<PAGE>
As filed with the Securities and Exchange Commission on October __, 1998
Registration No. 333-63309
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
VIRGINIA CAPITAL BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
VIRGINIA 6035 BEING APPLIED FOR
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
400 GEORGE STREET
FREDERICKSBURG, VIRGINIA 22404
(540) 899-5500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SAMUEL C. HARDING, JR.
PRESIDENT
FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
400 GEORGE STREET
FREDERICKSBURG, VIRGINIA 22404
(540) 899-5500
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
JOSEPH A. MULDOON, JR., ESQUIRE
LORI M. BERESFORD, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
----
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
----
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----
<TABLE>
<CAPTION>
==================================================================================================
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Offering Registration
Per Unit Price (2) Fee
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Common Stock
$.01 par value(1) 15,082,848 $10.00 $150,828,480 $44,495
==================================================================================================
</TABLE>
(1) Includes shares of Common Stock to be issued to the Fredericksburg Savings
Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The registration fee of $44,495 was previously paid upon the initial filing
of the Form S-1.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
SYNDICATED PROSPECTUS SUPPLEMENT
VIRGINIA CAPITAL BANCSHARES, INC.
(PROPOSED HOLDING COMPANY FOR FREDERICKSBURG
SAVINGS BANK)
__________ SHARES OF COMMON STOCK
Virginia Capital Bancshares, Inc. (the "Company"), a Virginia corporation,
is offering for sale in a syndicated community offering (the "Syndicated
Community Offering") __________ shares, at a per share price of $10.00, of its
common stock, par value $.01 per share (the "Common Stock"), to be sold upon the
conversion (the "Conversion") of Fredericksburg Savings and Loan Association,
F.A., Fredericksburg, Virginia from a federally chartered mutual savings bank to
a federally chartered stock savings bank ( Fredericksburg Savings and Loan
Association, F.A. and Fredericksburg Savings Bank are hereafter referred
to as the "Bank") and the issuance of the Bank's outstanding capital stock to
the Company pursuant to a plan of conversion, (the "Plan of Conversion"). The
remaining __________ shares of the Common Stock to be sold in the Conversion
have been subscribed for in subscription and community offerings (the
"Subscription and Community Offerings") by holders of deposit accounts with the
Bank with a balance of $50 or more as of June 30, 1997, by the Fredericksburg
Savings Bank Employee Stock Ownership Plan, a tax-qualified employee
benefit plan, and related trust (the "ESOP"), by holders of deposit accounts
with the Bank with a balance of $50 or more as of ______________, 199__, by
certain other account holders and borrowers of the Bank and, then, by certain
members of the general public. See "The Conversion - General." Contained
herein is the Prospectus in the form used in the Subscription and Community
Offerings. The purchase price for all shares sold in the Syndicated Community
Offering will be the same as the price paid by subscribers in the Subscription
and Community Offerings (the "Purchase Price"). The Purchase Price of $10.00
per share is the amount to be paid for each share at the time a purchase order
is submitted. See the cover page of the Prospectus and the table below for
information as to the method by which the range within which the number of
shares offered may vary and the method of subscribing for shares of the Common
Stock.
Funds submitted to the Bank with purchase orders will earn interest at the
Bank's passbook rate of interest from the date of receipt until completion or
termination of the Conversion. The Syndicated Community Offering will expire no
later than _______________, 199__, unless extended by the Bank and the Company
with the approval of the Office of Thrift Supervision (the "OTS"). Such
extensions may not go beyond _______________, 199__. If an extension of time has
been granted, all subscribers will be notified of such extension, and of their
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription. If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds will be returned promptly with
interest. The minimum number of shares which may be purchased
<PAGE>
is 25 shares. Except for the ESOP, which may purchase up to 10% of the total
number of shares of Common Stock issued in the Conversion, no person, together
with associates of and persons acting in concert with such person, may purchase
more than the total number of shares offered in the Community Offering and the
Syndicated Community Offering that could be purchased for $300,000 at the
Purchase Price and no person, together with associates of and persons acting in
concert with such person, may purchase more than 1.0% of the shares offered in
the Conversion. See "Plan of Conversion - Subscription Rights and Limitations on
Common Stock Purchases." The Company reserves the right, in its absolute
discretion, to accept or reject, in whole or in part, any or all subscriptions
in the Syndicated Community Offering.
The Company and the Bank have engaged Trident Securities, Inc. ("Trident")
as financial advisors to assist them in the sale of the Common Stock in the
Syndicated Community Offering. It is anticipated that Trident will use the
services of other registered broker-dealers ("Selected Dealers") and that fees
to Trident and such Selected Dealers will not exceed ____% of the aggregate
Purchase Price of the shares sold in the Syndicated Community Offering. Neither
Trident nor any Selected Dealer shall have any obligation to take or purchase
any shares of Common Stock in the Syndicated Community Offering.
The Company has applied to have its Common Stock listed on the Nasdaq
National Market ("NASDAQ") under the symbol "VCAP." Prior to this offering,
there has not been a public market for the Common Stock, and there can be no
assurance that an active and liquid trading market for the Common Stock will
develop. The absence or discontinuance of a market may have an adverse impact on
both the price and liquidity of the stock.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES ____ TO ____ OF THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
2
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Estimated Estimated Net Pro-
Underwriting Estimated Net ceeds of Subscrip-
Commissions Proceeds of tion, Community
Syndicated and Other Syndicated and Syndicated
Community Fees and Community Community
Offering Price Expenses(1) Offering Offerings(2)(3)
=====================================================================================================
<S> <C> <C> <C> <C>
Minimum Per Share $10.00 $ $ $
- -----------------------------------------------------------------------------------------------------
Midpoint Per Share $10.00 $ $ $
- -----------------------------------------------------------------------------------------------------
Maximum Per Share $10.00 $ $ $
- -----------------------------------------------------------------------------------------------------
Total Minimum(4) $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total Midpoint $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total Maximum(4) $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total Maximum, As Adjusted(5) $ $ $ $
=====================================================================================================
</TABLE>
______________________________
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
Company in connection with the Conversion (other than estimated fees to be
paid to Trident for services in connection with the Subscription and
Community Offerings) and estimated compensation of Trident and Selected
Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering which fees are estimated to be $__________ and
$__________ at the minimum and the maximum of the estimated price range and
may be deemed to be underwriting fees. The information under "Pro Forma
Data" in the Prospectus was based on the assumptions stated therein, which
may differ from the estimates used for this table. See "The Conversion -
Marketing and Underwriting Arrangements" for a more detailed discussion of
fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance of
the net proceeds will be transferred to the Bank in exchange for all of the
capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon the
sale of the __________ shares subscribed for at a price of $_____ per share
and after allocation of a pro rata portion of the estimated expenses
relating to the Conversion) are estimated to be $__________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
per share (the "Estimated Price Range"). The Total Minimum reflects the
sale of __________ shares at a per share price of $_____, leaving a total of
__________ shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due to
an increase in the Estimated Price Range of up to 15% to reflect changes in
market and financial conditions following commencement of the offerings.
See "The Conversion - Stock Pricing." For a discussion of the distribution
and allocation of the additional shares, see "The Conversion - Subscription
Rights and Limitations on Common Stock Purchases."
TRIDENT SECURITIES, INC.
_________________________________
The date of this Prospectus Supplement is _______________, 1997.
3
<PAGE>
PROSPECTUS
VIRGINIA CAPITAL BANCSHARES, INC.
(Proposed Holding Company for
Fredericksburg Savings Bank)
UP TO 13,965,600 SHARES OF COMMON STOCK
This offering is made as part of the plan of conversion of Fredericksburg
Savings and Loan Association, F.A., Fredericksburg, Virginia from a federally
chartered mutual savings and loan association to a federally chartered stock
savings bank to be known as Fredericksburg Savings Bank (Fredericksburg Savings
and Loan Association, F.A. and Fredericksburg Savings Bank are both referred to
herein as either the "Bank" or "Fredericksburg Savings"). In this conversion,
the Bank will become a wholly-owned subsidiary of Virginia Capital Bancshares,
Inc. (the "Company"). No shares will be sold if the minimum number of shares
are not subscribed for or if the necessary approvals from the banking regulatory
authorities and the members of the Bank are not received.
There is currently no public market for the common stock. The Company has
applied to have its common stock listed on the Nasdaq National Market ("Nasdaq")
under the symbol "VCAP" upon completion of the Conversion.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY, NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR
ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY. THE COMMON STOCK IS
SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM AS ADJUSTED,
MINIMUM MAXIMUM 8,976,000 13,965,600
PER SHARE PER SHARE SHARES SHARES
------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Offering price...................... $10.00 $10.00 $89,760,000 $139,656,000
Estimated underwriting commissions
and other expenses............... .23 .14 2,000,000 2,000,000
Estimated proceeds to Company....... 9.77 9.86 87,760,000 137,656,000
</TABLE>
The shares are offered first in a Subscription Offering to persons who have
specified priorities of subscription rights based on their relationship with the
Bank. IN ORDER TO PURCHASE SHARES PURSUANT TO A SUBSCRIPTION RIGHT, YOU MUST
SUBMIT A PROPERLY COMPLETED SUBSCRIPTION ORDER FORM AND CERTIFICATION, TOGETHER
WITH FULL PAYMENT FOR THE SHARES, TO THE BANK PRIOR TO THE EXPIRATION DATE,
____________, EASTERN TIME, ON _______________, 1998, UNLESS EXTENDED. All funds
received from subscribers will be held in an interest-bearing savings account at
the Bank until the completion or termination of the Conversion. Funds will be
returned promptly if the Conversion is terminated. If the Conversion is not
completed by __________, 1998 and the Office of Thrift Supervision consents to
an extension of time to complete the Conversion, subscribers will be given the
right to increase, decrease or rescind their orders. No single extension may
exceed 90 days and such extensions may not go beyond ____________, 2000.
To the extent sufficient shares to complete the conversion are not sold in
the Subscription Offering, the remaining shares will be offered for sale in a
Community Offering and, if necessary, other public offering.
Trident Securities, Inc. has agreed to assist the Company in selling the
shares, but does not guarantee that at least the minimum number of shares will
be sold.
--------------------------
TRIDENT SECURITIES, INC.
--------------------------
The date of this Prospectus is _____________, 1998.
<PAGE>
- --------------------------------------------------------------------------------
Map of the Commonwealth of Virginia with insert of the City of Fredericksburg
and Stafford and Spotsylvania Counties.
Listing of Branch Offices:
Main Office
-----------
400 George Street
Fredericksburg, VA
4535 Lafayette Blvd.
Fredericksburg, VA
3600 Plank Rd.
Fredericksburg, VA
117 Garrisonville Rd.
Stafford, VA
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
This summary highlights selected information from this document and does
not contain all the information that you need to know before making an informed
investment decision. To understand the stock offering fully, you should read
carefully this entire Prospectus, including the financial statements and the
notes to the financial statements of Fredericksburg Savings. References in this
document to the "Bank" or "Fredericksburg Savings" refer to Fredericksburg
Savings and Loan Association, F.A. when in mutual form and to Fredericksburg
Savings Bank upon conversion to stock form. References in this document to the
"Company" refer to Virginia Capital Bancshares, Inc.
VIRGINIA CAPITAL
BANCSHARES, INC. ......... The Company was recently organized as a
Virginia corporation to become a savings and
loan holding company and own all of the
capital stock of Fredericksburg Savings Bank
to be issued upon its conversion from mutual
to stock form. To date, the Company has not
engaged in any business.
The Company's office is located at 400 George
Street, Fredericksburg, Virginia and its
telephone number is (540) 899-5500. The
Bank's executive office has the same address
and phone number.
