
Total State and Political
Subdivisions $ 29,708 $ 30,211 6 4.8 6.61%
-------- --------
Other Securities:
Within One Year $ 0 $ 0 0 0.0 0.00%
After One But Within Five Years 500 500 2 10.0 5.47%
After Five But Within Ten Years 0 0 0 0.0 0.00%
After Ten Years 0 0 0 0.0 0.00%
-------- --------
Total Other Securities $ 500 $ 500 2 10.0 5.47%
-------- --------
Equity Securities: $ 7,871 $ 7,873
Total Securities $129,571 $130,615 4 0.7 6.18%
======== ========
</TABLE>
19
<PAGE>
Liquidity and Interest Sensitivity:
Liquidity is the ability to satisfy demands for withdrawal of deposits,
lending obligations and other corporate needs. Liquidity is provided from
sources such as readily marketable investments, principal and interest payments
on loans and through increases in deposits and borrowed funds. Planters' deposit
base has become more rate sensitive since deregulation; however, there remains a
strong base of core deposits. The investment portfolio of which 85.1% matures
within five years and the opportunity to purchase Federal Funds provides a basic
source of liquidity along with the principal and interest payments on the loan
portfolio. In the management of interest rate risk, all loans except consumer
and mortgage are made with the opportunity to reprice the interest on a one or
three year basis. The Bank strives to maintain a relationship between rate
sensitive assets and rate sensitive liabilities which will maximize profits
under foreseeable or projected economic and competitive conditions. Additional
data regarding liquidity and interest sensitivity is presented in Tables 11 and
12.
Interest Sensitivity
The primary goals of interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollars of net interest margin at a growth rate consistent with the
growth rate of total assets. These goals are accomplished by balancing the
volume of floating rate liabilities with a similar volume of floating-rate
assets, by keeping the average maturity of fixed rate asset and liability
contracts reasonably consistent and short, and by routinely adjusting pricing
rates to market conditions on a weekly basis.
The goal of Virginia Financial Corporation (VFC) is to generally maintain a
position that is to provide flexibility enough to move to an equality between
rate-sensitive assets and rate-sensitive liabilities, which may be desirable
when there are wide and frequent fluctuations in interest rates. Interest rate
gaps are managed through investments loan pricing and deposit pricing. When an
unacceptable positive gap within a one-year time frame occurs, maturities can be
extended by selling shorter term investments and buying longer maturities. The
same effect can also be accomplished by reducing emphasis on variable rate
loans. When an unacceptable negative gap occurs, variable rate loans can be
increased and more investment in shorter term investments can be made. Pricing
policies on either or both loans and deposits can be changed to accomplish any
of the goals. VFC reviews the interest sensitivity position once a quarter.
It is VFC's policy not to engage in activities considered to be derivative
in nature such as futures, option contracts, swaps, caps, floors. collars or
forward commitments. VFC considers derivatives as speculative which is contrary
to VFC's historical or prospective philosophy. VFC does not hold or issue
financial instruments for trading purposes. VFC does hold in its loan portfolio,
loans that adjust or float according to changes in the "prime" lending rate
which is not considered speculative, but necessary for good asset/liability
management. Off-balance sheet risks such as commitments to extend credit,
standby letters of credit and other items are discussed in Note 10 in the Notes
to Consolidated Financial Statements.
Forward-Looking Statements
The sections that follow, Market Risk Management, contain certain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These forward-looking statements may involve significant
risks and uncertainties. Although VFC believes that the expectations reflected
in such forward-looking statements are reasonable, actual results may differ
materially from the results discussed in these forward-looking statements.
Market Risk Management
The Annual Report, Pages 8 through 10, "Market Risk Management" is hereby
incorporated by reference.
20
<PAGE>
<TABLE>
<CAPTION>
Table 11 - Average Deposits and Rates Paid
(In Thousands)
December 31,
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest Bearing Deposits $ 55,967 -- $ 50,109 -- $ 44,711 --
-------- ------- -------
Interest Bearing Deposits
Interest Checking 101,067 3.35% 97,421 3.41% 99,981 3.44%
Regular Savings 35,359 2.98% 35,644 2.97% 38,562 2.99%
Time Deposits
Less than $100,000 146,169 5.49% 135,168 5.50% 119,745 5.48%
$100,000 and more 23,137 5.63% 21,474 5.30% 20,457 6.12%
-------- ------- -------
Total Interest- Bearing Deposits $305,732 4.50% $289,707 4.47% $278,745 4.45%
-------- ------- -------
Total $361,699 $339,816 $323,456
======== ======== ========
</TABLE>
Table 12 - Remaining Maturities of CD's and
Other Time Deposits of $100,000 or More
<TABLE>
<CAPTION>
December 31, 1998
(In Thousands)
<S> <C>
Three Months or Less $12,587
Over Three Through Six Months 893
Over Six Through Twelve Months 8,158
Over Twelve Months 3,424
-------
Total $25,062
=======
</TABLE>
21
<PAGE>
Stockholders' Equity:
Stockholders' equity, during 1998, increased $4,128,624 or 9.99%. Reflected
in this increase is $320,394 unrealized net gain on securities in the available
for sale category. During 1997 stockholders' equity increased $3,761,651 or
10.01%. This increase reflects $246,539 unrealized net gain on securities in the
available for sale category. Stockholders' equity, during 1996, increased
$3,420,220 or 10.01%. This increase reflects $201,581 unrealized net loss on the
securities in the available for sales category. These increases represent
retention of net income after the payment of dividends. Cash dividends paid
increased by 9.91% in 1998, 15.63% in 1997 and 15.66% in 1996. Book value per
share as of December 31, 1998 was $11.37, $10.33 as of December 31, 1997 and
$9.39 as of December 31, 1996. Book value per share has been adjusted for the
100% stock dividend in December 1997.
Table 13 - Return on Equity and Assets
<TABLE>
<CAPTION>
Year Ended December 31,
(In Thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total Dividends Paid as a
Percent of Net Income 39.05% 38.71% 34.65%
Return on Average Assets 1.50 1.48 1.51
Return on Average Equity 14.37 14.48 15.34
Average Equity to Average Assets 10.46 10.23 9.85
</TABLE>
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards for derivative
financial instruments and other similar financial instruments and for hedging
activities. The Statement also allows securities classified as held-to-maturity
to be transferred to the available-for-sale category at the date of initial
application of this standard. Statement 133 is effective for all fiscal years
beginning after June 15, 1999. Management is currently reviewing this statement
to determine the impact, if any, it will have since the Company does not
currently employ such derivative instruments and does not intend to do so in the
future.
The effects of these Statements on the Company's consolidated financial
statements are not expected to be material.
22
<PAGE>
Year 2000
The Annual Report, Pages 10 through 11, "Year 2000" is hereby incorporated
by reference.
Item 8. Financial Statements And Supplementary Data
Part IV, Item 14 titled "Exhibits, Financial Statement Schedules and
Reports on 8-K" of the Annual Report, Pages 22 through 38 is hereby incorporated
by reference.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None
PART III
Item 10. Directors And Executive Officers Of The Registrant
The section captioned "Definitive Proxy Statement" as filed with the
commission on March 26, 1999 is hereby incorporated by reference.
Executive Officers of Company and the Bank
The names and ages of all principal officers of the Company and the Bank
and of all persons chosen to become principal officers, the nature of any family
relationship between them, their positions and offices with the Company and the
Bank and terms of office and any arrangements or understandings between officers
and any other person pursuant to which that person was selected as an officer is
as follows:
William P. Heath, Jr., Age 53, President of Virginia Financial Corporation and
President of Planters Bank & Trust Company of Virginia.
Mr. Heath was employed by Planters Bank & Trust Company of Virginia in
January 1996 as Executive Vice President and served in that capacity through
December 31, 1996. Mr. Heath became Vice President of the Company on September
27,1996, President of the Bank on January 1, 1997 and President of the Company
January 1, 1998. Mr. Heath has thirty-two years experience in banking, having
served as Executive Vice President and area President in a statewide banking
organization.
Fred D. Bowers, Age 62, Secretary/Treasurer, Virginia Financial Corporation, and
Senior Vice President, Cashier, and Chief Financial Officer, Planters Bank &
Trust Company of Virginia.
Mr. Bowers was employed as an Assistant Vice President of Planters Bank &
Trust Company, Staunton, Virginia, October 19, 1968, and was elected Cashier on
December 31, 1972, Vice President and Cashier January 1, 1974, Senior Vice
President and Cashier December 4, 1984, and has served in that position to the
present time. Mr. Bowers was elected Secretary Treasurer of the Company on
September 27, 1996.
Joseph Shomo, Age 64, Senior Vice President, Planters Bank & Trust Company of
Virginia.
Mr. Shomo was employed by Planters Bank & Trust Company, Staunton,
Virginia, in July 1957. He was elected Assistant Cashier in 1963 and Vice
President in 1967. Mr. Shomo has been serving as Senior Vice President since
1974.
23
<PAGE>
Thomas A. Davis, Age 54, Senior Trust Officer, Planters Bank & Trust Company of
Virginia.
Mr. Davis was employed by Planters Bank & Trust Company of Virginia in May
of 1978 as Senior Trust Officer and head of the Trust Department. He continues
to serve in this capacity.
There is no family relationship among the principal officers of the Bank.
To the knowledge of the management of the Bank, there are no arrangements or
understandings between officers and any other person or persons pursuant to
which any person was selected as an officer of the Bank other than the usual
fiduciary relationship existing between the officers and stockholders and
depositors of the Bank.
Item 11. Executive Compensation
Executive Compensation summary table, page 7 of the Definitive Proxy
Statement is hereby included by reference.
Human Resources Committee Report On Executive Compensation
The report on Executive Compensation by the Personnel and Salary Committee
on page 8 of the Definitive Proxy Statement is hereby incorporated by reference.
Shareholder Return
Shareholder Return on page 9 of the Definitive Proxy Statement is hereby
incorporated by reference.
Item 12. Security Ownership Of Certain Beneficial Owners
Security Ownership of Certain Beneficial Owners on page 2 of the Definitive
Proxy Statement is hereby incorporated by reference.
Item 13. Certain Relationships And Related Transactions
Compensation Committee Interlocks and Insider Participation and Other
Transactions With Management on page 5 and 6 of the Definitive Proxy Statement
is hereby incorporated by reference.
Directors' Fees And Attendance
Directors Fees And Attendance on page 6 of the Definitive Proxy Statement is
hereby incorporated by reference.
Transactions In Which Directors Have An Interest
Transactions In Which Directors Have An Interest on page 6 of the Definitive
Proxy Statement is hereby incorporated by reference.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On 8-K
Listed below are all financial statements and exhibits filed as part of this
annual report.
(a) The following documents are filed or incorporated by reference as part of
this report on Form 10-K.
(1) Financial Statements
Financial statements of the registrant for the fiscal year ended December
31, 1998 are incorporated herein by reference to Exhibit 99.1.
(2) Financial Statement Schedules
All financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
(3) Exhibits
The following exhibits, when applicable, are filed with this Form 10-K or
incorporated by reference to previous filings.
Number Description
------ -----------
Exhibit 2. Not applicable.
Exhibit 3. (i) Articles of Incorporation incorporated
by reference to Exhibit 3.1 of the Company's
Form 8-B successor registration statement
filed March 24, 1997.
(ii) Bylaws incorporated by reference to
Exhibit 3.2 of the Company's Form 8-B
successor registration statement filed March
24, 1997.
Exhibit 4. Not applicable.
Exhibit 9. Not applicable.
Exhibit 10. Not applicable.
Exhibit 11. Not applicable.
Exhibit 12. Not applicable.
Exhibit 13. Annual Report Attached hereto.
Exhibit 16. Not applicable.
Exhibit 18. Not applicable.
Exhibit 21. Subsidiaries: Planters Bank & Trust Company
of Virginia
Exhibit 22. Not applicable.
25
<PAGE>
Exhibit 23. Not applicable.
Exhibit 24. Not applicable.