FREDERICKSBURG SAVINGS
BANK ..................... The Bank, which is currently a federally
chartered mutual savings and loan
association, will become a federally
chartered stock savings bank known as
Fredericksburg Savings Bank in connection
with its conversion from mutual to stock
form. At June 30, 1998, the Bank had total
assets of $472.3 million, total deposits of
$373.7 million and total equity capital of
$83.5 million.
The Bank operates four banking offices, one
in the City of Fredericksburg, one in
Stafford County and two in Spotsylvania
County, Virginia. The Bank historically has
operated as a community-oriented banking
institution primarily providing one- to four-
family residential mortgage loans and
consumer loans and a variety of retail
deposit products in its primary market area,
which consists of the City of Fredericksburg,
and Stafford, Spotsylvania and King George
Counties, Virginia.
THE CONVERSION ............ The Bank has adopted a Plan of Conversion
which is subject to requirements of the
Office of Thrift Supervision (the "OTS"), the
primary federal banking regulator of the
Bank. The conversion, which hereafter is
referred to as the "Conversion," is governed
by the Plan and has three major components,
as follows:
(i) The conversion of the Bank from mutual
to stock form;
(ii) The acquisition by the Company of all of
the outstanding capital
stock of the Bank;
(iii) The sale by the Company of common
stock.
The Conversion is subject to the approval of
the OTS, and approval of members of the Bank
eligible to vote at a special meeting to be
held on _____________, 1998 (the "Special
Meeting").
FREDERICKSBURG SAVINGS
CHARITABLE FOUNDATION .... The Bank has established a charitable
foundation, Fredericksburg Savings Charitable
Foundation, or the "Foundation." The Company
intends to
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
contribute to the Foundation common stock up to
8% of the common stock sold in the Conversion.
The authority for the affairs of the Foundation
is vested in its Board of Directors, all of whom
are existing Directors or officers of the
Company and the Bank.
TERMS OF THE OFFERING ..... The shares of common stock are offered at a
fixed price of $10.00 per share in the
Subscription Offering pursuant to subscription
rights in the following order of priority to:
(i) Eligible Account Holders - holders of
deposit accounts, including all
withdrawable deposits in the Bank,
including non-interest bearing demand
deposits, at the Bank totalling $50
or more as of June 30, 1997;
(ii) the Employee Stock Ownership Plan of
the Company and the Bank (the "ESOP");
(iii) Supplemental Eligible Account Holders -
holders of deposit accounts at the Bank
totalling $50 or more as of ____ who are
not entitled to a first priority
subscription right; and
(iv) Other Members - holders of deposit
accounts at the Bank as of ______ and
borrowers with loans outstanding as of
September 2, 1986, which continue to be
outstanding as of ________, who are not
entitled to a higher priority subscription
right.
Shares of common stock not subscribed for by
persons having priority subscription rights will
be offered to certain members of the general
public in a Community Offering with preference
given to natural persons residing in the City of
Fredericksburg and Stafford and Spotsylvania
Counties.
EXPIRATION DATE OF
SUBSCRIPTION OFFERING .... Subscription rights will expire if not exercised
and all orders to purchase common stock in the
Subscription Offering must be received by __:__
____, Eastern time, on ________, 1998, unless
extended, which is the "Expiration Date."
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS ...... The subscription rights are not transferable.
Persons found to be transferring such rights
will be subject to the forfeiture of such rights
and possible further sanctions and penalties
imposed by the OTS.
NUMBER OF SHARES OFFERED.. The Company is offering between a minimum of
8,976,000 shares and a maximum of 12,144,000
shares of common stock, or up to an adjusted
maximum of 13,965,600 shares if the maximum
number of shares is increased.
The number of shares offered is based upon an
independent appraisal prepared by FinPro, Inc.
("FinPro") dated as of ____________, 1998, which
estimates that the aggregate pro forma market
value of the Company ranged from $89.8 million
to $121.4 million. (This range is referred to as
the "Estimated Price Range"). FinPro is an
independent appraisal firm experienced in
appraisals of savings institutions. Establishing
the Foundation in connection with the Conversion
will result in a lower aggregate market
valuation than if the Conversion was completed
without the Foundation.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
The final aggregate estimated pro forma market
value of the Company will be determined at the
time of closing of the Subscription Offering, or
if all shares are not sold in the Subscription
Offering, the closing of the Community Offering
or other subsequent offering. Such estimated
aggregate pro forma market value is subject to
change due to changes in market and general
financial and economic conditions.
The maximum number of shares to be sold may be
increased up to the adjusted maximum, a 15%
increase over the maximum, if the aggregate
estimated pro forma market value of the common
stock to be sold is increased.
HOW TO ORDER STOCK ........ If you have a subscription right, you may order
shares in the Subscription Offering by
delivering to the Bank a properly executed stock
order and certification form together with full
payment for the shares ordered on or prior to
the Expiration Date. ONCE TENDERED, SUBSCRIPTION
ORDERS CANNOT BE REVOKED OR MODIFIED WITHOUT THE
CONSENT OF THE BANK. Please make sure you review
the Prospectus carefully. To ensure that each
purchaser receives a prospectus at least 48
hours prior to the Expiration Date in accordance
with Rule 15c2-8 of the Securities Exchange Act
of 1934, no prospectus will be mailed any later
than five days prior to the Expiration Date or
hand delivered any later than two days prior to
such date. The Bank is not obligated to accept
subscriptions not submitted on an original stock
order form. To ensure that subscription rights
are properly identified, persons must list all
qualifying savings accounts, as of the
respective qualifying dates, on the stock order
form. Persons who do not list all qualifying
savings accounts may be subject to reduction or
rejection of their subscription.
Persons wishing to order shares offered in the
Community Offering also must submit a properly
executed stock order and certification form
prior to the expiration date to be set for the
Community Offering.
FORM OF PAYMENT FOR
SHARES .................. Payment for subscriptions may be made:
(i) in cash (if delivered in person);
(ii) by check, bank draft or money order; or
(iii) by authorization of withdrawal from
deposit accounts maintained at the Bank.
Orders for common stock in the Subscription
Offering which aggregate $50,000 or more must be
paid by official bank or certified check or by
withdrawal authorization from a deposit account
at the Bank. No wire transfers will be accepted.
NUMBER OF SHARES THAT MAY
BE ORDERED .............. Minimum: 25 shares ($250).
Maximum:
. No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member
may purchase in the Subscription
Offering more than $300,000 of common
stock.
. No person, together with associates or
persons acting in concert with such
person, may purchase in the Community
Offering more than $300,000 of common
stock.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
. No person, together with associates or
persons acting in concert with such person,
may purchase in the aggregate more than the
overall maximum purchase limitation of 1% of
the total number of shares of Common Stock
sold. However, the ESOP may purchase up to
10% of the Common Stock to be issued in
connection with the Conversion, including
shares issued to the Foundation. It is
intended that the ESOP will purchase 8% of
the Common Stock issued, including shares
issued to the Foundation.
USE OF PROCEEDS ........... The Company will use 50% of the net proceeds
from the sale of common stock to purchase all of
the common stock of the Bank to be issued in the
Conversion. The portion of net proceeds retained
by the Company will be used for general business
activities, including the loan of funds to the
ESOP (to the extent such loan is not funded by a
third party) to enable the ESOP to purchase up
to 8% of the stock issued in connection with the
Conversion, including shares issued to the
Foundation. The Company intends initially to
invest the remaining net proceeds primarily in
short-term U.S. Government and Agency
obligations, including adjustable-rate mortgage-
backed securities. The Bank intends to utilize
the net proceeds from the sale of its stock to
the Company for general business purposes,
including investment in loans and to expand its
market share through offering new products and
services. A primary goal of the Bank is to
offer retail products that attract more local
business customers to the Bank. The Bank also
intends to capitalize on its growing market to
seek opportunities to expand loan growth through
the origination of one-to four-family mortgage
loans as well as other loans, including home
equity loans. The Bank also intends to seek
means to attract more local businesses to the
Bank for retail checking, deposit and loan
products. See "Business of the Bank--Market
Area and Competition" and "--Lending
Activities." The Bank also intends to pursue
means of expanding its market share through
offering new products and services and through
the acquisition of branch offices from other
financial institutions or through the
acquisition of other such companies. Although
this is a primary goal of the Bank, neither the
Company nor Bank have any specific plans with
respect to acquisitions at this time. See
"Management's Discussion and Analysis--
Management Strategy." In this regard, the Bank
intends to pursue means of expanding its market
share through offering new products and services
and through the acquisition of branch offices
from other financial institutions or through the
acquisition of other such companies. Although
this is a primary goal of the Bank, neither the
Company nor Bank have any specific plans with
respect to acquisitions at this time.
DIVIDEND POLICY ........... Upon Conversion, the Board of Directors of the
Company will have authority to declare dividends
on the Common Stock, subject to statutory and
regulatory requirements. Depending on market
conditions, the Company's Board of Directors
intends to pay cash dividends on the Common
Stock; however, no decision has been made
regarding the level of dividends or when they
will be paid, and no assurance can be given that
dividends will actually be paid. In addition,
from time to time in an effort to manage capital
to a reasonable level, the Board of Directors
may determine to pay periodic special cash
dividends in addition to, or in lieu of, regular
cash dividends. Additionally, in connection with
the Conversion, the Company and the Bank have
committed to the OTS that during the one-year
period following the Conversion, the Company
will not make any distribution to stockholders
that, for federal tax purposes, would be treated
as a return of capital without prior approval of
the OTS.
BENEFITS OF THE CONVERSION
TO MANAGEMENT ........... Among the benefits to the Bank and the Company
anticipated from the Conversion is the ability
to attract and retain personnel through the use
of stock options and other stock related benefit
programs. Subsequent to the Conversion, the
Company intends to adopt a Stock-Based Incentive
Plan for the benefit of directors, officers and
employees of the Company and Bank. If the Stock-
Based Incentive Plan is adopted within one year
after the Conversion, the plan will be subject
to stockholders' approval at a meeting of
stockholders which may not be held earlier than
six months after the Conversion. If adopted and
approved by stockholders, it is expected the
benefits set forth in the table below would be
available for distribution to employees and
directors pursuant to that plan.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Additionally, an ESOP, which is a tax qualified
plan, will be established to provide retirement
benefits to employees. Benefits under that plan
will be distributed to eligible employees over
an approximate twenty year period. See the table
below for the estimated value of such benefits.
<TABLE>
<CAPTION>
ESTIMATED PERCENTAGE OF SHARES ISSUED,
VALUE OF INCLUDING SHARES ISSUED
SHARES(1) TO THE FOUNDATION
-------------- ------------------------------
<S> <C> <C>
Employee Stock Ownership Plan............ $9,123,840 8.0%
Stock-Based Incentive Plan:
Stock Awards(2)......................... 4,561,920 4.0
Stock Options........................... --(3) 10.0
</TABLE>
_______________
(1) Assumes shares are allocated to participants at $10.00
per share and that shares are issued in the Conversion
at the midpoint of the Estimated Price Range.
(2) Any Common Stock awarded under the Stock-Based
Incentive Plan will be awarded at no cost to the
recipients.
(3) Stock options will be granted with an exercise price
equal to the fair market value of the Company's Common
Stock on the day of grant. Recipients of stock options
realize value only in the event of an increase in the
price of the Common Stock of the Company following the
date of grant of the stock options.
In addition, the Company and Bank will enter
into employment agreements with the Company's
and Bank's two executive officers. Benefits
under such agreements would only be paid if the
officer were terminated without cause or if the
officer voluntarily retired under certain
circumstances following a Change in Control. The
amounts payable under these agreements will
depend upon the compensation paid to the officer
in recent years prior to termination. See
"Management of the Bank--Executive
Compensation."
See "Management of the Bank" for more detail
regarding these and other benefits that are
currently available to employees or will be
following the Conversion.
PURCHASES BY OFFICERS
AND DIRECTORS ........... Directors and executive officers of the Bank and
the Company expect to purchase approximately
2.07% or 1.55% of shares of common stock to be
issued in the Conversion, including shares
issued to the Foundation, based on the estimated
minimum and maximum of such shares,
respectively.
MARKET FOR STOCK .......... As a mutual institution, the Bank has never
issued capital stock and, consequently, there is
no existing market for the Common Stock. The
Company has applied to have its Common Stock
listed on the Nasdaq under the symbol "VCAP"
subject to the completion of the Conversion and
compliance with certain conditions.
NO BOARD RECOMMENDATIONS .. The Bank's Board of Directors and the Company's
Board of Directors make no recommendation to
depositors or other potential investors
regarding whether such persons should purchase
the common stock. An investment in the common
stock must be made pursuant to each investor's
evaluation of his or her best interests.
STOCK INFORMATION CENTER .. If you have any questions regarding the
Conversion, please call the Stock Information
Center at (___) ___-____.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA OF THE BANK
The selected financial and other data of the Bank set forth below is
derived in part from, and should be read in conjunction with, the Financial
Statements of the Bank and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT
JUNE 30, AT DECEMBER 31,
------------ --------------------------------------------------------------
1998(1) 1997 1996(2) 1995 1994 1993
------------ -------- ----------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total Assets.................. $472,280 $471,920 $469,917 $468,759 $451,035 $447,706
Loans receivable, net(3)...... 415,986 413,032 405,145 390,541 371,269 375,229
Mortgage-backed securities.... 1,190 1,291 1,502 1,879 2,109 2,640
Investment securities(4)...... 30,928 31,151 31,979 49,257 52,361 49,629
Cash and cash equivalents..... 9,031 11,287 15,937 11,980 11,088 6,772
Deposits...................... 373,719 377,114 375,652 386,376 376,083 380,977
FHLB advances................. 8,000 8,000 15,000 8,000 8,000 8,000
Equity capital................ 83,500 80,073 73,296 68,703 62,218 54,908
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- -----------------------------------------------------
1998(1) 1997(1) 1997 1996(2) 1995 1994 1993
------------ ----------- ---------- ---------- --------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income..................... $ 18,244 $ 18,072 $ 36,504 $ 35,998 $ 36,305 $ 33,234 $35,049
Interest expense.................... 9,620 9,568 19,418 19,535 18,997 16,620 17,978
-------- -------- -------- -------- -------- -------- -------
Net interest income............... 8,624 8,504 17,086 16,463 17,308 16,614 17,071
Provision for loan losses........... 269 241 375 325 412 1,010 1,129
-------- -------- -------- -------- -------- -------- -------
Net interest income after
provision for loan losses....... 8,355 8,263 16,711 16,138 16,896 15,604 15,942
Total noninterest income............ 249 205 460 409 283 256 3
Total noninterest expense........... 3,069 3,059 6,794 9,565 6,451 6,850 7,326
-------- -------- -------- -------- -------- -------- -------
Income before income taxes and
cumulative effect of change in
accounting principle............ 5,535 5,409 10,377 6,982 10,728 9,010 8,619
Income tax expense.................. 2,215 2,150 3,952 2,401 4,070 1,687 3,935
-------- -------- -------- -------- -------- -------- -------
Net income before cumulative
effect of change in accounting
principle....................... 3,320 3,259 6,425 4,581 6,658 7,323 4,684
Cumulative effect of change in
accounting principle(5)........... -- -- -- -- -- -- 680
-------- -------- -------- -------- -------- -------- -------
Net income....................... $ 3,320 $ 3,259 $ 6,425 $ 4,581 $ 6,658 $ 7,323 $ 5,364
======== ======== ======== ======== ======== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------
1998(1) 1997(1) 1997 1996(2) 1995 1994 1993
------- ------- ----- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(6)
PERFORMANCE RATIOS:
Return on average assets............................. 1.40% 1.39% 1.36% 0.98% 1.45% 1.62% 1.19%
Return on average equity............................. 8.12 8.71 8.39 6.42 10.17 12.61 10.26
Interest rate spread(7).............................. 2.88 2.96 2.93 2.89 3.19 3.25 3.44
Net interest margin(8)............................... 3.74 3.72 3.73 3.61 3.86 3.76 3.88
Yield on average-interest earning assets............. 7.90 7.92 7.97 7.90 8.11 7.81 7.97
Net interest income after provisions for loan
losses, to total noninterest expenses............... 272.24 270.12 245.97 168.72 261.91 227.80 217.61
Total noninterest expense to average assets.......... 1.29 1.30 1.44 2.04 1.41 1.52 1.62
Efficiency ratio(9).................................. 34.58 35.12 38.72 56.69 36.67 40.60 42.91
REGULATORY CAPITAL RATIOS(10):
Tangible capital..................................... 17.05% 15.77% 16.34% 14.97% 14.53% 13.33% 12.21%
Core capital......................................... 17.05 15.77 16.34 14.97 14.53 13.33 12.21
Risk-based capital................................... 28.52 26.13 26.92 25.70 25.51 23.53 21.61
ASSET QUALITY RATIOS:
Non-performing loans to total assets(11)(12)......... 0.87% 1.48% 1.18% 1.91% 1.45% 2.34% 1.50%
Non-performing loans to total loans(11)(12).......... 0.94 1.61 1.29 2.10 1.64 2.67 1.68
Non-performing assets to total assets(12)............ 1.27 1.88 1.59 2.25 1.91 2.58 1.95
Allowance for loan losses to non-performing
loans(12)........................................... 137.81% 80.28% 98.60% 61.89% 80.60% 52.50% 79.66%
NUMBER OF FULL-SERVICE BANKING FACILITIES.............. 4 4 4 4 4 4 4
</TABLE>
____________________
(1) The data presented for the six months ended June 30, 1998 and 1997 was
derived from unaudited financial statements and reflect, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
interim periods. Interim results at and for the six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
(2) Includes effect of the one-time special assessment of $2.5 million, on a
pre-tax basis, to recapitalize the Savings Association Insurance Fund
("SAIF"), which was recorded by the Bank in 1996.
(3) Loans receivable, net, consist of loans receivable minus the allowance for
loan losses, deferred loan fees and unadvanced loan funds. The allowance
for loan losses at June 30, 1998 and December 31, 1997, 1996, 1995, 1994
and 1993 was $5.6 million, $5.5 million, $5.5 million, $5.5 million, $5.5
million and $5.4 million, respectively.
(4) The Bank adopted Statement of Financial Accounting Standards ("AFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities" as
of January 1, 1995. On December 31, 1995, a majority of the Bank's
portfolio was classified as "available-for-sale." Securities do not include
Federal Home Loan Bank of Atlanta ("FHLB-Atlanta" or "FHLB") stock of $3.5
million, $3.4 million, $3.2 million, $3.1 million, $4.1 million and $4.1
million at June 30, 1998 and December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(5) Represents the cumulative effect, as of January 1, 1993, of the initial
application of Financial Accounting Standards Board Statement 109,
"Accounting for Income Taxes."
(6) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(7) The interest rate spread represents the difference between the weighted
average yield on average interest-earning assets (which includes FHLB-
Atlanta stock and other equity securities) and the weighted average cost of
average interest-bearing liabilities.
(8) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(10) For definitions and further information relating to the Bank's regulatory
capital compliance requirements, see "Regulation--Federal Savings
Institution Regulation--Capital Requirements." See "Regulatory Capital
Compliance" for the Bank's pro forma capital levels as a result of the
Offerings.
(11) Loans include total loans before the allowance for loan losses.
(12) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of all loans 90 days or more past due
and other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or principal. It
is the Bank's policy to cease accruing interest on loans with interest 90
days or more past due. See "Business of the Bank."
- --------------------------------------------------------------------------------
9
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain financial and other information of
the Bank for the periods and at the dates indicated. The selected financial
data, operating data and ratios and other data as of September 30, 1998 and for
the three and nine months ended September 30, 1998 and 1997 are derived from
unaudited financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for the fair
presentation of financial data and operating data for the three and nine months
ended September 30, 1998 and 1997 are included. The results of operations and
ratios and other data presented for the three and nine months ended September
30, 1998 are not necessarily indicative of the results of operations for the
year ending December 31, 1998.
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Total Assets ..................... $478,626 $471,920
Loans receivable, net(1).......... 416,711 413,032
Mortgage-backed securities........ 1,091 1,291
Investment securities(2).......... 27,438 31,151
Cash and cash equivalents......... 18,441 11,287
Deposits.......................... 376,695 377,114
Other borrowings.................. 8,000 8,000
Equity capital.................... 85,134 80,073
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
----------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................ $9,011 $9,237 $ 27,255 $27,309
Interest expense............... 4,828 4,907 14,448 14,475
------ ------ -------- -------
Net interest income.......... 4,183 4,330 12,807 12,834
Provision for loan losses...... 146 128 415 369
------ ------ -------- -------
Net interest income after.... 4,037 4,202 12,392 12,465
provision for loan losses
Total noninterest income....... 85 111 334 316
Total noninterest expense...... 1,340 1,542 4,409 4,601
------ ------ -------- -------
Income before income taxes..... 2,782 2,771 8,317 8,180
Income tax expense............. 1,085 1,105 3,300 3,255
------ ------ -------- -------
Net income.................. $1,697 $1,666 $ 5,017 $ 4,925
====== ====== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------- ---------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(3)
PERFORMANCE RATIOS:
Return on average assets......................... 1.42% 1.41% 1.41% 1.40%
Return on average equity......................... 8.05 8.62 8.10 8.67
Interest rate spread(4).......................... 2.73 2.97 2.85 2.96
Net interest margin(5)........................... 3.61 3.78 3.70 3.75
Yield on average-interest earning assets......... 7.77 8.06 7.87 7.97
Net interest income after provisions for loan
losses, to total noninterest expenses.......... 301.27 272.50 281.06 270.92
Total noninterest expense to average assets...... 1.13 1.31 1.24 1.31
Efficiency ratio(6).............................. 31.40 34.72 33.55 34.99
REGULATORY CAPITAL RATIOS(7):
Tangible capital................................. 17.17 16.03 17.17 16.03
Core capital..................................... 17.17 16.03 17.17 16.03
Risk-based capital............................... 28.68 26.97 28.68 26.97
ASSET QUALITY RATIOS:
Non-performing loans to total assets(8)(9)....... 1.07 1.30 1.07 1.30
Non-performing loans to total loans(8)(9)........ 1.18 1.42 1.18 1.42
Non-performing assets to total assets(9)......... 1.40 1.66 1.40 1.66
Allowance for loan losses to non-performing
loans(9)....................................... 110.68 92.64 110.68 92.64
NUMBER OF FULL-SERVICE BANKING FACILITIES......... 4 4 4 4
</TABLE>
- -----------
(1) Loans receivable, net, consist of loans receivable minus the allowance for
loan losses, deferred loan fees and unadvanced loan funds. The allowance
for loan losses at September 30, 1998 and December 31, 1997 was $5.7
million and $5.5 million, respectively.
(2) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities" as
of January 1, 1995. On December 31, 1995, a majority of the Bank's
portfolio was classified as "available-for-sale." Securities do not include
Federal Home Loan Bank of Atlanta ("FHLB-Atlanta" or "FHLB") stock of $3.5
million, and $3.4 million, at September 30, 1998 and December 31, 1997,
respectively.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods and are annualized where
appropriate.