Exhibit 27. Financial Data Schedule Attached.
Exhibit 99. Additional Exhibits
99.1 The following consolidated financial
statements of the Company including the
related notes and the report of the
independent auditors for the year ended
December 31, 1998 (included as a part of the
Annual Report filed herewith as
Exhibit 13).
1. Report of Independent Auditors (See Annual
Report, page 14)
2. Consolidated Balance Sheets as of December
31, 1998, and December 31, 1997 (See Annual
Report, page 15)
3. Consolidated Statements of Income for Years
Ended December 31, 1998, December 31, 1997,
and December 31, 1996 (See Annual Report,
pages 16 and 17)
4. Consolidated Statements of Cash Flows for
Years Ended December 31, 1998, December 31,
1997, and December 31, 1996 (See Annual
Report, pages 18 and 19)
5. Consolidated Statements of Changes in
Stockholders' Equity for Years Ended
December 31, 1998, December 31, 1997, and
December 31, 1996 (See Annual Report, pages
20 and 21) 6. Notes to Consolidated
Financial Statements for Years Ended
December 31, 1998, December 31, 1997 and
December 31, 1996 (See Annual Report, pages
22-38)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
26
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
Virginia Financial Corporation Virginia Financial Corporation
Staunton, Virginia Staunton, Virginia
by /s/ William P. Heath, Jr. by /s/ Fred D. Bowers
-------------------------------- -----------------------------------
William P. Heath, Jr., President Fred D. Bowers, Secretary/Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Benham M. Black Chairman of the Board March 30, 1999
- -------------------------
Benham M. Black Director
/s/ Harry V. Boney, Jr. Director March 30, 1999
- -------------------------
Harry V. Boney, Jr.
/s/ Lee S. Baker Director March 30, 1999
- -------------------------
Lee S. Baker
/s/ William P. Heath, Jr. President March 30, 1999
- -------------------------
William P. Heath, Jr. Director
/s/ Jan S. Hoover Director March 30, 1999
- -------------------------
Jan S. Hoover
/s/ Martin F. Lightsey Director March 30, 1999
- -------------------------
Martin F. Lightsey
/s/ James S. Quarforth Director March 30, 1999
- -------------------------
James S. Quarforth
</TABLE>
27
<PAGE>
VIRGINIA FINANCIAL CORPORATION
EXHIBIT INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
13 Annual Report.
21 Subsidiaries of the Registrant.*
27 Financial Data Schedule.
99.1 The following consolidated financial
statements of the Company including the
related notes and the report of the
independent auditors for the year ended
December 31, 1998 (included as a part of the
Annual Report filed herewith as
Exhibit 13).
1. Report of Independent Auditors (See Annual
Report, page 14)
2. Consolidated Balance Sheets as of December
31, 1998, and December 31, 1997 (See Annual
Report, page 15)
3. Consolidated Statements of Income for Years
Ended December 31, 1998, December 31, 1997,
and December 31, 1996 (See Annual Report,
pages 16 and 17)
4. Consolidated Statements of Cash Flows for
Years Ended December 31, 1998, December 31,
1997, and December 31, 1996 (See Annual
Report, pages 18 and 19)
5. Consolidated Statements of Changes in
Stockholders' Equity for Years Ended
December 31, 1998, December 31, 1997, and
December 31, 1996 (See Annual Report, pages
20 and 21)
6. Notes to Consolidated Financial Statements
for Years Ended December 31, 1998, December
31, 1997 and December 31, 1996 (See Annual
Report, pages 22-38)
- ----------
* The only subsidiary of the Company is Planters Bank & Trust Company of
Virginia. A separate exhibit has not been included herewith.
28
Dear Fellow Stockholders:
It is my pleasure to report on the progress of both Virginia Financial
Corporation and Planters Bank & Trust Company of Virginia for the year ending
December 31, 1998.
First, I want to give credit to the officers and staff of the Bank whose work
during 1998 has enabled us to have a banner year. To all of the people in the
Planters family I say "Thanks for a job well done." I am proud to be associated
with such a fine group of people dedicated to preserving the reputation and
heritage of our bank. Our staff appreciates our customers and works hard every
day to deliver great customer service.
In October we opened a branch office in Harrisonburg which is being managed by
Jeff Smith, a native of Rockingham County. Jeff and his staff have made
excellent progress in opening new accounts, calling on clients and building a
strong loan portfolio. We are convinced there is much potential in the
surrounding area for a bank that can deliver a full array of competitively
priced products in a professional manner. Further expansion in the Harrisonburg
market is being studied and I will keep you informed as to our plans.
As I write this letter we have a new branch office under construction on the
corner of Rosser Avenue and Lucy Lane in Waynesboro. Construction will soon
begin on a branch office in Lexington where we currently have many good
customers and good prospective customers. With mergers and acquisitions taking
place all around us we hear from people who welcome the opportunity to bank with
a locally owned company. We are committed to being there when they are looking
for a bank they can rely on in the future.
Internet banking will soon be available through Planters' new on-line service
"Planet Banking." For those of you who use a personal computer and are on the
Internet, many services will soon be at your fingertips.
During 1998, we invested many hours training our tellers in the use of a new
computer system. This new system allows our tellers to access up-to-the-minute
account information and enables us to keep pace with the many advancements in
electronic banking.
You will find inside our Annual Report financial information related to Planters
Mortgage Services and the Trust Department. These two divisions experienced the
best and most profitable year in their history, with growth in the number of new
customers and revenue. They established momentum in 1998 that has continued into
the new year.
One of the most talked about issues in 1999 will be and already has been the
Year 2000 (Y2K) issue. We have been working with the regulators, our vendors,
our customers and staff to be positioned for whatever Y2K brings. We have tested
our computer systems, updated all personal computers, established contingency
plans and been examined by the FDIC. We encourage our customers to ask questions
so they will have confidence in how we are dealing with this matter.
In conclusion, your corporation is growing, staying abreast of the latest
technology, and developing new products and services while concentrating on the
things which will determine our destiny - creating value and maintaining
excellent customer service. Your support is greatly appreciated and I solicit
your input as we grow together.
Sincerely,
/s/ William P. Heath, Jr.
- -------------------------
William P. Heath, Jr.
President and Chief Executive Officer
<PAGE>
[PHOTOS OF DIRECTORS OF VIRGINIA FINANCIAL CORPORATION AND PLANTERS BANK &
TRUST COMPANY OF VIRGINIA]
<PAGE>
[PHOTOS OF DIRECTORS OF PLANTERS BANK & TRUST COMPANY OF VIRGINIA]
<PAGE>
Mission Statement of
Planters Bank & Trust Company of Virginia
Planters Bank & Trust Company of Virginia, an independent community bank, will:
o be the premier financial institution in the communities and markets in
which it serves
o provide its individual and business customers superior, competitively
priced, financial products and unequaled customer service
o produce superior financial performance and quality growth, consistent
with uncompromising dedication and commitment to sound business and banking
practices
o maintain an environment which promotes and rewards employee initiative,
development and contributions; and
o contributes to the economic and social well-being of its communities
through community reinvestment and employee involvement.
Adopted by the Board of Directors, July 11, 1995
<PAGE>
Contents
Selected Financial Data 1
Comments by Management 2
Report of Independent Auditors 14
Balance Sheets 15
Statements of Income 16
Statements of Cash Flows 18
Statements of Changes in Stockholders' Equity 20
Notes to Financial Statements 22
Virginia Financial Corporation Management 40
Planters Bank & Trust Company of Virginia Management 41
Locations 42
Virginia Financial Corporation
and Subsidiary
provide a full range of banking services with eleven offices in Staunton,
Waynesboro, Harrisonburg, and the counties of Augusta and Rockingham.
Selected Financial Data
(000's omitted on dollar items, except for Per Share amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Deposits $ 370 432 $ 352 167 $ 330 375 $ 319 578 $ 297 006
Loans, Net $ 275 357 $ 265 829 $ 232 913 $ 209 541 $ 194 054
Assets $ 434 140 $ 403 999 $ 377 113 $ 356 068 $ 344 473
Stockholders' Equity $ 45 464 $ 41 335 $ 37 574 $ 34 154 $ 30 046
Interest Income $ 31 060 $ 29 068 $ 27 321 $ 26 073 $ 22 902
Net Interest Income $ 16 872 $ 15 776 $ 14 637 $ 13 730 $ 13 154
Provision for Loan Losses $ 1 327 $ 831 $ 450 $ 309 $ 421
Other Expenses Net of Other Income $ 6 475 $ 6 590 $ 6 131 $ 6 108 $ 5 875
Income Taxes $ 2 821 $ 2 620 $ 2 514 $ 2 278 $ 2 105
Net Income $ 6 248 $ 5 735 $ 5 542 $ 5 035 $ 4 753
Return on Average Assets (%) 1.50 1.48 1.51 1.45 1.43
Return on Average Equity (%) 14.37 14.48 15.34 15.48 16.30
Earnings Per Share, basic and diluted* $ 1.56 $ 1.43 $ 1.39 $ 1.26 $ 1.19
Book Value Per Share $ 11.37 $ 10.33 $ 9.39 $ 8.54 $ 7.51
Cash Dividends Per Share $ 0.61 $ 0.56 $ 0.48 $ 0.42 $ 0.36
Average Shares Outstanding* 4 000 000 4 000 000 4 000 000 4 000 000 4 000 000
</TABLE>
*Adjusted for 100% stock dividends, December 1997
1
<PAGE>
Comments By Management
Nature and Scope of Business
At a special meeting of Shareholders held November 14, 1996, the shareholders
approved the agreement and plan of reorganization dated July 30, 1996 between
Planters Bank & Trust Company of Virginia and Virginia Financial Corporation.
The agreement provided for the reorganization of the Bank into a wholly-owned
subsidiary of Virginia Financial Corporation, organized to serve as the holding
company for the Bank. This reorganization became effective January 2, 1997.
Planters Bank & Trust Company of Virginia, a registered state bank with its main
office and executive offices located at 24 South Augusta Street, Staunton,
Virginia, was formed in 1977 by the merger of Planters Bank & Trust Company,
Staunton, Virginia, organized in 1911, and Augusta Bank & Trust Company,
organized in 1972. The Bank has eleven offices in Staunton, Waynesboro,
Harrisonburg, and the counties of Augusta and Rockingham. Commercial banking and
trust activities account for 100% of the Bank's business. Planters provides a
full range of banking services, and as of December 31, 1998 has 186 full-time
employees and 16 part-time employees. The composition of the Bank's business is
reflected by the breakdown of current loans and deposits as shown.
The Bank, effective December 12, 1995, formed Planters Insurance Agency, Inc., a
wholly-owned subsidiary of Planters Bank & Trust Company of Virginia. During
January 1996 the agency began marketing title insurance, its only product, to
the general public. During 1998, the Bank discontinued marketing title insurance
through the agency and now markets title insurance through Bankers Title
Shenandoah, LLC.
Loans:
Real Estate 69.77%
Farmers 0.93%
Commercial 13.51%
Consumer 15.66%
Other 0.13%
Deposits:
Demand Deposits 16.90%
NOW 12.40%
Money Market 14.41%
Savings 10.05%
Time Deposits 46.24%
Stock
The Corporation issues one class of stock, Common, which is not listed for
trading on a registered exchange or quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ), and so far as the
Corporation is aware, there are no active market makers in the Corporations
stock. Trades in the Corporations stock occur sporadically on a local basis.
Local brokerage offices will "match" or "pair" buy and sell orders. Accordingly,
there is no established public trade market for shares of the Corporations
stock, and quotations do not necessarily reflect the price that would be paid in
an active and liquid market.
On December 31, 1998, there were 1,160 stockholders. Cash dividends per share
for 1998 were $0.61 and for 1997 were $0.56. Management expects to pay
approximately $0.65 per share dividends in 1999.
Based upon sale prices furnished to the Corporation by the Staunton, Virginia
office of a Virginia headquartered brokerage firm, the high and low sales prices
of Corporation stock during 1996, 1997 and 1998 were as shown on the chart.