(4) The interest rate spread represents the difference between the weighted
average yield on average interest-earning assets (which includes FHLB-
Atlanta stock and other equity securities) and the weighted average cost of
average interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents the ratio of noninterest expenses divided by
the sum of net interest income and noninterest income.
(7) For definitions and further information relating to the Bank's regulatory
capital compliance requirements, see "Regulation--Federal Savings
Institution Regulation--Capital Requirements." See "Regulatory Capital
Compliance" for the Bank's pro forma capital levels as a result of the
Offerings.
(8) Loans include total loans before the allowance for loan losses.
(9) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of all loans 90 days or more past due
and other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or principal. It
is the Bank's policy to cease accruing interest on loans with interest 90
days or more past due. See "Business of the Bank."
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
Assets totalled $478.6 million at September 30, 1998, an increase of $6.7
million, or 1.42 % from total assets of $471.9 million at December 31, 1997.
The increase in assets during the nine month period was due primarily to a $3.7
million increase in the Bank's loan portfolio. Cash and cash equivalents
increased $7.2 million, offset by reductions in investment securities of $3.7
million and $200,000 in mortgage backed securities.
LOANS. The increase in total loans was primarily due to increases in
residential real estate mortgage loans and construction and development loans,
partially offset by a decrease in non-residential real estate loans. Although
total residential real estate mortgage loans increased $9.9 million, or 2.76%,
total mortgage loans, as a percentage of total loans, remained relatively stable
from December 31, 1997, at 97.98% at September 30, 1998. Construction and
development loans increased from $16.0 million (3.72% of the portfolio) at
December 31, 1997 to $21.0 million (4.81% of the portfolio) at September 30,
1998. Non-residential real estate loans decreased by $7.1 million from $41.0
million at December 31, 1997 to $33.9 million at September 30, 1998. This was
the result of large loan payoffs in this portfolio. Undisbursed loan funds
increased from $5.0 million at December 31, 1997 to $8.1 million at September
30, 1998.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from
$5.5 million at December 31, 1997 to $5.7 million at September 30, 1998, an
increase of $217,000. The relatively stable allowance during this period
reflects the economic stability in the market area as well as improvement in net
charged off loans. The adequacy of the allowance for loan losses is evaluated
monthly by management based upon a review of significant loans, with particular
emphasis on nonperforming and delinquent loans that management believes warrant
special attention. At September 30, 1998, the allowance for loan losses
provided coverage of 110.68% of total nonperforming loans, an increase from
98.60% at December 31, 1997. The balance of the allowance is maintained at a
level which is, in management's judgement, representative of the amount of risk
inherent in the loan portfolio. See "Business - Allowance for Loan Losses."
INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.3 and $31.2 million, respectively, at
December 31, 1997 to $1.1 million and $27.4 million, respectively, at September
30, 1998. These decreases were primarily due to redemptions and principal
payments of these securities totalling approximately $5.2 million during the
nine months ended September 30, 1998. These repayments were offset by purchases
of securities totalling $1.5 million. Currently, management intends to
continue allowing the Bank's investment securities to mature and paydown and to
reinvest the proceeds primarily in securities to be classified by the Bank as
available-for-sale and in new loans.
DEPOSITS. Total deposits decreased $419,000, or .11%, from 377.1 million
at December 31, 1997 to $376.7 million at September 30, 1998. While time
deposits increased $2.0 million, or .69%, during the period, savings accounts
decreased $161,000, or .42%, money market accounts decreased $2.5 million, or
5.48%, and noninterest-bearing accounts increased $251,000, or 7.69%.
COMPARISON OF OPERATING RESULTS FOR THETHREE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL. Net income was $1.7 million for both the three months ended
September 30, 1998 and 1997. Net interest income was $4.2 million for the three
months ended September 30, 1998, a decrease of $147,000 from $4.3 million for
the three months ended September 30, 1997.The Bank's return on average assets
(ROA) was 1.42% for the three months ended September 30, 1998, an increase from
1.41% for the three months ended September 30, 1997. The Bank's return on
average equity (ROE) was 8.05% for the three months ended September 30, 1998, a
decrease from 8.62% for the three months ended September 30, 1997.
<PAGE>
INTEREST INCOME. Interest income for the three months ended September 30,
1998 was $9.0 million, a decrease of $226,000, or 2.5%, from $9.2 million for
the three months ended September 30, 1997. The decrease in interest income was
primarily the result of a 29 basis point decrease in the yield on average
interest-earning assets from 8.06% for the three months ended September 30,
1997, to 7.77% for the three months ended September 30, 1998. The decline in the
yield on average interest-earning assets was partially offset by an increase in
average interest-earning assets of $5.4 million from $458.3 million for the
three months ended September 30, 1997 to $463.7 million for the three months
ended September 30, 1998.
INTEREST EXPENSE. Interest expense was $4.8 million for the three months
ended September 30, 1998, a decrease of $79,000, or 1.6%, from $4.9 million for
the three months ended September 30, 1997. The decrease in interest expense was
primarily the result of a 5 basis point decrease in the average cost of
interest-bearing liabilities from 5.09% for the three months ended September 30,
1997 to 5.04% for the three months ended September 30, 1998. In addition, the
decline in interest expense was furthered by a decrease in average interest-
bearing liabilities of $2.5 million from $385.7 million for the three months
ended September 30, 1997 to $383.2 million for the three months ended
September 30, 1998.
NET INTEREST INCOME. Net interest income for the three months ended
September 30, 1998 was $4.2 million, a decrease of $147,000, or 3.4%, from $4.3
million for the three months ended September 30, 1997. The decrease was the net
result of a $226,000 decrease in interest income and a $79,000 decrease in
interest expense. The Bank's interest rate spread was 2.73% for the three months
ended September 30, 1998, a decrease of 24 basis points from 2.97% for the three
months ended September 30, 1997. The Bank's net interest margin was 3.61% for
the three months ended September 30, 1998, a decrease of 17 basis points from
3.78% for the three months ended September 30, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $18,000
from $128,000 for the three months ended September 30, 1997 to $146,000 for the
three months ended September 30, 1998. The increase is primarily the result of
additional provisions for losses recorded on several individual lending
relationships and the result of growth in the Bank's loan portfolio from
September 30, 1997.
NONINTEREST INCOME. Total noninterest income was $85,000 for the three
months ended September 30, 1998, a decrease of $26,000 from $111,000 for the
three months ended September 30, 1997. Noninterest income is composed primarily
of servicing fees and deposit account service charges.
NONINTEREST EXPENSE. Total noninterest expense was $1.3 million for the
three months ended September 30, 1998, a decrease of $202,000 from $1.5 million
for the three months ended September 30, 1997. This decrease consists of
reductions in compensation and benefits of $68,000, reductions in Federal
deposit insurance premiums of $48,000 and reductions in the net cost of
foreclosed real estate operations of $71,000.
INCOME TAXES. Income tax expense was $1.1 million for both the three
months ended September 30, 1998 and 1997. The consistent income tax expense from
1997 to 1998 was the result of consistent income before income taxes of $2.8
million for both years.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL. Net income for the nine months ended September 30, 1998 increased
$92,000 to $5.0 million compared to the nine months ended September 30, 1997.
This increase was primarily a result of a decrease in noninterest expense of
$192,000, which was partially offset by an increase in the provision for loan
losses of $46,000, a decrease in net interest income of $27,000 and an increase
in income tax expense of $45,000. The Bank's return on average assets (ROA) was
1.41% for the nine months ended September 30, 1998, up from 1.40% for the same
period in 1997. The Bank's return on average equity (ROE) was 8.10% for the
nine months ended September 30, 1998, down from 8.67% for the nine months ended
September 30, 1997.
<PAGE>
INTEREST INCOME. Interest income for the nine months ended September 30,
1998 decreased $54,000 to $27.2 million, from $27.3 million for the comparable
period in 1997 primarily the result of a 10 basis point decrease in the yield on
average interest-earning assets from 7.97% for the nine months ended September
30, 1998, to 7.87% for the nine months ended September 30, 1997. The decline in
the yield on average interest-earning assets was partially offset by an increase
in average interest-earning assets of $5.4 million from $456.6 million for the
nine months ended September 30, 1997 to $462.0 million for the nine months ended
September 30, 1998.
INTEREST EXPENSE. Interest expense was $14.4 million for the nine months
ended September 30, 1998, a decrease of $27,000, or .19%, from 14.5 million for
the nine months ended September 30, 1997. The decrease in interest expense was
primarily the result of a decrease in the average balance of interest-bearing
liabilities of $1.7 million from $385.1 million for the nine months ended
September 30, 1997 to $383.4 for the nine months ended September 30, 1998.
NET INTEREST INCOME. Net interest income was $12.8 million for both the
nine months ended September 30, 1998 and 1997. The Bank's interest rate spread
was 2.85% for the nine months ended September 30, 1998, a decrease of 11 basis
points from 2.96% for the nine months ended September 30, 1997. The Bank's net
interest margin was 3.70% for the nine months ended September 30, 1998, a
decrease of 5 basis points from 3.75% for the nine months ended September 30,
1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $46,000
from $369,000 for the nine months ended September 30, 1997 to $415,000 for the
nine months ended September 30, 1998. The increase is primarily the result of
additional provisions for losses recorded on several individual lending
relationships and the result of growth in the Bank's loan portfolio from
September 30, 1997.
NONINTEREST INCOME. Total noninterest income was $334,000 for the nine
months ended September 30, 1998, an increase of $18,000 from $316,000 for the
same period in 1997. Noninterest income is composed primarily of servicing fees
and deposit account service charges.
NONINTEREST EXPENSE. Total noninterest expense was $4.4 million for the
nine months ended September 30, 1998, a decrease of $192,000 from $4.6 million
for the nine months ended September 30, 1997. Decreases in compensation and
benefits of $295,000 and net cost of foreclosed real estate operations of
$66,000 were offset by increases in other expenses totalling $185,000.
INCOME TAXES. Income tax expense was $3.3 million for both the nine months
ended September 30, 1998 and 1997. Income before income tax expense was $8.3
million for the year ended September 30, 1998 compared to $8.2 million for the
year ended September 30, 1997.
<PAGE>
RISK FACTORS
Investors should consider the following risk factors, in addition to those
discussed elsewhere in this Prospectus, before deciding whether to purchase the
Common Stock offered hereby.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.
The Bank attempts to manage its interest rate risk by seeking to originate
and retain adjustable-rate and shorter-term fixed-rate loans, and by originating
shorter-term, higher yielding consumer loans and investing in securities with
shorter stated or estimated maturities. However, in recent years the Bank has
originated primarily fixed-rate mortgage loans with terms of 15 to 30 years,
which the Bank retains in its portfolio. The Bank has done this in response to
very low customer demand for adjustable-rate loans and the Bank's concern that
failure to continue to originate loans in its primary market area would
adversely affect the Bank's ability to compete against other financial services
companies in its market area over the long term. Most recently, while the Bank
has continued to emphasize 15 year fixed-rate loans, the Bank has primarily
originated 30 year fixed-rate loans due to market demand. This has resulted in
the Bank becoming significantly vulnerable to changes in interest rates. At June
30, 1998, the Bank's gross total loans had an average weighted maturity of 17.4
years. At such date, $119.7 million, or 27.4% of the Bank's loans had adjustable
interest rates with a weighted average maturity of 20.0 years. At June 30, 1998,
the Bank had $196.7 million of certificates of deposit with maturities of less
than one year and $45.3 million of certificates of deposit over $100,000 ("jumbo
certificates of deposit"). Such jumbo certificates of deposit tend to be less
stable sources of funding as compared to money market, savings and retail
checking. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Management of Interest Rate Risk and Market Risk
Analysis." At June 30, 1998, the Bank's total interest-bearing liabilities
maturing or repricing within one year exceeded its total interest-earning assets
maturing or repricing in the same time period by $71.6 million, representing a
cumulative one-year interest sensitivity gap as a percentage of total assets of
negative 15.17%. To date, the Bank's policy of remaining competitive,
notwithstanding the potentially negative effects this strategy may have, has not
adversely affected the Bank. However, in a rapidly rising interest rate
environment, the cost of the Bank's interest-bearing liabilities will generally
increase at a rate faster than the yield on its interest-earning assets thereby
likely adversely affecting the Bank's net interest income. The Bank's high level
of capital and liquid assets could limit the effect of such a change in interest
rates, but the Bank would also be subject to other risks. Specifically,
increases in interest rates also could adversely affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank which, in turn,
could adversely impact the yields earned on the Bank's loan portfolios as well
as the amount of secondary market activity in which the Bank may engage.