Dividend per Share(S)* Per Share Sales Prices* Stock Price per Share
Year-End (S)*
High Low
1994 0.36 1996 18.50 15.50 1994 16.12
1995 0.42 1997 25.00 18.50 1995 18.50
1996 0.48 1998 29.50 25.00 1996 22.50
1997 0.56 1997 25.00
1998 0.61 1998 27.50
2
<PAGE>
Managements Discussion and Analysis of Operations
During 1998, the Corporations net income was $6,248,230 compared to $5,735,112
for 1997 and $5,541,801 for 1996. The increase in net income comparing 1998 to
1997 was $513,118 or 8.95%, comparing 1997 to 1996 was $193,311 or 3.49% and
comparing 1996 to 1995 was $507,194 or 10.07%.
Net interest income is the principal source of income for the Corporation. The
changes in volume, interest rates and the mix of interest-earning assets and
interest-bearing liabilities has a significant impact on net interest income.
Net interest income was $16.9 million for 1998 compared to $15.8 million for
1997 and $14.6 million for 1996. This represents increases of 7.0% in 1998, 7.8%
in 1997 and 6.6% in 1996.
Net Income Net Income per Share ($)*
($ in Millions)
1996 5.542 1996 1.39
1997 5.735 1997 1.43
1998 6.248 1998 1.56
Investment Securities
The average maturity of the investment portfolio was 4.1 years, 2.5 years and
1.9 years as of December 31, 1998, 1997 and 1996, respectively. Securities
maturiting in one year or less were $16.1 million or 12.4% of the portfolio as
of December 31, 1998, $36.2 million or 31.9% of the portfolio as of December 31,
1997 and $14.7 million or 12.4% of the portfolio as of December 31, 1996.
The portfolio increased during 1998 by $16.9 million. Funds for this growth were
provided by increases in deposits, securities sold under agreement to repurchase
and federal funds purchased less the growth in loans. The portfolio was reduced
during 1997 by $5.4 million to fund loan growth, and reduced during 1996 by $6.6
million to also fund loan growth.
U.S. Treasury Securities were 8.6% of the portfolio as of December 31, 1998,
11.6% as of December 31, 1997 and 11.4% as of December 31, 1996. U.S. Government
Agencies were 62.1% of the portfolio as of December 31, 1998, 72.9% as of
December 31, 1997 and 72.7% as of December 31, 1996. Obligations of state and
political subdivisions were 22.9% of the portfolio as of December 31, 1998,
15.5% as of December 31, 1997 and 15.7% as of December 31, 1996. Corporate and
equity securities made 6.4% of the portfolio as of December 31, 1998.
As of December 31, 1998 investment securities classified as available for sale
were $78.3 million, as of December 31, 1997 were $56.2 million and as of
December 31, 1996 were $50.7 million. Securities classified as available for
sale are reported at fair value and as of December 31, 1998 had an unrealized
gain of $720,941, as of December 31, 1997 had an unrealized gain of $235,495 and
as of December 31, 1996 had an unrealized loss of $138,052 which is shown net of
deferred taxes as a separate component of stockholders' equity.
Investment Securities ($ in Millions)
1996 118.8
1997 113.4
1998 130.3
3
<PAGE>
Loans
The loan portfolio increased during 1998 by $9.5 million, increased during 1997
by $32.9 million and during 1996 increased by $23.4 million. The percentage of
net loans to total assets as of December 31, 1998 was 63.4%, as of December 31,
1997 was 65.8% and as of December 31, 1996 was 61.8%.
The demand for loans and the retention of loans, as indicated by overall growth
and as a percentage of assets, was not as strong during 1998 as during 1997 or
1996. The primary trade area continues to provide diversity in the customer
base, unemployment continues to be very low and economic activity continues to
be strong.
During 1999 approximately $140.5 million of the loan portfolio will mature or
have the ability to be repriced compared to $143.8 million in 1998 and $139.2
million during 1997.
Most mortgage loans placed in the loan portfolio are made with the provision to
reprice on a one, three or five year basis. A significant number of commercial
and personal loans are represented by demand notes which provide the ability to
reprice.
Mortgage loan financing is offered through the secondary mortgage market which
provides other sources of financing for the customer base. During 1998 about $53
million was placed through the secondary mortgage market, during 1997 about $30
million was placed and during 1996 about $35 million was placed.
Total non-earning loans which represent loans on which the accrual of interest
has been discontinued were $1,973,000 as of December 31, 1998, $1,193,000 as of
December 31, 1997 and $194,000 as of December 31, 1996. This increase is due, in
part, to an increase of the total loan portfolio and to the deterioration of a
select group of credits. Management believes the overall quality and
collectability of the loan portfolio remains good.
Total Net Loans ($ in Millions)
1996 232.9
1997 265.8
1998 275.4
Allowance for Loan Losses
The allowance for loan losses is an estimate of an amount, by management, to
provide for potential losses in the loan portfolio. Various factors, including
charge-off experience, change in the mix and volume of loans, the level of
under-performing loans, the ratio of outstanding loan balances to total loans
and the perceived economic conditions in the primary trade area are taken into
consideration in determining the amount of the provision for loan losses and the
total amount of the loan loss reserve.
The reserve for loan losses was 1.15% of outstanding loans as of December 31,
1998, 1.39% as of December 31, 1997 and 1.29% as of December 31, 1996. Net
charge-offs were $1,868,177 during 1998, $117,293 during 1997 and $196,833
during 1996. The percentage of net charge-offs to year end loans was 0.67% for
1998, 0.04% for 1997 and 0.08% for 1996. The balance of the reserve for loan
losses was $3,211,782 as of December 31, 1998, $3,752,500 as of December 31,
1997 and $3,038,958 as of December 31, 1996. Several large lending relationships
significantly deteriorated during the year and resulted in charge-offs to the
allowance for loan losses.
Provisions & Net Charge-Offs
($ in Thousands)
Provisions Net Charge-Offs
1996 450 197
1997 831 117
1998 1,327 1,868
4
<PAGE>
Total Deposits ($ in Millions)
1996 330.4
1997 352.2
1998 370.4
Deposits
During 1998 total deposits increased by $18.3 million or 5.2% when compared to
December 31, 1997. All areas of deposits with the exception of money market
accounts experienced growth. Non-interest checking increased by $8.2 million or
15.0%. NOW accounts increased by $3.0 million or 7.1%, savings accounts
increased by $1.8 million or 4.9% and Certificates of Deposit increased by $9.9
million or 6.1%. Money market checking decreased by $4.6 million or 7.9%.
Interest rates paid on money market checking were reduced during 1998, which
contributed to this decrease.
During 1997 total deposits increased by $21.8 million or 6.6% compared to year
end 1996. Certificates of Deposit increased during 1997 by about $13.7 million
or 9.3% due to competitive interest rates on select maturities. NOW accounts
increased by $3.2 million, money market checking accounts increased by $2.5
million and savings accounts decreased by $0.8 million. Non-interest checking
also increased by $3.2 million due primarily to increased volume and customer
base. A Visa debit card program was also introduced and promoted along with an
image statement system which also contributed to the growth.
During 1996 total deposits increased $10.8 million or 3.4% compared to 1995.
Demand deposits and NOW accounts both experienced growth during 1996. Money
market accounts and savings accounts decreased during the year due to the
movement of these deposits to Certificates of Deposit. Certificates of Deposit
continued to increase during 1996 due to interest rates on certificates compared
to other interest earning deposits offered by the Bank.
Interest rates and the versatility of financial instruments offered by other
entities continue to present strong competition in the growth of deposits and
attracting new deposit balances.
Assets
During 1998 total assets increased $30.1 million or 7.5%. The two major
categories of assets are the loan and investment securities. The loan portfolio
increased by $9.5 million and investment securities increased by $16.9 million.
This growth in assets was funded by increases in deposits, securities sold under
agreement to repurchase, federal funds purchased and by retained earnings.
During 1997 total assets increased $26.9 million or 7.1%. The loan portfolio
increased about $32.9 million during the year and the security investment
portfolio decreased about $5.4 million or 4.5%. This decrease in the investment
portfolio along with the decrease in cash and due from banks along with the
growth in deposits and securities sold under agreement to repurchase funded the
loan growth. At year end 1997 the loan portfolio was 65.8% of assets and the
investment portfolio was 28.1% of assets.
Total assets increased during 1996 by approximately $21 million or 5.9%.
Securities during 1996 decreased about $6.6 million and the loan portfolio
increased by about $23.4 million. The decrease in the investment portfolio, the
increase in deposits of about $10.8 million and federal funds purchased of $5.0
million funded the loan growth. At year end 1996 loans were 61.8% of assets and
the investment portfolio was 31.5% of assets.
Total Assets ($ in Millions)
1996 377.1
1997 404.0
1998 434.1
5
<PAGE>
Stockholders' Equity
Stockholders' equity, during 1998, increased $4,128,624 or 9.99%. Reflected in
this increase is $320,394 unrealized net gain on securities in the available for
sale category. During 1997 stockholders equity increased $3,761,651 or 10.01%.
Reflected in this increase is $246,539 unrealized net gain on securities in the
available for sale category. During 1996 stockholders equity increased
$3,420,220 or 10.01%. This increase reflects $201,581 unrealized net loss on
securities held in the available for sale category. These increases represent
retention of net income after the payment of dividends. Cash dividends paid
increased by 9.91% in 1998, 15.63% in 1997 and 15.66% in 1996. Book value per
share as of December 31, 1998 was $11.37, $10.33 as of December 31, 1997 and
$9.39 as of December 31, 1996. Book value per share has been adjusted for the
100% stock dividend in December 1997.
Additional dividend information is provided under "Selected Financial Data" and
on page 4 under "Stock." The Corporations Tier I risk based capital ratio as of
December 31, 1998 was 17.02%, as of December 31, 1997 was 16.97% and as of
December 31, 1996 was 17.20%. The total risk based capital ratio as of December
31, 1998 was 18.24%, as of December 31, 1997 was 18.22% and as of December 31,
1996 was 18.45%. Additional risk based capital information is provided under
"Notes to Consolidated Financial Statements, Note 12, Regulatory Matters."
Dividends per Share ($)*
1996 0.48
1997 0.56
1998 0.61
Year-End Stockholders Equity
($ in Millions)
1996 37.60
1997 41.30
1998 45.50
Return on Average Equity (%)
1996 15.3
1997 14.5
1998 14.4
6
<PAGE>
Results of Operations
Net income for 1998 was $6,248,230 for an increase of $513,118 or 8.95% when
compared to 1997. Net income for 1997 increased by $193,311 or 3.49% when
compared to 1996 and net income for 1996 increased $507,194 or 10.07% when
compared to 1995.
Net Interest Income Net interest income represents the difference in interest
received on interest earning assets and interest paid on interest bearing
liabilities. Factors which have a significant impact on net interest income and
the net interest margin are changes in volume and mix and their respective
yields or rates on interest earning assets and interest bearing liabilities. Net
interest income for 1998 was $16,872,086 for an increase of $1,096,556 or 6.95%
when compared to 1997. Net interest income for 1997 $15,775,530 for an increase
of $1,138,421 of 7.78% when compared to 1996. Net interest income for 1996 was
$14,637,109 for an increase of $906,951 or 6.61% when compared to 1995. The net
interest margins for 1998, 1997 and 1996 were 4.43%, 4.40% and 4.32%,
respectively.
Net Interest Income
($ in Millions)
1996 14.6
1997 15.8
1998 16.9
Non-Interest Income Non-interest income increased $1,070,614 or 37.11% when
compared to 1997. The major components making up this increase are the following
areas: fiduciary income from the Trust department increased $153,921 or 14.89%.
This increase was due to increases in business volume and a modest increase in
the fee schedule for services. Service charges on deposit accounts increased
$393,413 or 58.34%. This increase is due to a uniform program of accessing and
collecting fees. Secondary mortgage fees increased $406,529 or 92.51%. This
increase is due to the expansion of the department and the volume of business.