Furthermore, increases in market interest rates would result in an increase
in the interest rates on the Bank's adjustable-rate loans, thereby causing
higher loan payment amounts by the borrowers which, in turn, may result in
elevated delinquencies on such loans. Increases in the level of interest rates
may also adversely affect the value of the Bank's investment securities and
other interest-earning assets and, in turn, its results of operations or
retained earnings. At June 30, 1998, the Bank's securities available-for-sale
had an estimated fair value of $30.9 million, which was $458,000 greater than
the amortized cost of $30.5 million. At the same date, the Bank's mortgage-
backed securities held-to-maturity had an estimated fair value of $1.2 million,
which was $36,000 greater than their amortized cost. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis," "Business of Bank--
Lending Activities--One- to Four-Family Lending" and "--Investment Activities."
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POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At June 30, 1998, the Bank's ratio of equity capital to total assets was
17.68%. The Company's equity position will be significantly increased as a
result of the Conversion. On a pro forma basis as of June 30, 1998,
assuming the sale of Common Stock at the midpoint of the Estimated Price
Range, the Company's ratio of stockholders' equity to total assets would
have been 31.4%. The Company's ability to deploy this new capital through
investments in interest-earning assets, such as loans and securities, which
bear rates of return comparable to its current investments, will be
significantly affected by industry competition for such investments. The
Company currently anticipates that it will take time to prudently deploy
such capital. In addition, although the Bank has operated extremely
efficiently in the past and management intends to continue to control
costs, the Bank will incur additional expenses operating as a public
company. Furthermore, the addition of new products and services may result
in increased expense, including the hiring of additional personnel. As a
result of these factors, the Company's return on equity initially is
expected to be below its historical return on equity and may be below peer
group institutions after the Conversion. Additionally, due to the
implementation of stock-based benefit plans such as the ESOP and the Stock-
Based Incentive Plan, the Company's future compensation expense will be
increased, thereby, adversely affecting its net income and return on
equity.
LENDING RISKS ASSOCIATED WITH NON-RESIDENTIAL REAL ESTATE, CONSTRUCTION AND
DEVELOPMENT, MULTI-FAMILY, LAND AND LAND DEVELOPMENT AND CONSUMER LOANS
At June 30, 1998, the Bank's non-residential real estate, construction
and development, land and land development, multi-family and consumer loan
portfolios totalled $70.2 million, or 16.06%, of total loans. Of this
amount, $3.4 million, or 0.78%, consisted of multi-family loans, $20.0
million, or 4.57%, consisted of construction and development loans, $35.3
million, or 8.08%, consisted of non-residential real estate loans, which
includes $12.1 million in loans to local churches, $2.3 million or 0.53%
consisted of land and land development and $9.2 million, or 2.10%,
consisted of consumer loans. These types of loans are generally viewed as
exposing the lender to greater risk of loss than one- to four-family
residential loans and, with the exception of consumer loans, frequently
have higher principal amounts. The specific risks associated with these
types of loans are discussed in "Business of the Bank -- Lending
Activities."
POTENTIAL NEGATIVE EFFECTS OF THE FOUNDATION
The Company intends to establish the Foundation and to contribute to it
shares of common stock equal to 8% of the shares to be sold in the
Conversion. Establishment of the Foundation is subject to the approval of
the Bank's members at a Special Meeting. If approved by members, the
establishment of the Foundation will be dilutive to the voting and
ownership interests of stockholders and will have an adverse impact on the
operating results of the Company for its year ending December 31, 1998,
possibly resulting in an operating loss for that year.
DILUTION OF STOCKHOLDERS' INTERESTS. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation
would be 718,080, 844,800, and 971,520 shares, with a value of $7,180,800,
$8,448,000, and $9,715,200, respectively, based on the public offering
price of $10.00 per share for the shares of common stock to be sold in the
Conversion (the "Purchase Price"). Upon completion of the Conversion and
establishment of the Foundation, the Company will have 13,115,520 shares
issued and outstanding at the maximum of the Estimated Price Range, of
which the Foundation will own 971,520 shares, or 7.4% AS A RESULT, PERSONS
PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING
INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA DATA."
NEGATIVE IMPACT ON EARNINGS. The Company will recognize an expense in
the amount of the contribution to the Foundation in the quarter in which it
occurs, which is expected to be the fourth quarter of 1998. Such expense
will reduce earnings and have a material adverse impact on the Company's
earnings for the fiscal year. The amount of the contribution will range
from $7.2 million to $9.7 million, depending on the amount of common stock
sold in the Conversion. The contribution expense will be partially offset
by the tax deductibility of the expense. The Company has been advised by
its independent accountants that the contribution to the Foundation will be
deductible for federal income tax purposes, subject to a limitation based
on 10% of the Company's annual taxable income.
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<PAGE>
Assuming a contribution of $8.4 million in common stock, based on the mid-
point of the Estimated Price Range, the Company estimates a net tax
effected expense of $5.2 million. If the Foundation had been established at
June 30, 1998, the Bank would have reported a net loss of $1.9 million for
the first six months of 1998 rather than reporting net income of $3.3
million. In addition to the contribution to the Foundation, the Bank may in
the future continue to make ordinary charitable contributions within its
community.
POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. The Company estimates
that substantially all of the contribution to the Foundation should be
deductible for federal tax purposes over the permissible six-year period.
However, no assurance can be made that the Company will have sufficient
pre-tax income over the five-year period following the year in which the
contribution is initially made to fully utilize the carryover related to
the excess contribution. Furthermore, although the Company and the Bank
have received an opinion of their independent accountants that the Company
will be entitled to the deduction for the contribution to the Foundation,
there can be no assurance that the IRS will recognize the Foundation as a
Section 501(c)(3) exempt organization or that the deduction will be
permitted. In such event, there would be no tax benefit related to the
Foundation.
POTENTIAL ANTI-TAKEOVER EFFECT. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total
shares of the Company's common stock outstanding. However, pursuant to the
terms of the contribution as mandated by the OTS, the shares of common
stock held by the Foundation must be voted in the same ratio as all other
shares of the Company's common stock on all proposals considered by the
stockholders of the Company. As a result, the Company does not believe the
Foundation will have an anti-takeover effect on the Company. In the event,
however, that the OTS were to waive this voting restriction and not impose
other restrictions and requirements with respect to the Foundation, the
Foundation's board of directors would exercise sole voting power over such
shares. See "The Conversion--Establishment of the Charitable Foundation--
Regulatory Conditions Imposed on the Foundation." If the Foundation's
shares are combined with shares purchased directly by officers and
directors of the Company, shares held by proposed stock benefit plans, if
approved by stockholders, and shares held in the Bank's ESOP, the aggregate
of such shares could exceed 20% of the Company's outstanding common stock,
which could enable management to defeat stockholder proposals requiring 80%
approval. Consequently, in the event the voting restriction was waived,
this potential voting control might preclude takeover attempts that certain
stockholders deem to be in their best interest, and might tend to
perpetuate management. Since the ESOP shares are allocated to all eligible
employees of the Bank, and any unallocated shares will be voted by an
independent trustee, and because awards under the proposed stock benefit
plans may be granted to employees other than executive officers and
directors, management of the Company does not expect to have voting control
of all shares held or allocated by the ESOP or other stock benefit plans.
See "--Certain Anti-Takeover Provisions Which May Discourage Takeover
Attempts--Voting Control of Officers and Directors."
There will be no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the
management or policies of the Company by the Foundation which may
discourage takeover attempts, including agreements related to voting,
acquisition or disposition of the Company's common stock. Finally, as the
Foundation sells its shares of common stock over time, its ownership
interest and voting power in the Company are expected to decrease.
POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in only
a limited number of instances. As such, the Foundation may be subject to
potential challenges notwithstanding that the Boards of Directors of the
Company and the Bank have carefully considered the various factors involved
in the establishment of the Foundation. See "The Conversion--Establishment
of the Charitable Foundation--Purpose of the Foundation." If anyone were
to institute an action seeking to require that the Bank eliminate
establishment of the Foundation, no assurances can be made that the
resolution of such action would not result in a delay in the consummation
of the Conversion or that any objecting persons would not be ultimately
successful in obtaining the elimination of the Foundation or other
equitable relief or monetary damages against the Company or the Bank.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.
APPROVAL OF MEMBERS. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at a Special Meeting. The Foundation will be
considered
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<PAGE>
as a separate matter from approval of the Plan of Conversion. If the Bank's
members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the aggregate pro forma market value of the common
stock to be sold in the Conversion since the estimate of such amount takes
into account the dilutive impact of the issuance of shares to the
Foundation. If the aggregate pro forma market value of the common stock
without the Foundation is either greater than $139.7 million or less than
$89.8 million, the Bank will establish a new Estimated Price Range and
commence a resolicitation of subscribers (i.e., subscribers will be
permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscriptions funds will be promptly
refunded with interest at the Bank's passbook rate of interest, or be
permitted to increase, decrease, or cancel their subscriptions). Any change
in the Estimated Price Range must be approved by the OTS. See "The
Conversion--Stock Pricing." A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45
days unless further extended by the OTS for periods of up to 90 days not to
extend beyond ________, 2000.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings association. In addition, the Company, as a savings and loan
holding company, is subject to regulation and supervision. Such
regulations, which affect the Bank on a daily basis, may be changed at any
time, and the interpretation of the relevant law and regulations is also
subject to change by the authorities who examine the Bank and interpret
those laws and regulations. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the OTS, the Federal Deposit
Insurance Corporation ("FDIC") or the Congress, could have a material
impact on the Company, the Bank, its operations or the Bank's Conversion.
See "Regulation."
LEGISLATIVE UNCERTAINTY
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the BIF (the deposit insurance
fund that covers most commercial bank deposits) and the SAIF will merge on
January 1, 1999, if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and the OTS. A bill originally
reported by the House Banking Committee would have required federal thrifts
to become national banks or state banks within two years of enactment or
they would have become national banks by operation of law. OTS would have
been abolished and its functions transferred to the bank regulatory
agencies. The bill as passed by the House of Representatives, however, did
not provide for the elimination of the federal thrift charter or OTS, but
did provide that unitary savings and loan holding companies existing or
applied for after March 31, 1998 would not have the ability to engage in
unlimited activities but would be subject to the activities restrictions
applicable to multiple savings and loan holding companies. Unitary holding
companies existing or applied for before such date would be grandfathered
and could continue to engage in unlimited activities and could transfer the
grandfather rights to acquirors of the holding company. The Senate has not
acted on the legislation but if such legislation were enacted, the Company
would not qualify for unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. The Bank is unable to predict whether the legislation will be
enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also
unable to predict whether the SAIF and BIF will eventually be merged or the
federal thrift charter eliminated, and what effect, if any, such
legislation would have on the Bank.
EXPENSES ASSOCIATED WITH ESOP AND THE STOCK-BASED INCENTIVE PLAN
If the ESOP and the Stock-Based Incentive Plan are implemented, the Bank
will recognize additional material employee compensation and benefit
expenses that stem from the shares purchased or granted to employees and
executives under those plans. The Bank cannot predict the actual amount of
these new expenses because applicable accounting practices require that
they be based on the fair market value of the shares of common stock when
the expenses are recognized. Expenses for the ESOP would be recognized
when shares are committed to be released to participants' accounts, and
expenses for the Stock-Based Incentive Plan would be recognized over the
vesting period of awards made to recipients. These expenses have been
reflected in the pro forma financial information under "Pro
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Forma Data" assuming the $10.00 per share purchase price as fair market
value. Actual expenses, however, will be based on the fair market value of
the common stock at the time of recognition, which may be higher or lower
than $10.00. For further discussion of these plans, see "Management of the
Bank --Benefits -- Employee Stock Ownership Plan and Trust" and "--
Benefits --Stock-Based Incentive Plan."
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Conversion, the Stock-Based Incentive Plan will acquire an
amount of shares equal to 4% of the shares of common stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of
common stock from the Company. If the Stock-Based Incentive Plan is funded
by the issuance of authorized but unissued shares, the voting interests of
existing stockholders at that time will be diluted by 3.8%. Also following
the Conversion, directors, officers and employees will be granted stock
options under the Stock-Based Incentive Plan in an amount up to 10% of the
Common Stock issued in the Conversion, including shares issued to the
Foundation. The exercise of such stock options may be satisfied by the
issuance of authorized but unissued shares. If all of the stock options
were to be exercised using authorized but unissued common stock and the
stock awards granted under the Stock-Based Incentive Plan were funded with
authorized but unissued shares, the voting interests of existing
stockholders at that time would be diluted at that time by 12.3%.
VOTING CONTROL OF EXECUTIVE OFFICERS AND DIRECTORS.
Directors and executive officers of the Bank and the Company expect to
purchase approximately 2.07% or 1.55% of the shares of Common Stock to be
issued in the Conversion, including shares issued to the Foundation, based
upon the minimum and the maximum of the Estimated Price Range,
respectively. The ESOP may be viewed as giving directors, officers and
employees the potential to control the voting of an additional 8% of the
Company's common stock. In addition, the Foundation will be funded with a
contribution by the Company up to 8% of the common stock sold in the
Conversion. If a waiver of the voting restriction imposed on such common
stock is obtained from the OTS and the OTS does not impose other
restrictions, the Foundation shares may be voted as determined by the
directors of the Foundation who also will be directors or officers of the
Company and Bank. Management's potential voting control could, together
with additional stockholder support, defeat stockholder proposals requiring
80% approval of stockholders. As a result, this potential voting control
may preclude takeover attempts that certain stockholders deem to be in
their best interest and may tend to perpetuate existing management. See
"Restrictions on Acquisition of the Company and the Bank--Restrictions in
the Company's Articles of Incorporation and Bylaws."
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING
INSTRUMENTS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Certain provisions of the Company's Articles of Incorporation and Bylaws
and the Bank's Stock Articles of Incorporation and Bylaws, as well as
certain federal regulations and state laws, may assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for
directors, limits on the calling of special meetings, limits on voting
shares in excess of 10% of outstanding shares, and certain uniform price
provisions for certain business combinations. These provisions in the
Company's governing instruments may discourage potential proxy contests and
other potential takeover attempts, particularly those which have not been
negotiated with the Board of Directors, and thus, generally may serve to
perpetuate existing management. For a more detailed discussion of these
provisions, see "Restrictions on Acquisitions of the Company and the Bank."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company
has applied to have its common stock listed on Nasdaq under the symbol
"VCAP" upon completion of the Conversion. However, there can be no
assurance that an active and liquid trading market for the common stock
will develop or, once developed, will continue, nor can there be any
assurances that purchasers of the common stock will be able to sell their
shares at or above the purchase price. The absence or discontinuance of a
market for the common stock
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<PAGE>
would have an adverse impact on both the price and liquidity of the common
stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and
financial conditions following the commencement of the Subscription and
Community Offerings. In the event that the Estimated Price Range is so
increased, it is expected that the Company will issue up to 13,965,600
shares of common stock for an aggregate purchase price of up to $139.7
million. An increase in the number of shares issued will decrease a
subscriber's pro forma net earnings per share and stockholders' equity per
share and will increase the Company's pro forma consolidated stockholders'
equity and net earnings. Such an increase will also increase the purchase
price as a percentage of pro forma stockholders' equity per share and net
earnings per share.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems
can accommodate this date value. Many existing application software
products were designed to accommodate only two-digits. For example, "96"
is stored on the system and represents 1996. The Bank has conducted a
comprehensive review of its systems to identify applications that could be
affected by the "Year 2000" issue and has developed an implementation plan
to address the issue. The Bank has already begun testing on its own
systems. The Bank has been told that its primary service providers
anticipate all reprogramming efforts will be complete by December 31, 1998,
allowing the Bank significant time for testing. The Bank believes that its
costs related to Year 2000 will be approximately $200,000. There can be no
assurances, however, that the performance by the Bank's vendors will be
effective to remedy all potential problems. To the extent the Company's
systems are not fully Year 2000 compliant, there can be no assurance that
potential systems interruptions or the cost necessary to update software
would not have a materially adverse effect on the Company's business,
financial condition, results of operations and business prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Year 2000 Compliance."
COMPETITION
Due to the significant growth in the Fredericksburg area in recent years,
the Bank has encountered a significant increase in competition for both
loan origination and attracting deposits. The Bank's primary market area
is highly competitive and the Bank faces direct competition from a
significant number of financial institutions, many with a state-wide or
regional presence and, in some cases, a national presence. Many of these
financial institutions are significantly larger and have greater financial
resources than the Bank. The Bank's competition for loans comes
principally from commercial banks, savings banks, credit unions, mortgage
brokers, mortgage banking companies, and insurance companies, and most
recently, from one- to four-family home builders who not only finance their
own projects, but also arrange permanent financing for purchasers. Its
most direct competition for deposits has historically come from savings,
cooperative and commercial banks and credit unions. In addition, the Bank
faces significant competition for deposits from non-bank institutions such
as brokerage firms and insurance companies in such instruments as short-
term money market funds, corporate and government securities funds, mutual
funds and annuities. Competition may also increase as a result of the
lifting of restrictions on the interstate operations of financial
institutions. The Bank has also experienced significant competition from
credit unions which have a competitive advantage as they do not pay state
or federal income taxes. Such competitive advantage has placed increased
pressure on the Bank with respect to its loan and deposit pricing.
VIRGINIA CAPITAL BANCSHARES, INC.
The Company was organized under Virginia law in September 1998 at the
direction of the Board of Directors of the Bank for the purpose of
acquiring all of the capital stock to be issued by the Bank in the
Conversion. The Company has applied to the OTS to become a savings and
loan holding company and, upon approval, will be subject to regulation by
the OTS. Upon consummation of the Conversion, the Company will conduct
business initially as a unitary savings and loan holding company. See
"Regulation--Holding Company Regulation." After completion of
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the Conversion, the Company's assets will consist of all of the outstanding
shares of the Bank's capital stock issued to the Company in the Conversion
and that portion of the net proceeds of the Offerings retained by the
Company. The Company intends to use part of the net proceeds it retains to
loan funds to the ESOP to enable the ESOP to purchase 8% of the Common
Stock issued in the Conversion, including shares issued to the Foundation.
Based on certain regulatory and market conditions, the Company and Bank
may, however, alternatively choose to fund the ESOP's stock purchases
through a loan by a third-party financial institution. The Company intends
to initially invest any remaining proceeds in federal funds and short-term
U.S. Government and agency obligations. See "Use of Proceeds." Immediately
after the Conversion, the Company will have no significant liabilities.
Initially, the Company will neither own nor lease any property, but will
instead use the premises, equipment and furniture of the Bank. The
management of the Company is set forth under "Management of the Company."
At the present time, the Company does not intend to employ any persons
other than officers of the Company who are also officers of the Bank, but
will utilize the support staff of the Bank from time to time. Additional
employees will be hired as appropriate to the extent the Company expands
its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities,
should it decide to do so, through existing or newly-formed subsidiaries,
or through acquisitions of other financial institutions and financial
services related companies. In addition, management believes that the
Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any
acquisition and expansion opportunities that may arise. There are no
current arrangements, understandings or agreements, written or oral,
regarding any such opportunities or transactions. The initial activities
of the Company are anticipated to be funded by the net proceeds retained by
the Company and earnings thereon or, alternatively, through dividends from
the Bank.
The Company's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.
FREDERICKSBURG SAVINGS
The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family
residences. To a lesser extent, the Bank invests in multi-family,
construction and development, commercial real estate and consumer loans.
The Bank originates one- to four-family loans primarily for investment. At
June 30, 1998, the Bank's loans, net, totalled $415.9 million, or 88.1% of
total assets. To a significantly lesser extent, the Bank also invests in
securities, primarily consisting of U.S. Government and agency obligations
and highly rated corporate bonds. At June 30, 1998, the Bank's securities
portfolio totalled $32.1 million, or 6.8% of total assets, of which $30.9
million, or 96.3% of total investment securities, were classified as
available-for-sale. For the six months ended June 30, 1998, the Bank's
deposit accounts averaged $375.3 million, or 95.69% of total average
liabilities, of which $83.1 million, or 21.2% of total average liabilities,
were savings, money market and negotiable order of withdrawal ("NOW")
accounts (collectively, "core deposits"). The Bank also uses advances from
the FHLB-Atlanta as a source of funds. At June 30, 1998, such advances
totalled $8.0 million, or 2.06% of total liabilities. See "Business of the
Bank."
The Bank's executive offices are located at 400 George Street,
Fredericksburg, Virginia 22404 and the telephone number is (540) 899-5500.
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REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Bank exceeded all regulatory capital
requirements. See "Regulation--Federal Savings Institution Regulation--
Capital Requirements." Set forth below is a summary of the Bank's
compliance with the regulatory capital standards as of June 30, 1998, on a
historical and pro forma basis assuming that the indicated number of shares
were sold as of such date and receipt by the Bank of 50% of the net
proceeds. For purposes of the table below, the amount expected to be
borrowed by the ESOP and the cost of the shares expected to be acquired by
the Stock-Based Incentive Plan are deducted from pro forma regulatory
capital.