The volume of business was affected by the level of interest rates creating
opportunities to refinance. Fees generated from the investment department
offering non-FDIC insured investment products increased $44,963 or 19.80%. This
increase is due to increased volume and the lower level of interest rates of
FDIC insured deposit accounts.
Non-interest income increased $342,817 or 13.49% during 1997 when compared to
1996. Trust department income increased by $48,457 or 4.92% during 1997 when
compared to 1996. This increase in Trust department income is due primarily to
increases in the volume of fee generating activity and to increases in the
market values. Other non-interest income and fee income increased about $257,000
in the following areas: fees on ATM foreign transactions, Visa debit cards,
printed check commissions and fees from the sale of non-FDIC insured investment
products.
Non-interest income increased during 1996 compared to 1995 by $417,108 or
19.63%. Trust department income increased by $163,283 or 19.87% during 1996
compared to 1995. This increase was due to the number and asset size of estates
closed and under administration and the overall volume of fee generating
activity during the year. Income from the secondary mortgage market area
increased $110,523 or 32.75%. The increase in this area was the result of a
greater number of loans being closed and the dollar amount of these loans.
During 1996 the Bank began offering non-FDIC insured investment products which
produced income of $86,648. Also during 1996, the Bank began operating Planters
Insurance Agency, Inc., a wholly-owned subsidiary of the Bank, which markets
title insurance, provided income of $17,408. Service charges on deposit
accounts, safe deposit box rent and other non-interest income experienced a very
modest increase due to the volume of business only, as the pricing of these
services and fees have not changed.
Non-Interest Income
($ in Thousands)
1996 2,542
1997 2,885
1998 3,9055
7
<PAGE>
Non Interest Expense
($ in Millions)
1996 8.7
1997 9.5
1998 10.4
Non-Interest Expense
Non-interest expense increased during 1998 by $955,737 or 10.09% compared to
1997. Salaries and employee benefits increased by $523,829 or 9.47%. This
increase is due to increases in individual salaries, the staffing of a new
branch in Harrisonburg, Virginia, and additional employees in select areas.
Premise and fixed asset expense increased by $97,052 or 8.59% due to the new
Harrisonburg office, updating teller stations in all offices to an on-line
system and the refurbishing of the Grottoes, Virginia office. Computer services
increased by $154,222 or 25.64% due to updating the teller stations, and the
equipment and communications to support these updates. Other areas of
non-interest expense which increased during 1998 were advertising by $45,649 or
30.91%, consultant fees by $21,054 or 103.67%, legal fees by $16,055 or 34.20%,
state bank exam fees by $17,583 or 33.12% and telephone expenses by $29,019 or
24.37%. The expansion by branching, new products and increased volume of
business increased most areas of non-interest expense.
Non-interest expense increased during 1997 by $795,704 or 9.17% compared to
1996. Salaries and employee benefits increased by $252,437 or 4.78% comparing
1997 to 1996. This increase was due to an increase in the number of employees
and to increases in individual salaries. Expense of premises and fixed assets
increased by $190,992 or 20.34%. This increase is due to installing an image
item processing system and image statement system along with two additional ATM
and two cash machines. Computer expense increased by $44,487 due to additional
volume and FDIC Insurance expense increased $39,185. Other non-interest expenses
which increased in 1997 were advertising which increased by $49,757, ATM
operating expenses which increased by $22,955 and supplies in the ongoing day to
day operations which increased $75,293. This increase was also due to an
increased volume of business activity.
Non-interest expense increased during 1996 compared to 1995 by $444,218 or
5.39%. Salaries and employee benefits increased by $579,717 or 12.34%. This
increase was due to increases in individual salaries, employee benefits and the
expansion of the officer staff. These additions were in preparation of pending
retirements of executive and other officers. Most other operating expenses
continued to increase due to increased prices and the increase in volume of
business. Technological changes taking place in the financial industry at a
rapid pace must be dealt with, and though over a period of time result in
savings, have impact on other operating expenses, i.e. research, installation,
educational training and equipment costs. Two areas of non-interest expense
which had a rather significant decrease were advertising and FDIC Insurance.
Advertising decreased about $61,000 and FDIC Insurance decreased about $347,000
due to premium decreases.
Market Risk Management
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. VFC's market risk is composed primarily of interest rate risk.
Asset/Liability/Risk Committee ("ALCO") is responsible for reviewing the
interest rate sensitivity position of VFC and establishing policies to monitor
and limit exposure to interest rate risk. Guidelines established by ALCO are
reviewed by VFC's Board of Directors.
Asset/Liability/Risk Management: The primary goals of asset/liability management
are to maximize net interest income and the net value of VFC's future cash flows
within the interest rate risk limits set by ALCO.
Interest Rate Risk Measurement
Interest rate risk is monitored through the use of three complementary measures:
static gap analysis, earnings simulation modeling and net present value
estimation. While each of the interest rate risk measurements has limitations,
taken together they represent a reasonably comprehensive view of the magnitude
of interest rate risk in the Corporation, the distribution of risk along the
yield curve, the level or risk through time, and the amount of exposure to
changes in certain interest rate relationships. To this point the ALCO Committee
has relied on static gap and static gap shock. In the interest of better
management of interest rate risk, the ALCO Committee will begin employing the
above technique in future policy decisions.
8
<PAGE>
Static Gap
Gap analysis measures the amount of repricing risk embedded in the balance sheet
at a point in time. It does so by comparing the differences in the repricing
characteristics of assets and liabilities. A gap is defined as the difference
between the principal amount of assets and liabilities, adjusted for off-balance
sheet instruments, which reprice within a specified time period. The cumulative
one-year gap was -18.2% of total earning assets on December 31, 1998 and 1.7% of
total earning assets on December 31, 1997. The policy limit for the one-year gap
is plus or minus 15% of adjusted total earning assets.
Core deposits and loans with noncontractual maturities are included in the gap
repricing distributions based upon historical patterns of balance attrition and
pricing behavior which are reviewed at least annually.
The gap repricing distributions include principal cash flows from residential
mortgage loans in the time frames in which they are expected to be received.
Mortgage prepayments are estimated by applying industry median projections of
prepayment speeds to portfolio segments based on coupon range and loan age.
Earnings Simulation
The earnings simulation model forecasts one year net income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effects on income of alternative
interest rate scenarios against earnings in a stable interest rate environment.
This type of analysis is also most useful in determining the short-run earnings
exposures to changes in customer behavior involving loan payments and deposit
additions and withdrawals.
The most recent earnings simulation model projects net income would increase by
approximately 5.2% of stable-rate net income if rates immediately fall by two
percentage points over the next year. It projects a decrease of approximately
6.5% if rates rise immediately by two percentage points. Management believes
this reflects a liability-sensitive rate risk position for the one-year horizon.
This one-year forecast is within the ALCO guideline of 15.0%.
This dynamic simulation model includes assumptions about how the balance sheet
is likely to evolve through time, in different interest rate environments. Loan
and deposit growth rate assumptions are derived from historical analysis and
management's outlook, as are the assumptions used to project yields and rates
for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning. Non
contractual deposit growth rates and pricing are assumed to follow historical
patterns. The sensitivities of key assumptions are analyzed at least annually
and reviewed by ALCO.
Net Present Value
The Net Present Value ("NPV") of the balance sheet, at a point in time, is
defined as the discounted present value of asset cash flows minus the discounted
value of liability cash flows. Interest rate risk analysis using NPV involves
changing the interest rates used in determining the cash flows and in
discounting the cash flows. The resulting percentage change in NPV is an
indication of the longer term repricing risk and options risk embedded in the
balance sheet.
At year-end, a 200 basis point immediate increase in rates is estimated to
reduce NPV by 11.4%. Additionally, NPV is projected to increase by 8.0% if rates
fall immediately by 200 basis points. Analysis of the average quarterly change
in the Treasury yield curve over the past ten years indicates that a parallel
curve shift of 200 basis points or more is an event that has less than a .1%
chance of occurrence.
As with gap analysis and earnings simulation modeling, assumptions about the
timing and variability of balance sheet cash flows are critical in NPV analysis.
Particularly important are the assumptions driving mortgage prepayments and the
assumptions about expected attrition of the core deposit portfolios. These
assumptions are applied consistently across the different rate risk measures.
9
<PAGE>
Summary information about Interest rate risk measures is presented below:
Interest Rate Risk Measures
1998 1997
---- ----
Static 1-Year Cumulative Gap -18.2% 1.7%
1-year Net Income Simulation projection
-200 bp Shock vs. Stable Rate 5.2% -2.5%
+200 bp Shock vs. Stable Rate -6.5% 1.2%
Static Net Present Value Change
-200 bp Shock vs. Stable Rate 8.0% -0.2%
+200 bp Shock vs. Stable Rate -11.4% -4.5%
Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, VFC's balance sheet tends to move toward
more asset sensitivity with the passage of time. The earnings simulation model
indicates that if all prepayments, calls and maturities of the securities
portfolios expected over the next year were to remain uninvested, then the
current liability sensitivity position would be reduced. Purchases of fixed rate
securities have been made to offset the natural tendency toward a less liability
sensitive interest rate risk position.
Management expects interest rates to be relatively stable during 1999 and
believes that the current level of liability sensitivity is manageable.
Year 2000
The Year 2000 issue involves the risk that the computer programs and computer
systems may not be able to perform without interruption into the Year 2000. If
computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or could create erroneous results. Such erroneous results could affect
interest payments or due dates and could cause the temporary inability to
process transactions and to engage in ordinary business activities. The failure
of the Corporation, its suppliers, and its borrowers to address the Year 2000
issue could have a materially adverse effect on the Corporation's financial
condition, results of operations, or liquidity.
In 1997, the Corporation initiated a review and assessment of all data
processing systems, hardware and software to confirm that it will function
properly in the year 2000. Based on this assessment, the Corporation's data
processing systems, hardware and banking software are currently Year 2000
compliant. However, testing is required to confirm this. Testing began in the
second quarter of 1998 and will continue through the second quarter of 1999. For
certain other systems, the Corporation has replaced or modified, or will replace
or modify, certain pieces of hardware and/or software so that the systems will
properly function in the year 2000. For systems on which the Corporation relies
on third party vendors, these vendors have been contacted and have indicated
that the hardware and/or software will be Year 2000 compliant.
The Corporation has also initiated formal communications with all significant
loan customers to determine the extent to which the Corporation is vulnerable to
those third parties' failures to remedy their own Year 2000 issues. The
Corporation believes that exposure to customers who are not Year 2000 compliant
is minimal.
The Corporation plans to complete the majority of the Year 2000 project by June
30, 1999. To date, the Corporation has expensed $17,500 related to the
assessment of, and efforts in connection with, the Year 2000 issue. Remaining
expenditures are not expected to have material effects on the Corporation's
consolidated financial statements.
10
<PAGE>
The Corporation continues to assess its risk from other environmental factors
over which it has little direct control, such as the electrical power supply,
voice transmission and data transmission. However, because of the nature of
these external factors, the Corporation is not actively engaged in any repair,
replacement or testing efforts for these services. Based on its current
assessments and remediation plans, which are based in part on certain
representations of third party servicers, the Corporation does not expect that
it will experience a significant disruption of its operations as a result of the
change of date to the year 2000. The Corporation has no reason to conclude that
a disruption or failure on the part of its electrical or voice and data
transmission suppliers will occur; however, if such a disruption or failure does
occur, the most likely result will be an inability on the part of those
suppliers to provide power or data transmission services to a computer system or
facility of the Corporation, in which case the Corporation will implement a
contingency plan. The most reasonable outcome to expect from a disruption or
failure on the part of the Corporation's electrical or voice and data
transmission suppliers would entail a diminishment of service levels, some
customer inconvenience, and any unanticipated costs associated with the
implementation of the contingency plan.