<TABLE>
<CAPTION>
FREDERICKSBURG SAVINGS
PRO FORMA AT JUNE 30, 1998 BASED UPON THE SALE
OF COMMON STOCK AT $10.00 PER SHARE
-----------------------------------------------------------------------------------
13,965,600
8,976,000 10,560,000 12,144,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ESTIMATED
JUNE 30, 1998 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------------- ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............... $83,500 17.68% $115,747 22.94% $121,614 23.83% $127,482 24.69% $134,229 25.66%
Tangible Capital:
Capital Level........... $79,903 17.05% $112,150 22.39% $118,017 23.29% $123,885 24.16% $130,632 25.15%
Requirement............. 7,084 1.50 7,514 1.50 7,602 1.50 7,691 1.50 7,792 1.50
------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Excess.................. $72,819 15.55% $104,636 20.89% $110,415 21.79% $116,194 22.66% $122,840 23.65%
======= ====== ======== ===== ======== ===== ======== ===== ======== =====
Tier I Capital:
Capital Level........... $79,903 17.05% $112,150 22.39% $118,017 23.29% $123,885 24.16% $130,632 25.15%
Requirement(3).......... 18,748 3.00 15,029 3.00 15,205 3.00 15,381 3.00 15,583 3.00
------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Excess.................. $61,155 14.05% $ 97,121 19.39% $102,812 20.29% $108,504 21.16% $115,049 22.15%
======= ====== ======== ===== ======== ===== ======== ===== ======== =====
Risk-Based Capital:
Capital Level(4)(5)..... $83,446 28.52% $115,693 39.05% $121,560 40.62% $127,428 42.17% $134,175 43.91%
Requirement............. 22,414 8.00 23,704 8.00 23,939 8.00 24,173 8.00 24,443 8.00
------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Excess.................. $61,032 20.52% $ 91,989 31.05% $ 97,621 32.62% $103,255 34.17% $109,732 35.91%
======= ====== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
____________________
(1) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range of
up to 15% as a result of regulatory considerations or changes in
market or general financial and economic conditions following the
commencement of the Subscription Offering.
(2) Tangible capital levels are shown as a percentage of tangible assets.
Tier I capital levels are shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of risk-
weighed assets.
(3) The current OTS core capital requirement for savings associations is
3% of total adjusted assets. The OTS has proposed core capital
requirements which would require a core capital ratio of 3% of total
adjusted assets for thrifts that receive the highest supervisory
rating for safety and soundness and a 4% to 5% core capital ratio
requirement for all other thrifts. See "Regulation--Federal Savings
Institution Regulation--Capital Requirements."
(4) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
(5) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable
to a portion of the general valuation allowance of $3.5 million and
any unrealized gains on available-for-sale securities at June 30,
1998.
17
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $87.8 million and $119.4 million (or $137.7 million if the
Estimated Price Range is increased by 15%). See "Pro Forma Data" and "The
Conversion--Stock Pricing" as to the assumptions used to arrive at such
amounts. The Company will be unable to utilize any of the net proceeds of
the Offerings until the consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Bank to be issued upon Conversion in exchange for 50% of the net proceeds
of the Offerings, with the remaining net proceeds to be retained by the
Company. Based on net proceeds of $103.6 million, the Company expects to
utilize $51.8 million of net proceeds to purchase the common stock of the
Bank. Such portion of net proceeds will be added to the Bank's general
funds which the Bank currently intends to utilize for general corporate
purposes, including: investment in loans, particularly residential real
estate loans, non-residential real estate loans, including commercial
real estate loans in the Bank's primary market area, construction and
development loans and consumer loans, including home equity loans;
investment primarily in U.S. Treasury and Agency obligations,
including short-term adjustable-rate mortgage-backed securities; the
repayment of FHLB advances; funding of stock-based benefit plans; and, to a
lesser extent, investment in short-term high quality investments, such as
highly rated corporate bonds and municipal bonds. Management intends to
invest the proceeds received to the greatest extent possible in investments
that will help reduce the Bank's exposure to interest rate risk.
Management also intends to seek means to expand its products and market
share. A primary goal of the Bank is to seek opportunities to expand its
products and services and examine opportunities to expand its facilities
and operations through acquisitions of other financial institutions,
including, possibly a commercial bank, branch offices or other financial
services companies; however, the Bank has no specific acquisition plans
at this time. See "Management's Discussion and Analysis--Management
Strategy."
The Company intends to use a portion of the net proceeds it retains to
loan funds to the ESOP to enable the ESOP to purchase 8% of the Common
Stock issued in the Conversion, including shares issued to the Foundation.
Alternatively, the Company and Bank may choose to fund the ESOP's stock
purchases through a loan by a third-party financial institution. The
remaining net proceeds retained by the Company will initially be invested
in short-term U.S. Treasury and Agency obligations. Based upon the sale of
8,976,000 shares or 12,144,000 shares at the minimum and maximum of the
Estimated Price Range and the issuance of shares to the Foundation, the
amount of the loan to the ESOP would be $7.8 million or $10.5 million,
respectively (or $12.1 million if the Estimated Price Range is increased by
15%) to be repaid approximately over a twenty year period at the prevailing
prime rate of interest, which currently is 8.5%. At the minimum, midpoint
and maximum of the Estimated Price Range, total shares issued to the
Foundation would be 718,080, 844,800 and 971,520 shares, with a value of
$7,180,800, $8,448,000 and $9,715,200, respectively, based upon a per share
price of $10.00. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support the
future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of financial
institutions or their assets, including those located within the Bank's
market area, or diversification into other banking related businesses. The
Company has no current arrangements, understandings or agreements regarding
any such opportunities or transactions. The Company, upon the Conversion,
will be a unitary savings and loan holding company, which under existing
laws would generally not be restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender ("QTL"). See "Regulation--Holding Company
Regulation" for a description of certain regulations applicable to the
Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to conduct stock repurchases, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any
shares of the Common Stock for three years except (i) for an offer to all
stockholders on a pro rata basis, or (ii) for the repurchase of qualifying
shares of a director. Notwithstanding the foregoing and except as provided
below, beginning one year following completion of the Conversion, the OTS
regulations permit the Company to repurchase its Common Stock so long as:
(i) the repurchases within the following two years are part of an open-
market program not involving greater than 5% of its outstanding capital
stock during a 12-month period; (ii) the repurchases do not cause the Bank
to become "undercapitalized" within the meaning of the OTS prompt
corrective action regulation; and (iii) the Company provides to the
Regional Director of the OTS no later than 10 days prior to the
commencement of a repurchase program written
18
<PAGE>
notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. See "Regulation--
Prompt Corrective Regulatory Action." In addition, under current OTS
policies, repurchases may be allowed in the first year following Conversion
and in amounts greater than 5% in the second and third years following
Conversion provided there are valid and compelling business reasons for
such repurchases and the OTS does not object to such repurchases.
Based upon facts and circumstances following the Conversion and subject
to applicable regulatory requirements, the Board of Directors may determine
to repurchase stock in the future. Such facts and circumstances may
include but not be limited to: (i) market and economic factors such as the
price at which the stock is trading in the market, the volume of trading,
the attractiveness of other investment alternatives in terms of the rate of
return and risk involved in the investment, the ability to increase the
book value and/or earnings per share of the remaining outstanding shares
and the opportunity to improve the Company's return on equity; (ii) the
avoidance of dilution to stockholders by not having to issue additional
shares to cover the exercise of stock options or to fund employee stock
benefit plans; and (iii) any other circumstances in which repurchases would
be in the best interests of the Company and its shareholders. Although the
Company has no current plans to repurchase its stock, in the event the
Company does determine to repurchase stock, such repurchases may be made at
market prices which may be in excess of the Purchase Price in the
Conversion.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in
excess of all applicable regulatory requirements after any such repurchases
and that such capital will be adequate, taking into account, among other
things, the level of non-performing and other risk assets, the Company's
and the Bank's current and projected results of operations and
asset/liability structure, the economic environment, tax and other
considerations. See "The Conversion--Certain Restrictions on Purchase or
Transfer of Shares after Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory
and regulatory requirements. Depending on market conditions, the Company's
Board of Directors intends to pay cash dividends on the Common Stock;
however, no decision has been made regarding the level of dividends that
will actually be paid. In addition, from time to time in an effort to
manage capital to a reasonable level, the Board of Directors may determine
to pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends. Declarations of dividends by the Board of
Directors, if any, will depend upon a number of factors, including the
amount of net proceeds retained by the Company in the Conversion,
investment opportunities available to the Company or the Bank, capital
requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and
general economic conditions. No assurances can be given, however, that any
dividends will be paid or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation
Rights." For information concerning federal regulations which apply to the
Bank in determining the amount of proceeds which may be retained by the
Company and regarding a savings institution's ability to make capital
distributions, including payment of dividends to its holding company, see
"Federal and State Taxation--Federal Taxation--Distributions" and
"Regulation--Federal Savings Institution Regulation--Limitation on Capital
Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by
the Company and earnings thereon and may be dependent, in part, upon
dividends from the Bank. The Company is subject, however, to the
requirements of Virginia law, which generally provide that a Virginia
corporation may make distributions to its stockholders unless, after giving
effect to the distribution, (i) the corporation would not be able to pay
its debts as they become due in the usual course of business, or (ii) the
corporation's total assets would be less than the sum of its total
liabilities plus (unless the articles of incorporation permit otherwise,
which in the case of the Company they do not) the amount that would be
needed, if the corporation were to be dissolved at the time of the
19
<PAGE>
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.
Additionally, in connection with the Conversion, the Company and Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not declare an
extraordinary dividend to stockholders which would be treated by recipient
stockholders as a tax-free return of capital for federal income tax
purposes without prior approval of the OTS.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The
Company has applied to have its Common Stock listed on Nasdaq under the
symbol "VCAP" upon completion of the Conversion. Such approval is subject
to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that
the Common Stock will be able to meet the applicable listing criteria in
order to maintain its listing on Nasdaq or that an active and liquid
trading market will develop or, if developed, will be maintained. A public
market having the desirable characteristics of depth, liquidity and
orderliness, however, depends upon the presence in the marketplace of both
willing buyers and sellers of Common Stock at any given time, which is not
within the control of the Company. No assurance can be given that an
investor will be able to resell the Common Stock at or above the purchase
price of the Common Stock after the Conversion.
20
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at June 30, 1998 and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE OF COMMON STOCK
AT $10.00 PER SHARE
-------------------------------------------------------
13,965,600
SHARES
8,976,000 10,560,000 12,144,000 (15% ABOVE
SHARES SHARES SHARES MAXIMUM OF
(MINIMUM OF (MIDPOINT OF (MAXIMUM ESTIMATED
BANK ESTIMATED ESTIMATED OF ESTIMATED PRICE
HISTORICAL PRICE RANGE PRICE RANGE) PRICE RANGE) RANGE)(1)
----------- ----------- ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)............................................. $373,719 $ 373,719 $ 373,719 $ 373,719 $ 373,719
FHLB borrowings......................................... 8,000 8,000 8,000 8,000 8,000
-------- ---------- ----------- ----------- -----------
Total deposits and borrowings........................... $381,719 $ 381,719 $ 381,719 $ 381,719 $ 381,719
======== ========== =========== =========== ===========
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000
shares authorized; none to be issued................ $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 75,000,000 shares
authorized; shares to be issued as reflected........ -- 97 114 131 151
Additional paid-in capital(3)......................... -- 87,663 103,486 119,309 137,505
Retained earnings(4).................................. 83,216 83,216 83,216 83,216 83,216
Net unrealized gain on available-for-sale securities.. 284 284 284 284 284
Less: Expense of contribution to the Foundation,
net of taxes(5)........................... -- (4,452) (5,238) (6,023) (6,927)
Plus: Shares issued to the Foundation................ -- 7,181 8,448 9,715 11,172
Less: Common Stock acquired by the ESOP(6)........... -- (7,755) (9,124) (10,492) (12,066)
Common Stock acquired by the Stock-Based
Incentive Plan(7)......................... -- (3,878) (4,562) (5,246) (6,033)
-------- ---------- ----------- ----------- -----------
Total stockholders' equity.............................. $ 83,500 $ 162,356 $ 176,624 $ 190,894 $ 207,302
======== ========== =========== =========== ===========
</TABLE>
__________________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the issuance
of additional shares pursuant to the Company's Stock-Based Incentive Plan
intended to be adopted by the Company. An amount equal to 10% of the
shares of Common Stock issued in the Conversion, including shares issued to
the Foundation, will be reserved for issuance upon the exercise of options
to be granted under the Stock-Based Incentive Plan. See "Risk Factors--
Possible Dilutive Effect of Stock-Based Incentive Plan," Footnote 4 to the
tables under "Pro Forma Data" and "Management of the Bank--Benefits--Stock-
Based Incentive Plan."