For the computer systems and facilities that the Corporation has determined to
be most critical, the Company expects to complete development of, test and adopt
contingency plans by June 30,1999. These plans will conform to recently issued
guidance from the FFIEC on business contingency planning for Year 2000
readiness. Contingency plans will include, among other actions, manual work
arounds and the identification of resource requirements and alternative
solutions for resuming critical business processes in the event of a Year 2000
related failure. While the Corporation will have contingency plans in place to
address a temporary disruption or failure in these services, there can be no
assurance that any disruption or failure will be only temporary, that the
Corporation's contingency plans will function as anticipated, or that the
results of operations or the financial condition or liquidity of the Corporation
will not be adversely affected in the event of a prolonged disruption or
failure.
Additionally, there can be no assurance that the FFIEC or other federal
regulators will not issue new regulatory requirements that entail additional
work by the Corporation and, if issued, that new regulatory requirements will
not increase the cost or delay the completion of the Corporation's Year 2000
project.
The costs of the project and the date on which the Corporation's plans to
complete the Year 2000 modifications are based are management's best estimates.
These estimates are based on numerous assumptions of future events, including
the continued availability of certain resources, the modification plans of third
parties and other factors. There can, however, be no guarantee that these
estimates are accurate. Actual costs and dates could differ materially from
those estimated. Specific factors that might cause such material differences
include, but are not limited to, the availability of personnel trained in this
area, the ability of third party vendors to correct their software and hardware,
the ability of significant customers to remedy their Year 2000 issues, and
similar uncertainties.
Forecast
The economy in the Corporations trade area continued to expand during 1998,
although not at the pace experienced during 1997, and the level of employment
continued to be very strong.
During 1999, the economy for the area is expected to remain relatively strong
with strong competition for employees as the unemployment percentage is expected
to remain very low. Competition for deposits and loans is expected to remain
strong. In April of 1999 the Bank will open a full service branch office at 100
Lucy Lane, Waynesboro, Virginia and in July 1999 will open a full service branch
at 1197 North Lee Highway, Lexington, Virginia. The data software system which
has been installed during 1998 will be completed in 1999 and the home banking
program will be available the second quarter of 1999.
Virginia Financial Corporation and its subsidiary, Planters Bank & Trust Company
of Virginia, continues to strive to be positioned to expand product offerings as
appropriate and positioned for possible geographic expansion.
11
<PAGE>
Unaudited Interim Financial Information
The results of operations for each of the quarters during the two
years ended December 31, 1998 and 1997 are summarized below (in
thousands, except per share data). Per share data has been
retroactively adjusted to reflect the 100% stock dividend declared
and paid in 1997.
<TABLE>
<CAPTION>
1998
Quarter Ended
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 7 650 $ 7 716 $ 7 878 $ 7 816
Net interest income 4 173 4 181 4 264 4 254
Income before
income taxes 2 398 2 452 2 112 2 108
Net income 1 632 1 676 1 466 1 474
Net income per share,
basic and diluted 0.41 0.42 0.37 0.36
<CAPTION>
1997
Quarter Ended
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 6 935 $ 7 097 $ 7 412 $ 7 624
Net interest income 3 814 3 933 3 896 4 133
Income before
income taxes 2 309 1 931 1 895 2 220
Net income 1 582 1 328 1 303 1 522
Net income per share,
basic and diluted 0.40 0.33 0.33 0.37
</TABLE>
12
<PAGE>
[YOUNT, HYDE & BARBOUR, P.C. LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
Virginia Financial Corporation
and Subsidiaries
Staunton, Virginia
We have audited the accompanying consolidated balance sheets of Virginia
Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1998, 1997, and 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Virginia
Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997, and 1996, in conformity with generally accepted accounting
principles.
/s/ Yount, Hyde & Barbour, P.C.
- --------------------------------
Winchester, Virginia
January 8, 1999
14
<PAGE>
VIRGINIA FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 17,557,042 $ 14,684,410
Securities (fair value: 1998, $130,615,093;
1997, $113,524,939) 130,291,723 113,409,044
Loans, net 275,356,880 265,828,579
Bank premises and equipment, net 5,781,813 4,793,779
Accrued interest on loans and securities 3,277,532 3,236,457
Intangibles 242,511 266,161
Other real estate owned 278,900 258,000
Other assets 1,353,860 1,522,237
------------ ------------
Total assets $434,140,261 $403,998,667
============ ============
Liabilities and Stockholders' Equity
Liabilities
Demand deposits $ 62,607,987 $ 54,456,838
Negotiable orders of withdrawal 45,937,568 42,896,782
Money market deposit accounts 53,393,627 57,949,660
Regular savings 37,226,362 35,472,191
Time certificates of deposit of $100,000 or more 25,061,579 22,589,613
Time deposits 146,204,960 138,801,691
------------ ------------
Total deposits $370,432,083 $352,166,775
Securities sold under agreements to repurchase 7,695,000 4,960,000
Federal funds purchased 9,475,000 4,550,000
Other liabilities 1,074,094 986,432
------------ ------------
Total liabilities $388,676,177 $362,663,207
------------ ------------
Commitments and contingencies
Stockholders' Equity
Common stock; $5 par value; 10,000,000 shares
authorized; 4,000,000 shares issued and
outstanding $ 20,000,000 $ 20,000,000
Surplus 13,554,034 13,554,034
Retained earnings 11,434,230 7,626,000
Accumulated other comprehensive income 475,820 155,426
------------ ------------
Total stockholders' equity $ 45,464,084 $ 41,335,460
------------ ------------
Total liabilities and stockholders' equity $434,140,261 $403,998,667
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE>
VIRGINIA FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest
Income Interest and fee income on loans:
Loans secured by real estate $16,505,842 $15,113,716 $13,621,057
Loans to finance agricultural production
and other loans to farmers 299,281 278,000 290,222
Commercial and industrial loans 3,509,454 3,341,429 3,260,741
Loans to individuals for household, family
and other personal expenditures 3,698,556 3,495,993 3,051,222
Obligations of states and political subdivisions
in the U.S. 10,566 18,790 27,113
Interest on investment securities:
U.S. Treasury and U.S. Government
Agency securities 1,468,021 2,469,621 3,353,388
Corporate securities -- 8,015 34,616
Nontaxable interest income, state and municipal
securities 883,881 786,117 827,466
Interest on securities available for sale:
U.S. Treasury and U.S. Government
Agency securities 4,045,087 3,419,348 2,763,960
Corporate securities 171,755 -- --
Nontaxable interest income, state and municipal securities 153,801 -- --
Interest income on federal funds sold and
securities purchased under agreements to resell 314,226 136,946 90,918
----------- ----------- -----------
Total interest income $31,060,470 $29,067,975 $27,320,703
----------- ----------- -----------
Interest Expense
Interest on time certificates of deposit of $100,000
or more $ 1,302,555 $ 1,202,135 $ 1,251,381
Interest on other deposits 12,466,384 11,754,937 11,154,523
Interest on federal funds purchased and securities
sold under agreements to repurchase 419,445 335,373 277,690
----------- ----------- -----------
Total interest expense $14,188,384 $13,292,445 $12,683,594
----------- ----------- -----------
Net interest income $16,872,086 $15,775,530 $14,637,109
Provision for loan losses (Note 5) 1,327,459 830,835 450,000
----------- ----------- -----------
Net interest income after provision for loan losses $15,544,627 $14,944,695 $14,187,109
----------- ----------- -----------
Noninterest Income
Trust department income $ 1,187,305 $ 1,033,384 $ 984,927
Service charge on deposit accounts 1,067,746 674,333 636,560
Fees on loans sold 845,983 439,454 423,105
Other noninterest income 854,220 737,469 497,231
----------- ----------- -----------
Total noninterest income $ 3,955,254 $ 2,884,640 $ 2,541,823
----------- ----------- -----------
Gains on securities $ -- $ -- $ 5,963
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
VIRGINIA FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Noninterest Expense
Salaries and employee benefits $ 6,053,792 $ 5,529,963 $ 5,277,526
Expense of premises and fixed assets 1,227,112 1,130,060 939,068
Computer services 755,744 601,522 557,035
Other noninterest expense 2,393,619 2,212,985 1,905,197
----------- ----------- -----------
Total noninterest expense $10,430,267 $ 9,474,530 $ 8,678,826
----------- ----------- -----------
Income before income taxes $ 9,069,614 $ 8,354,805 $ 8,056,069
Applicable income taxes 2,821,384 2,619,693 2,514,268
----------- ----------- -----------
Net income $ 6,248,230 $ 5,735,112 $ 5,541,801
=========== =========== ===========
Earnings per share, basic and diluted * $ 1.56 $ 1.43 $ 1.39
Average shares outstanding* 4,000,000 4,000,000 4,000,000
</TABLE>
* Adjusted for 100% stock dividend, December 1997.
See Notes to Consolidated Financial Statements.
17
<PAGE>
VIRGINIA FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Interest received $ 30,896,790 $ 28,816,153 $ 27,390,248
Fees and other noninterest income 3,922,557 2,861,488 2,534,371
Interest paid (14,079,768) (13,395,456) (12,648,063)
Origination of loans available for sale (52,984,711) (28,472,859) (11,504,489)
Proceeds from sale of loans available for sale 50,019,403 27,579,113 10,506,939
Cash paid to suppliers and employees (9,750,330) (8,695,381) (8,251,920)
Income taxes paid (2,725,546) (2,817,404) (2,580,651)
------------ ------------ ------------
Net cash provided by operating activities $ 5,298,395 $ 5,875,654 $ 5,446,435
------------ ------------ ------------
Cash Flows from Investing Activities
Proceeds from maturities and calls of investment securities $ 33,435,000 $ 15,255,000 $ 30,297,080
Proceeds from maturities and calls of securities available
for sale 31,250,374 13,760,000 7,500,000
Proceeds from sales of securities available for sale -- -- 7,023,789
Purchases of investment securities (28,192,791) (4,631,609) (9,764,647)
Purchases of securities available for sale (52,791,023) (18,616,475) (28,787,127)
Net (increase) in loans (7,890,452) (33,103,354) (22,824,368)
Proceeds from sale of equipment 1,000 7,800 --
Capital expenditures (1,567,746) (1,045,119) (575,017)
Other real estate owned improvements (20,900) -- --
Purchase of other assets (157,008) (76,350) (261,042)
------------ ------------ ------------
Net cash (used in) investing activities $(25,933,546) $(28,450,107) $(17,391,332)
------------ ------------ ------------
Cash Flows from Financing Activities
Net increase in certificates of deposit $ 9,875,235 $ 13,676,434 $ 16,699,960
Net increase (decrease) in demand and savings deposits 8,390,073 8,115,376 (5,902,782)
Net increase (decrease) in federal funds purchased 4,925,000 (450,000) 5,000,000
Net increase in securities sold under repurchase agreements 2,735,000 1,850,000 1,780,000
Cash dividends paid (2,417,525) (2,220,000) (1,920,000)
------------ ------------ ------------
Net cash provided by financing activities $ 23,507,783 $ 20,971,810 $ 15,657,178
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents $ 2,872,632 $ (1,602,643) $ 3,712,281
Cash and cash equivalents at beginning of year 14,684,410 16,287,053 12,574,772
------------ ------------ ------------
Cash and cash equivalents at end of year $ 17,557,042 $ 14,684,410 $ 16,287,053
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
VIRGINIA FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 6,248,230 $ 5,735,112 $ 5,541,801
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 705,076 636,925 475,822
Provision for loan losses 1,327,459 830,835 450,000
Deferred tax (benefit) 232,125 (249,245) (77,777)
Origination of loans available for sale (52,984,711) (28,472,859) (11,504,489)
Proceeds from sale of loans available for sale 50,019,403 27,579,113 10,506,939
(Gain) on sale of securities -- -- (5,963)
(Gain) loss on sale of equipment 945 (3,694) 5,886
Changes in assets and liabilities:
Increase (decrease) in taxes payable (60,696) 51,534 9,161
(Increase) decrease in interest receivable (45,007) (248,508) 95,155
Increase (decrease) in interest payable 108,617 (103,011) 35,531
(Increase) decrease in prepaid expenses (119,955) 24,396 (34,244)
Increase (decrease) in accrued expenses (264) (15,772) 8,276
Premium amortization (discount accretion)
on securities, net (98,794) 111,749 (20,868)
(Decrease) in deferred income (1,337) (921) (38,795)
(Increase) in fees receivable (32,696) -- --
------------ ------------ ------------
Net cash provided by operating activities $ 5,298,395 $ 5,875,654 $ 5,446,435
============ ============ ============
Supplemental Schedule of Noncash
Investing Activities
Other real estate acquired in settlement of loans $ -- $ 258,000 $ --
============ ============ ============
Unrealized gain (loss) on securities available for sale $ 485,445 $ 373,544 $ (305,430)
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
VIRGINIA FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Capital Retained
Stock Surplus Earnings
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 10,000,000 $ 13,554,034 $ 10,489,087
Comprehensive income:
Net income -- -- 5,541,801
Other comprehensive income net of tax:
Unrealized gain (loss) on securities available for sale:
Unrealized holding (losses) arising during the period
(net of tax, $102,549) -- -- --
Less: reclassification adjustment (net of tax, $1,296) -- -- --
Other comprehensive income (net of tax, $103,845) -- -- --
Total comprehensive income -- -- --
Cash dividends ($0.48 per share) -- -- (1,920,000)
------------- ------------ ------------
Balance, December 31, 1996 $ 10,000,000 $ 13,554,034 $ 14,110,888
Comprehensive income:
Net income -- -- 5,735,112
Other comprehensive income net of tax:
Unrealized gain (loss) on securities available for sale:
Unrealized holding gains arising during the period
(net of tax, $127,005) -- -- --
Other comprehensive income (net of tax, $127,005) -- -- --
Total comprehensive income -- -- --
Cash dividends ($0.56 per share) -- -- (2,220,000)
Stock split effected in the form of a 100% stock dividend, at par 10,000,000 -- (10,000,000)
------------ ------------ ------------
Balance, December 31, 1997 $ 20,000,000 $ 13,554,034 $ 7,626,000
Comprehensive income:
Net income -- -- 6,248,230
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available for sale:
Unrealized holding gains arising during the period
(net of tax, $165,051) -- -- --
Other comprehensive income (net of tax, $165,051) -- -- --
Total comprehensive income -- -- --
Cash dividends ($0.61 per share) -- -- (2,440,000)
------------ ------------ ------------
Balance, December 31, 1998 $ 20,000,000 $ 13,554,034 $ 11,434,230
============ ============ ============
See Notes to Consolidated Financial Statements.
20
<PAGE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Income Income Total
--------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 110,468 $ 34,153,589
Comprehensive income:
Net income -- $ 5,541,801 5,541,801
------------
Other comprehensive income net of tax:
Unrealized gain (loss) on securities available for sale:
Unrealized holding (losses) arising during the period
(net of tax, $102,549) -- $ (199,064) --
Less: reclassification adjustment (net of tax, $1,296) -- (2,517) --
------------
Other comprehensive income (net of tax, $103,845) (201,581) $ (201,581) (201,581)
------------
Total comprehensive income -- $ 5,340,220 --
============
Cash dividends ($0.48 per share) -- (1,920,000)
------------ ------------
Balance, December 31, 1996 $ (91,113) $ 37,573,809
Comprehensive income:
Net income -- $ 5,735,112 5,735,112
------------
Other comprehensive income net of tax:
Unrealized gain (loss) on securities available for sale:
Unrealized holding gains arising during the period
(net of tax, $127,005) -- $ 246,539 --
------------
Other comprehensive income (net of tax, $127,005) 246,539 $ 246,539 246,539
------------
Total comprehensive income -- $ 5,981,651 --
============
Cash dividends ($0.56 per share) -- (2,220,000)
Stock split effected in the form of a 100% stock dividend, at par -- --
------------ -----------
Balance, December 31, 1997 $ 155,426 $ 41,335,460
Comprehensive income:
Net income -- $ 6,248,230 6,248,230
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available for sale:
Unrealized holding gains arising during the period
(net of tax, $165,051) -- $ 320,394 --
------------
Other comprehensive income (net of tax, $165,051) 320,394 $ 320,394 320,394
------------ ------------ ------------
Total comprehensive income -- $ 6,568,624 --
============
Cash dividends ($0.61 per share) -- (2,440,000)
------------ ------------
Balance, December 31, 1998 $ 475,820 $ 45,464,084
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
VIRGINIA FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
On November 14, 1996, the stockholders of Planters Bank & Trust Company of
Virginia voted in favor of a merger to become a wholly-owned subsidiary of
Virginia Financial Corporation which became a newly formed one-bank holding
company.
Upon consumption of the reorganization at January 2, 1997, each outstanding
common share of Planters Bank and Trust Company of Virginia was exchanged
for one share of Virginia Financial Corporation common stock, par value $5
per share. The exchange of shares was a tax-free transaction for federal
income tax purposes. The merger was accounted for on the same basis as a
pooling-of-interests and financial statements for prior periods are
identical to the financial statements of the Bank. Stockholders' equity has
been restated to reflect this transaction in all prior periods.
In 1996, Planters Bank and Trust Company of Virginia formed Planters
Insurance Agency, Inc., a wholly-owned subsidiary of the Bank. This
subsidiary was formed to acquire and hold an interest in Bankers' Title of
Shenandoah, LLC.
Virginia Financial Corporation and Subsidiaries (the Corporation) grant
consumer, agribusiness, commercial and real estate loans to customers
located primarily in the Augusta County and Rockingham County, Virginia
area. The loan portfolio is well diversified and is not concentrated with
any one business sector or industry.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and predominant practices within
the banking industry. The following is a description of the more
significant of these policies:
Principles of Consolidation
The consolidated financial statements of Virginia Financial
Corporation and Subsidiaries, Planters Bank & Trust Company of
Virginia and Planters Insurance Agency, Inc., include the accounts of
all three companies. All material intercompany balances and
transactions have been eliminated in consolidation.
Cash and Due From Banks
For purposes of reporting cash flows, cash and due from banks includes
cash on hand, amounts due from banks and cash items in process of
collection. Cash flows from deposits, federal funds purchased and
renewals and extensions of loans are reported net.
Securities
Securities are classified in three categories and accounted for as
follows:
22
<PAGE>
Notes to Consolidated Financial Statements
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability to
hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest
method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and
equity securities that the Corporation intends to hold for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Corporation's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in stockholders'
equity, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the short term
in anticipation of market gains, are carried at fair value.
Realized and unrealized gains and losses on trading account
assets are included in interest income on trading account
securities. The Corporation had no trading securities at December
31, 1998 and 1997.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned discount, unearned fees, and an allowance for loan losses.
Interest on all loans is accrued daily on the outstanding balances.
Commitment fees related to standby letters of credit are recognized
over the commitment period.
The impairment of loans that have been separately identified for
evaluation is measured based on the present value of expected future
cash flows or, alternatively, the observable market price of the loans
or the fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is expected
to be provided solely by the underlying collateral) and for which
management has determined foreclosure is probable, the measure of
impairment of those loans is based on the fair value of the
collateral.
The Corporation considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These loans are
not subject to impairment. A loan is considered impaired when it is
probable that the Corporation will be unable to collect all principal
and interest amounts according to the contractual terms of the loan
agreement. Factors involved in determining impairment include, but are
not limited to, expected future cash flows, financial condition of the
borrower, and the current economic conditions. A performing loan may
be considered impaired, if the factors above indicate a need for
impairment. A loan on nonaccrual status may not be impaired if in the
process of collection or there is an insignificant shortfall in
payment. An insignificant delay of less than 30 days or a shortfall of
less than 5% of the required principal and interest payment generally
does not indicate an impairment situation, if in management's judgment
the loan will be paid in full. Loans that meet the regulatory
definitions of doubtful or loss generally qualify as an impaired loan.
Charge-offs for impaired loans occur when the loan, or portion of the
loan is determined to be uncollectible, as is the case for all loans.
23
<PAGE>
Notes to Consolidated Financial Statements
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent for 90 days
or more. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
Mortgage loans held for resale are stated at the lower of cost or
market on an individual loan basis.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends
in historic loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses,
which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are
charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Nonrefundable Loan Fees and Costs
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized as
an adjustment of the related loan's yield.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Repairs and maintenance are expensed as incurred. Gains
and losses on routine dispositions are reflected in current
operations.
Depreciation is computed by the straight-line and declining balance
methods over the following estimated useful lives:
Buildings and improvements 10-50 years
Furniture and equipment 3-25 years
Computer software 3 years
Trust Department Assets
Securities and other property held by the Trust Department in a
fiduciary or agency capacity are not assets of the Corporation and are
not included in the accompanying financial statements.
24
<PAGE>
Notes to Consolidated Financial Statements
Deposit Intangibles
The cost of purchased deposit relationships and other intangible
assets, based on independent valuation, are being amortized over
estimated remaining lives ranging from nine to fifteen years.
Amortization expense charged to operations was $23,650 in 1998, and
$23,652 in 1997 and 1996.
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,
it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Earnings Per Share
The earnings per common share have been computed by dividing net
income by the weighted average number of common shares outstanding.
Weighted average shares were 4,000,000 for each of the years ended
1998, 1997, and 1996, respectively. The Corporation had no potential
common stock as of December 31, 1998, 1997, and 1996.
Pension Plan
The Corporation has a trusteed, noncontributory, defined contribution
pension plan covering substantially all full-time employees.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Advertising Costs
The Corporation follows the policy of charging the production costs of
advertising to expense as incurred.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed
real estate.
25
<PAGE>
Notes to Consolidated Financial Statements
Comprehensive Income
As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income".
Statement 130 established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement had no impact on the Corporation's net income or
stockholders' equity. The Statement requires other comprehensive
income to include unrealized gains and losses on securities available
for sale, which prior to adoption were reported separately in
stockholders' equity. The financial statements have been reclassified
to conform to the requirements of Statement No. 130.
Emerging Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement establishes accounting and reporting
standards for derivative financial instruments and other similar
financial instruments and for hedging activities. The Statement also
allows securities classified as held-to-maturity to be transferred to
the available-for-sale category at the date of initial application of
this standard. Statement 133 is effective for all fiscal years
beginning after June 15, 1999. Management is currently reviewing this
statement to determine the impact, if any, it will have since the
Corporation does not currently employ such derivative instruments and
does not intend to do so in the future.
Note 2. Restrictions on Cash
To comply with Federal Reserve Regulations, the Bank is required to
maintain certain average reserve balances. The daily average reserve
requirement was $5,968,000 and $5,035,000 for the reserve periods
including December 31, 1998 and 1997, respectively.
Note 3. Securities
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U. S. Government Agencies $32,190,103 $ 65,519 $ (124,849) $32,130,773
State and Municipal 19,797,601 397,539 (14,839) 20,180,301
----------- ----------- ----------- -----------
Total $51,987,704 $ 463,058 $ (139,688) $52,311,074
=========== =========== =========== ===========
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U. S. Government Agencies $39,659,677 $ 54,184 $ (110,088) $39,603,773
State and Municipal 17,590,097 187,140 (15,341) 17,761,896
----------- ----------- ----------- -----------
Total $57,249,774 $ 241,324 $ (125,429) $57,365,669
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1998 and 1997 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 any penalties.
1998
---------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 5,905,483 $ 5,926,499
Due after one year through
five years 37,385,698 37,580,192
Due after five years through
ten years 6,260,064 6,326,474
Due after 10 years 2,436,459 2,477,909
----------- -----------
Total $51,987,704 $52,311,074
=========== ===========
The amortized cost and fair values of securities available for sale as
of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Treasury $11,139,105 $ 115,305 $ -- $11,254,410
U. S. Government Agencies 48,162,896 496,524 (13,425) 48,645,995
State and Municipals 9,909,756 139,345 (18,189) 10,030,912
Corporate 973,081 1,381 -- 974,462
Other 7,398,240 -- -- 7,398,240
----------- ----------- ---------- -----------
Total $77,583,078 $ 752,555 $ (31,614) $78,304,019
=========== =========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Treasury $13,025,137 $ 108,104 $ (3,160) $13,130,081
U. S. Government Agencies 42,898,638 186,289 (55,738) 43,029,189
----------- ----------- ----------- -----------
Total $55,923,775 $ 294,393 $ (58,898) $56,159,270
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of securities available for sale as
of December 31, 1998 and 1997, 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 any penalties.
27
<PAGE>
Notes to Consolidated Financial Statements
1998
--------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $10,140,544 $10,190,359
Due after one year through
five years 48,143,530 48,697,078
Due after five years through
ten years 2,629,646 2,653,740
Due after ten years 8,298,038 8,390,140
Corporate and other 8,371,320 8,372,702
----------- -----------
Total $77,583,078 $78,304,019
=========== ===========
Proceeds from calls and maturities of securities held to maturity
during 1998, 1997, and 1996 were $33,435,000, $15,255,000, and
$30,297,080, respectively. No gains or losses were realized on these
transactions during 1998 or 1997. Gross gains of $2,150 were realized
on calls in 1996.
There were no sales of securities available for sale during 1998 or
1997. Proceeds from the sale of securities available for sale during
1996 were $7,023,789. Proceeds from calls and maturities of securities
available for sale during 1998, 1997, and 1996 were $31,250,374,
$13,760,000, and $7,500,000, respectively. No gains or losses were
realized on these transactions during 1998 or 1997. Gross gains of
$14,493 and gross losses of $10,680 were realized on the sale during
1996.
The book value of securities pledged to secure deposits and for other
purposes amounted to $26,509,694 and $19,751,457 at December 31, 1998
and 1997, respectively.
Note 4. Loans
Loans at December 31, 1998 and 1997, are summarized as follows:
1998 1997
-------- --------
(In Thousands)
Real estate loans:
Construction $ 20,065 $ 20,183
Secured by farmland 1,284 1,316
Secured by 1-4 family residential 113,477 128,130
Other real estate loans 59,752 39,037
Loans to farmers (except those
secured by real estate) 2,598 2,725
Commercial and industrial loans
(except those secured by real estate) 37,693 34,434
Loans to individuals for household, family
and other consumer expenditures 43,676 43,364
All other loans (including overdrafts) 368 799
-------- --------
Total loans $278,913 $269,988
Less: Unearned income 344 406
Allowance for loan losses 3,212 3,753
-------- --------
Net loans $275,357 $265,829
======== ========
28
<PAGE>
Notes to Consolidated Financial Statements
Information about impaired loans as of and for the years ended December 31,
1998 and 1997 is as follows.
1998 1997
-------- --------
(In Thousands)
Impaired loans for which an allowance
has been provided $ -- $379,632
Impaired loans for which no allowance
has been provided 944,461 --
-------- --------
Total impaired loans $944,461 $379,632
======== ========
Allowance provided for impaired loans,
included in allowance for loan losses $ -- $379,632
======== ========
Average balance in impaired loans $455,291 $379,632
======== ========
Interest income recognized $ 14,199 $ --
======== ========
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $1,028,481, $813,395, and $193,876 at December 31, 1998, 1997
and 1996, respectively. If interest on these loans had been accrued, such
income would have approximated $142,108, $72,937, and $15,476 for 1998,
1997, and 1996, respectively.
Note 5. Allowance for Loan Losses
Transactions in the allowance for loan losses for each of the three years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning $3,752,500 $3,038,958 $2,785,791
Recoveries 75,428 40,514 70,955
Provisions charged to operations 1,327,459 830,835 450,000
---------- ---------- ----------
Total $5,155,387 $3,910,307 $3,306,746
Loans charged off 1,943,605 157,807 267,788
---------- ---------- ----------
Balance, ending $3,211,782 $3,752,500 $3,038,958
========== ========== ==========
</TABLE>
Note 6. Bank Premises and Equipment
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 1,532,938 $ 1,162,221
Buildings and improvements 4,622,298 4,384,493
Furniture and equipment 5,066,795 4,370,443
----------- -----------
$11,222,031 $ 9,917,157
Accumulated depreciation 5,440,218 5,123,378
----------- -----------
$ 5,781,813 $ 4,793,779
=========== ===========
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements
Depreciation charged to operations was $577,768 in 1998, $515,835 in 1997,
and $408,181 in 1996.
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of December
31, 1998 and 1997:
1998 1997
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 858,765 $1,042,609
Deferred loan fees 74,690 90,593
Other 56,409 4, 052
---------- ----------
$ 989,864 $1,178,254
---------- ----------
Deferred tax liabilities:
Bank premises $ 176,104 $ 133,330
Securities available for sale 245,119 80,068
Other 3,360 2,399
---------- ----------
$ 424,583 $ 215,797
---------- ----------
$ 565,281 $ 962,457
========== ==========
The provision for income taxes charged to operations for the years ended
December 31, 1998, 1997 and 1996, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense $ 2,589,259 $ 2,868,938 $ 2,592,045
Deferred tax expense (benefit) 232,125 (249,245) (77,777)
----------- ----------- -----------
$ 2,821,384 $ 2,619,693 $ 2,514,268
=========== =========== ===========
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the U. S. federal income tax rate to pretax income due to the
following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense $ 3,083,669 $ 2,840,634 $ 2,739,063
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (277,802) (217,874) (234,641)
Other 15,517 (3,067) 9,846
----------- ----------- -----------
$ 2,821,384 $ 2,619,693 $ 2,514,268
=========== =========== ===========
</TABLE>
Note 8. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000 was $25,061,579 and $22,589,613 in 1998 and 1997,
respectively.
30
<PAGE>
Notes to Consolidated Financial Statements
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 $144,448,213
2000 15,374,798
2001 4,036,816
2002 5,780,443
2003 and thereafter 1,626,269
------------
$171,266,539
============
Note 9. Related Party Transactions
The Corporation has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, their
immediate families and affiliated companies in which they are principal
stockholders, all of which have been, in the opinion of management, on the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with others.
Aggregate loan transactions with related parties were as follows:
1998 1997
--------- ---------
Beginning balance $ 887,656 $ 690,591
New loans 595,728 605,697
Repayments (520,678) (408,632)
--------- ---------
Ending balance $ 962,706 $ 887,656
========= =========
Note 10. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet. The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented
by the contractual amount of those instruments. The Corporation uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
A summary of the contract amount of the Corporation's exposure to
off-balance-sheet risk as of December 31, 1998 and 1997 is as follows:
1998 1997
-------- --------
(in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $48,808 $48,537
Standby letters of credit 3,000 3,033
31
<PAGE>
Notes to Consolidated Financial Statements
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 and
represent the undrawn portion of the total commitment. Collateral held is
primarily, deeds of trust on real estate.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Most commitments are extended for less than one year with the longest
expiring in 2003. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers. The
extent of collateral held for those commitments at December 31, 1998,
varies from 0% to 100%; the average amount collateralized is 69%.
The Corporation maintains cash accounts in other commercial banks. The
amount on deposit at December 31, 1998 exceeded the insurance limits of the
Federal Deposit Insurance Corporation by $6,762,740.
Note 11. Commitments and Contingencies
The Corporation is party to various legal proceedings. Counsel is of the
opinion that settlement of these items should not have a material effect on
financial position.
The Corporation is heavily dependent on computer processing in the conduct
of its business activities and, therefore is susceptible to the Year 2000
(Y2K) Issue. The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. The Corporation has conducted a comprehensive
review of its computer systems to identify the systems that could be
affected by the Year 2000 Issue, and has developed and is implementing a
remediation plan.
Note 12. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets, and of Tier 1 capital to average
assets. Management believes, as of December 31, 1998, that the Corporation
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Corporation must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
32
<PAGE>
Notes to Consolidated Financial Statements
The Corporation's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ----------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 47,958 18.29% >$ 20,981 > 8.0% > N/A
- - -
Bank $ 36,176 13.98% >$ 20,695 > 8.0% >$ 25,868 > 10.0%
- - - -
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 44,746 17.06% >$ 10,491 > 4.0% > N/A
- - -
Bank $ 32,965 12.74% >$ 10,347 > 4.0% >$ 15,521 > 6.0%
- - - -
Tier 1 Capital (to
Average Assets):
Consolidated $ 44,746 10.78% >$ 16,610 > 4.0% > N/A
- - -
Bank $ 32,965 7.94% >$ 16,615 > 4.0% >$ 20,769 > 5.0%
- - - -
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 44,508 18.22% >$ 19,544 > 8.0% > N/A
- - -
Bank $ 35,812 14.77% >$ 19,403 > 8.0% >$ 24,254 > 10.0%
- - - -
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 41,446 16.97% >$ 9,772 > 4.0% > N/A
- - -
Bank $ 32,771 13.51% >$ 9,701 > 4.0% >$ 14,552 > 6.0%
- - - -
Tier 1 Capital (to
Average Assets):
Consolidated $ 41,446 10.34% >$ 16,039 > 4.0% > N/A
- - -
Bank $ 32,771 8.23% >$ 15,930 > 4.0% >$ 19,912 > 5.0%
- - - -
</TABLE>
Transfer of funds from the banking subsidiary to the Parent Corporation in
the form of loans, advances and cash dividends, are restricted by federal
and state regulatory authorities. As of December 31, 1998, the aggregate
amount of unrestricted funds which could be transferred from the
Corporation's subsidiary to the Parent Corporation, without prior
regulatory approval, totaled $9,653,111 or 21.2% of the consolidated net
assets.
Note 13. Employee Retirement Plan
The Corporation has a defined contribution retirement plan which covers
substantially all full-time salaried employees. Contributions are at the
discretion of the Board of Directors. Contributions amounted to $346,377,
$329,661, and $316,464 in 1998, 1997, and 1996, respectively.
33
<PAGE>
Notes to Consolidated Financial Statements
Note 14. Leases
The Bank leases its Terry Court banking facility located in the Terry Court
Shopping Center on North Augusta Street, Staunton, Virginia. The lease
provides for an original five (5) year term ending April 30, 1991, with
options for three (3) five (5) year extensions. The second option for a
five (5) year extension was exercised. The current monthly lease payment is
$1,694 with annual increases of 2 1/2%.
The Bank leases a banking facility in Harrisonburg, Virginia. The lease
provides for an original ten (10) year term ending July 31, 2008, with
options for one additional ten (10) year term or one five (5) year term
with one additional five (5) year term. The current monthly lease payment
is $1,500, with a 5% increase every two years.
Rent expense was $50,536, $31,894 and $30,466 for the years ended December
31, 1998, 1997, and 1996, respectively.
The future minimum annual lease payments are as follows:
1999 $ 38,665
2000 39,557
2001 26,019
2002 19,294
2003 19,845
2004 and thereafter 97,008
----------
$ 240,388
==========
Note 15. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
For securities held for investment purposes, fair values are based on
quoted market prices or dealer quotes.
Loan Receivables
For certain homogeneous categories of loans, such as some residential
mortgages, and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans
is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
34
<PAGE>
Notes to Consolidated Financial Statements
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under
repurchase agreements, and other short-term borrowings maturing within 90
days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date.
At December 31, 1998 and 1997, the carrying amounts and fair values of loan
commitments and stand-by letters of credit were immaterial.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 17,557 $ 17,557 $ 14,684 $ 14,684
Securities 130,292 130,615 113,409 113,525
Loans 275,357 285,587 265,829 273,205
-------- -------- -------- --------
Total financial assets $423,206 $433,759 $393,922 $401,414
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits $370,432 $372,240 $352,167 $352,481
Securities sold under agreements
to repurchase 7,695 7,695 4,960 4,960
Federal funds purchased 9,475 9,475 4,550 4,550
-------- -------- -------- --------
Total financial liabilities $387,602 $389,410 $361,677 $361,991
======== ======== ======== ========
</TABLE>
Note 16. Short-Term Borrowings
The Corporation had unused lines of credit totaling $4,525,000 with
nonaffiliated banks at December 31, 1998.
35
<PAGE>
Notes to Consolidated Financial Statements
Note 17. Condensed Financial Information - Parent Company Only
VIRGINIA FINANCIAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash on deposit with subsidiary bank $ 25,750 $ 106,268
Investments 10,015,312 7,999,104
Loans 1,756,753 --
Accrued interest 61,342 112,139
Organizational expenses, net 20,845 27,793
Investment in subsidiaries, at cost, plus equity
in undistributed net income 33,646,341 33,193,067
----------- -----------
$45,526,343 $41,438,371
=========== ===========
Liabilities
Due to subsidiary $ 20,917 $ 102,911
Dividends payable 22,475 --
Deferred income taxes 18,867 --
----------- -----------
Total liabilities $ 62,259 $ 102,911
----------- -----------
Stockholders' Equity
Common stock $20,000,000 $20,000,000
Surplus 13,554,034 13,554,034
Retained earnings 11,434,230 7,626,000
Accumulated other comprehensive income 475,820 155,426
----------- -----------
Total stockholders' equity $45,464,084 $41,335,460
----------- -----------
Total liabilities and stockholders' equity $45,526,343 $41,438,371
=========== ===========
</TABLE>
36
<PAGE>
Notes to Consolidated Financial Statements
VIRGINIA FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Income
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Income
Dividends from subsidiaries $ 5,840,000 $ 10,330,000
Interest on investments 404,194 34,150
Interest on loans 39,775 --
------------ ------------
Total income $ 6,283,969 $ 10,364,150
------------ ------------
Expenses
Amortization $ 6,948 $ 6,948
Directors' fees 9,600 6,160
Legal fees 9,458 12,126
Stockholder accounting 13,270 12,000
Other 24,350 6,214
------------ ------------
Total expenses $ 63,626 $ 43,448
------------ ------------
Income before income tax and distributions in excess of
earnings of subsidiaries $ 6,220,343 $ 10,320,702
Income tax expense (benefit) 141,617 (1,578)
------------ ------------
Income before equity distributions in excess of earnings
of subsidiaries $ 6,078,726 $ 10,322,280
Equity in undistributed net income of subsidiaries 169,504 --
Distributions in excess of earnings of subsidiaries -- (4,587,168)
------------ ------------
Net income $ 6,248,230 $ 5,735,112
============ ============
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements
VIRGINIA FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 6,248,230 $ 5,735,112
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization (accretion), net (118,102) 6,948
Undistributed earnings of subsidiaries (169,504) (3,371,823)
(Increase) decrease in accrued interest 50,797 (7,650)
Increase in organization costs -- (34,741)
(Decrease) in due to subsidiary (81,994) (1,578)
------------ ------------
Net cash provided by operating activities $ 5,929,427 $ 2,326,268
------------ ------------
Cash Flows from Investing Activities
Proceeds from maturities and calls of
investment securities $ 8,000,000 $ --
Proceeds from maturities and calls of securities
available for sale 5,475,374 --
Purchases of securities available for sale (15,311,041) --
Net (increase) in loans receivable (1,756,753) --
------------ ------------
Net cash (used in) investing activities $ (3,592,420) $ --
------------ ------------
Cash Flows from Financing Activities,
cash dividends paid $ (2,417,525) $ (2,220,000)
------------ ------------
Increase (decrease) in cash and cash
equivalents $ (80,518) $ 106,268
Cash and Cash Equivalents
Beginning 106,268 --
------------ ------------
Ending $ 25,750 $ 106,268
============ ============
Supplemental Schedule of Noncash
Investing Activities, dividend of securities
from the subsidiary $ -- $ 7,999,104
============ ============
</TABLE>
38
<PAGE>
Virginia Financial
Corporation
Board of Directors
Lee S. Baker Owner/Manager
Staunton Tractor, Inc.
Benham M. Black Attorney at Law
Black, Noland, & Read, P.L.C.
Harry V. Boney, Jr. Vice-Chairman of the Board
Planters Bank & Trust Company of Virginia
William P. Heath, Jr. President & Chief Executive Officer
Planters Bank & Trust Company of Virginia
Jan S. Hoover Vice President and Treasurer
Arehart Associates, Ltd.
Martin F. Lightsey President and Chief Executive Officer
Specialty Blades, Inc.
James S. Quarforth President, Chief Executive Officer, and Director
CFW Communications Company
Officers
Benham M. Black Chairman of the Board
William P. Heath, Jr. President and Chief Executive Officer
Fred D. Bowers Secretary / Treasurer
40
<PAGE>
PLANTERS BANK & TRUST COMPANY OF VIRGINIA
Board of Directors
Lee S. Baker
Benham M. Black
Harry V. Boney, Jr.
H.C. Stuart Cochran
Steven C. Corell
G. Raymond Ergenbright
William P. Heath, Jr.
Jan S. Hoover
Martin F. Lightsey
James S. Quarforth
Elizabeth M. Schreiber
Executive Officers
Benham M. Black Chairman of the Board
William P. Heath, Jr. President and Chief Executive Officer
Fred D. Bowers Senior Vice President and Cashier/
Chief Financial Officer
Thomas A. Davis Senior Trust Officer
Joseph Shomo Senior Vice President/Lending
<TABLE>
<CAPTION>
Commercial Officers
<S> <C>
Taylor M. Cole Senior Vice President/Lending
Robert E. Harris Senior Vice President/ Branch Administration
Donna H. Snyder Senior Vice President/Senior Accounting Officer
Larry F. Staples Senior Vice President/Operations
George Ballew Vice President/Planters Mortgage Services
David W. Balser Vice President/Branch Manager
Boyd M. Beasley Vice President/City Executive
John P. Bowers Vice President/Commercial Loan Officer
M. Paul Coleman Vice President/Portfolio Support Manager
Carl H. Craig, Jr. Vice President/Senior Commercial Real Estate Officer
Kelly S. Davis Vice President/Marketing and Training
Mark R. Dunsmore Vice President/Branch Manager
Francis W. Irvine Vice President/City Executive
Paul K. Martin Vice President/Commercial Loan Officer
Bobbie E. Meyerhoeffer Vice President/Consumer Loan Officer
Brenda F. Moore Vice President/Branch Manager
Jeffery R. Smith Vice President/Area Manager
Donald F. Luttrell Auditor
Davis A. Miers Retail Investment Officer
Charlie W. Barnes Assistant Vice President/Consumer Loan Officer
Jo Ann W. Bartley Assistant Vice President/Branch Manager
Susan S. Brown Assistant Vice President/Loan Operations
Elizabeth I. Early Assistant Vice President/Retail Branch Manager
John M. Holmes Assistant Vice President/Branch Manager
Edward L. Pursley Assistant Vice President/Branch Manager
Alan J. Sweet Assistant Vice President/Commercial Loan Officer
Robert D. Thompson Assistant Vice President/Branch Manager
Eric K. Moore Consumer Loan Officer
Diana K. Bowers Branch Officer
S. D'Ann Burford Training Officer
Carolyn S. Curry Senior Mortgage Loan Originator
Kathy C. Floyd Senior Systems Officer
Janice T. Johnson Human Resources Administrative Officer
Daniel J. Morgan Systems Officer
Cathy C. Myers Customer Support Officer
Sheila M. Price Mortgage Loan Operations Officer
Linda L. Thompson Senior Underwriting Officer
</TABLE>
Trust Department Officers
Mollie K. Butler Trust Officer
Glendon K. Gill Trust New Business Development Officer
Jeffrey C. Jones Assistant Trust Officer
Safiya Mahmoodian Trust New Business Development Officer
Gregory L. Owen Pension Trust Officer
Mark J. Setaro Trust Investment Officer
Priscilla R. Stanley Senior Pension Trust Officer
Dorothea S. Stewart Trust Operations Officer
Ruth C. Talmage Trust Officer
41
<PAGE>
Locations
Virginia Financial Corporation
Corporate Headquarters
24 South Augusta Street
Staunton, Virginia 24401
(540) 885-1232 fax 885-8530
Planters Bank & Trust Company of Virginia
Main Office*
24 South Augusta Street
Staunton, Virginia 24401
(540) 885-1232 fax 885-8530
Richmond Road Office*
1135 Richmond Road
Staunton, Virginia 24401
(540) 885-6501 fax 885-1834
West Beverley Office*
2307 West Beverley Street
Staunton, Virginia 24401
(540) 885-6469 fax 885-6432
Northside Office
2201 North Augusta Street
Staunton, Virginia 24401
(540) 885-6730 fax 885-4793
Greenville Avenue Office*
1480 Greenville Avenue
Staunton, Virginia 24401
(540) 885-6888 fax 886-1694
Harrisonburg Office
375 North Mason Street
Harrisonburg, Virginia 22801
(540) 432-9709 fax 438-8420
Lexington Office*
1197 Lee Highway
Lexington, Virginia 22450
(540) 464-6319
(opening in 1999)
Fishersville Office
VA Route 640 & US Route 250
Fishersville, Virginia 22939
(540) 943-1161 fax 943-7024
Waynesboro Office*
251 North Poplar Street
Waynesboro, Virginia 22980
(540) 949-7145 fax 943-1336
Stuarts Draft Office*
132 Greenville Road
Stuarts Draft, Virginia 24477
(540) 337-1563 fax 337-5436
Verona Office*
5018 Lee Highway
Verona, Virginia 24482
(540) 248-7243 fax 248-7246
Grottoes Office
106 Sixth Street
Grottoes, Virginia 24441
(540) 249-3691 fax 249-5521
Rosser Avenue Office*
100 Lucy Lane
Waynesboro, Virginia 22980
(540) 932-2600
(opening 2nd quarter 1999)
Cash Machines
Food Lion
600 North Coalter Street
Staunton, Virginia
7-11 Convenience Store
305 Augusta Street
Grottoes, Virginia
Planters Mortgage Services
24 South Augusta Street
Staunton, Virginia 24401
(540)885-1232 fax 885-2471
113 Tinkling Springs Road
Fishersville, Virginia 22939
(540) 941-8400 fax 941-8060
10 East Washington Street, Number 2
Lexington, Virginia 22450
(540) 464-1538 fax 464-1638
Planters Investment Services
24 South Augusta Street
Staunton, Virginia 24401
(540) 885-1232 fax 885-2471
Website
plantersofva.com
e-mail
[email protected]
Trust Department e-mail
[email protected]
Investment Services e-mail
[email protected]
24-Hour Banking By Phone
1-888-286-1045
(540) 885-9882
(540) 942-1491
*ATM location
42
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,557
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,304
<INVESTMENTS-CARRYING> 51,988
<INVESTMENTS-MARKET> 52,311
<LOANS> 278,569
<ALLOWANCE> 3,212
<TOTAL-ASSETS> 434,140
<DEPOSITS> 370,432
<SHORT-TERM> 17,170
<LIABILITIES-OTHER> 1,074
<LONG-TERM> 0
0
0
<COMMON> 20,000
<OTHER-SE> 25,464
<TOTAL-LIABILITIES-AND-EQUITY> 434,140
<INTEREST-LOAN> 24,024
<INTEREST-INVEST> 6,722
<INTEREST-OTHER> 314
<INTEREST-TOTAL> 31,060
<INTEREST-DEPOSIT> 13,769
<INTEREST-EXPENSE> 14,188
<INTEREST-INCOME-NET> 16,872
<LOAN-LOSSES> 1,327
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,430
<INCOME-PRETAX> 9,070
<INCOME-PRE-EXTRAORDINARY> 9,070
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,248
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 8.05
<LOANS-NON> 1,973
<LOANS-PAST> 897
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,752
<CHARGE-OFFS> 1,944
<RECOVERIES> 75
<ALLOWANCE-CLOSE> 3,212
<ALLOWANCE-DOMESTIC> 2,816
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 396
</TABLE>