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion--Liquidation Rights" and "Regulation--
Federal Savings Institution Regulation--Limitations on Capital
Distributions."
(5) Represents the value of the contribution of Common Stock to the
Foundation at $10.00 per share reduced by the associated tax benefits $2.7
million, $3.2 million, $3.7 million and $4.2 million at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, based on an effective tax rate of 38%. The realization of
the federal tax benefit is limited annually to 10% of the Company's annual
taxable income, subject to the ability of the Company to carry forward any
unused portion of the deduction for five years following the year in which
the contribution is made. For state income tax purposes, the Bank will not
be able to utilize any such carry forward.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and that the funds used to acquire such shares will be borrowed from the
Company. See "Use of Proceeds." The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
(7) Assumes that subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued to
the Foundation, is purchased by the Stock-Based Incentive Plan through open
market purchases at the offering price of $10.00 per share. The Common
Stock purchased by the Stock-Based Incentive Plan is reflected as a
reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 3 to the tables under "Pro
Forma Data" and "Management of the Bank--Benefits--Stock-Based Incentive
Plan."
21
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $87.8 million and $119.4 million (or
$137.7 million in the event the Estimated Price Range is increased by 15%)
based upon the following assumptions: (i) Trident will receive a fee of
$525,000 for its marketing services and financial advisory role in
connection with the Conversion; and (ii) other Conversion expenses,
excluding the marketing fees paid to Trident, will be approximately $1.5
million. Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the six months ended
June 30, 1998, and for the year ended December 31, 1997, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 5.41% and
5.41% which is equivalent to the one year Treasury rate at June 30, 1998.
The calculations have been based on the one year Treasury rate, as opposed
to the Bank's yield on average interest earning assets, because the Bank
will initially invest the proceeds in short-term assets, at a lower yield,
and will more effectively invest the proceeds over time. The tables below
do not reflect the effect of withdrawals from deposit accounts for the
purchase of Common Stock or the effect of any possible use of the net
Conversion proceeds. The pro forma after-tax yields for the Company and
the Bank are assumed to be 3.35% and 3.35% for the six months ended June
30, 1998 and for the year ended December 31, 1997, respectively. All
calculations were based on an effective combined federal and state income
tax rate of 38%. Historical and pro forma net earnings per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued in the Conversion,
including shares issued to the Foundation, as adjusted to give effect to
unallocated and uncommitted shares held by the ESOP. Historical and pro
forma stockholders' equity per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares
of Common Stock issued in the Conversion, including the issuance of shares
to the Foundation.
The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion
actually occurs and should not be taken as indicative of future results of
operations. Pro forma consolidated stockholders' equity represents the
difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent
the fair market value of the Common Stock and may be stated in an amount
greater than amounts that would be available for distribution to
stockholders in the event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the six months ended June 30, 1998 and at or
for the year ended December 31, 1997, based on the assumptions set forth
above and in the table and should not be used as a basis for projections of
market value of the Common Stock following the Conversion. The tables
below give effect to the Stock-Based Incentive Plan, which is expected to
be adopted by the Company following the Conversion and presented to
stockholders for approval at a meeting of stockholders. See Footnote 3 to
the tables and "Management of the Bank--Benefits--Stock-Based Incentive
Plan." No effect has been given in the tables to the possible issuance of
additional shares reserved for future issuance pursuant to the Stock-Based
Incentive Plan to be adopted by the Board of Directors of the Company and
presented to stockholders for approval at a meeting of stockholders, nor
does book value give any effect to the liquidation account to be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or, in the event of liquidation of the Bank, to
the tax effect of the bad debt reserve and other factors. See Footnote 3
to the tables below, "The Conversion--Liquidation Rights" and "Management
of the Bank--Benefits--Stock-Based Incentive Plan." THE FOLLOWING TABLES
ASSUME THAT THE FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND
THEREFORE GIVE EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF
THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE
COMPLETION OF THE CONVERSION. THE VALUATION RANGE, AS SET FORTH HEREIN AND
IN THE TABLES BELOW, TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE
OF SHARES TO THE FOUNDATION.
22
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------
13,965,600
8,976,000 10,560,000 12,144,000 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $10.00
AT $10.00 AT $10.00 AT $10.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM OF
OF ESTIMATED OF ESTIMATED OF ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(8)
------------- ------------ ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................................. $ 89,760 $ 105,600 $ 121,440 $ 139,656
Plus: Shares issued to Foundation (equal to 8% of the
stock sold in the Conversion)....................... 7,181 8,448 9,715 11,172
---------- ----------- ----------- -----------
Pro forma market capitalization...................... $ 96,941 $ 114,048 $ 131,155 $ 150,828
========== =========== =========== ===========
Gross proceeds............................................. $ 89,760 $ 105,600 $ 121,440 $ 139,656
Less: Offering expenses and commission.............. (2,000) (2,000) (2,000) (2,000)
---------- ----------- ----------- -----------
Estimated net proceeds.............................. 87,760 103,600 119,440 137,656
Less: Common Stock acquired by the ESOP............. (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan.................................. (3,878) (4,562) (5,246) (6,033)
---------- ----------- ----------- -----------
Estimated net proceeds, as adjusted................. $ 76,127 $ 89,914 $ 103,702 $ 119,557
========== =========== =========== ===========
Consolidated net earnings(1):
Historical........................................... $ 3,320 $ 3,320 $ 3,320 $ 3,320
Pro forma earnings on net proceeds................... 1,275 1,506 1,737 2,003
Less: Pro forma ESOP adjustment(2).................. (120) (141) (163) (187)
Pro forma Stock-Based Incentive Plan
adjustment(3)................................... (240) (283) (325) (374)
---------- ----------- ----------- -----------
Pro forma net earnings.............................. $ 4,235 $ 4,402 $ 4,569 $ 4,762
========== =========== =========== ===========
Per share net earnings(1)(4):
Historical........................................... $ 0.37 $ 0.32 $ 0.27 $ 0.24
Pro forma earnings on net proceeds................... 0.14 0.14 0.14 0.14
Less: Pro forma ESOP adjustment(2).................. (0.01) (0.01) (0.01) (0.01)
Pro forma Stock-Based Incentive Plan
adjustment(3)................................... (0.03) (0.03) (0.03) (0.03)
---------- ----------- ----------- -----------
Pro forma net earnings per share.................... $ 0.47 $ 0.42 $ 0.37 $ 0.34
========== =========== =========== ===========
Stockholders' equity:
Historical........................................... $ 83,500 $ 83,500 $ 83,500 $ 83,500
Estimated net proceeds............................... 87,760 103,600 119,440 137,656
Plus: Tax benefit of Foundation(1).................. 2,729 3,210 3,692 4,245
Less: Common Stock acquired by ESOP(2).............. (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan(3)............................... (3,878) (4,562) (5,246) (6,033)
---------- ----------- ----------- -----------
Pro forma stockholders' equity(3)(5)(6)............. $ 162,356 $ 176,624 $ 190,894 $ 207,302
========== =========== =========== ===========
Stockholders' equity per share(7):
Historical........................................... $ 8.61 $ 7.32 $ 6.37 $ 5.54
Estimated net proceeds............................... 9.05 9.08 9.11 9.13
Plus: Tax benefit of Foundation..................... 0.28 0.28 0.28 0.28
Less: Common Stock acquired by ESOP(2).............. (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by Stock-Based
Incentive Plan(3)............................... (0.40) (0.40) (0.40) (0.40)
---------- ----------- ----------- -----------
Pro forma stockholders' equity per share(3)(5)(6)... $ 16.74 $ 15.48 $ 14.56 $ 13.75
========== =========== =========== ===========
Offering price as a percentage of pro forma stockholders'
equity per share......................................... 59.74% 64.60% 68.68% 72.73%
Offering price to pro forma net earnings
per share (annualized)................................... 10.64 11.90 13.51 14.71
</TABLE>
(Footnotes on next page)
23
<PAGE>
______________________
(1) Does not give effect to the non-recurring expense that is expected to
be recognized in the fourth quarter of 1998 if the establishment of
the Foundation is approved. In that event, the Company will recognize
an after-tax expense for the amount of the contribution to the
Foundation which is expected to be $4.5 million, $5.2 million, $6.0
million and $6.9 million at the minimum, midpoint, maximum, and
maximum as adjusted, of the Estimated Price Range, respectively, based
on an effective tax rate of 38%.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from
the Company. See "Use of Proceeds." The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to
make annual contributions to the ESOP in an amount at least equal to
the principal and interest requirement of the debt. The Bank's total
annual payment of the ESOP debt is based upon 20 equal annual
installments of principal, with an assumed interest rate at 8.5%. The
pro forma net earnings assume: (i) that the Bank's contribution to the
ESOP is equivalent to the debt service requirement for the six months
ended June 30, 1998 and was made at the end of the period; (ii) that
19,388, 22,810, 26,231 and 30,166 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, were committed to be released during the six months
ended June 30, 1998 at an average fair value of $10.00 per share in
accordance with Statement of Position (SOP") 93-6; and (iii) only the
ESOP shares committed to be released were considered outstanding for
purposes of the net earnings per share calculations. A tax rate of 38%
was used for all calculations. See "Management of the Bank--Benefits--
Employee Stock Ownership Plan and Trust."
(3) Gives effect to the Stock-Based Incentive Plan expected to be adopted
by the Company following the Conversion, and assumes any necessary
stockholder or regulatory approval of the Stock-Based Incentive Plan
has been received. The Stock-Based Incentive Plan intends to acquire
an amount of Common Stock equal to 4% of the shares of Common Stock
issued in the Conversion, including shares issued to the Foundation,
or 387,763, 456,192, 524,621 and 603,314 shares of Common Stock at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, either through open market purchases, if
permissible, or from authorized but unissued shares of Common stock or
treasury stock of the Company, if any. Funds used by the Stock-Based
Incentive Plan to purchase the shares will be contributed to the Stock
-Based Incentive Plan by the Bank. In calculating the pro forma effect
of the Stock-Based Incentive Plan, it is assumed that the shares were
acquired by the Stock-Based Incentive Plan at the beginning of the
period presented in open market purchases at the Purchase Price and
that 10% of the amount contributed was an amortized expense during
such period. The issuance of authorized but unissued shares of the
Company's Common Stock to the Stock-Based Incentive Plan instead of
open market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.46, $0.41, $0.37 and $0.34 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, and pro
forma shareholders' equity per share would be $16.10, $14.89, $13.99
and $13.22 at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively. There can be no assurance that stockholder
approval of the Stock-Based Incentive Plan will be obtained, or that
the actual purchase price of the shares will be equal to the Purchase
Price. A tax rate of 38% was used for all calculations. See
"Management of the Bank--Benefits--Stock-Based Incentive Plan."
(4) The number of shares used in the calculation of historical and pro
forma earnings per share was 8,937,942, 10,515,226, 12,092,509 and
13,906,386 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively.
(5) No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Stock-Based Incentive Plan expected to be
adopted by the Company following the Conversion. An amount equal to
10% of the Common Stock issued in the Conversion, including shares
issued to the Foundation, or 969,408, 1,140,480, 1,311,552 and
1,508,285 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, will be reserved
for future issuance upon the exercise of options to be granted under
the Stock-Based Incentive Plan. The issuance of Common Stock pursuant
to the exercise of options under the Stock-Based Incentive Plan will
result in the dilution of existing stockholders' interests. Assuming
all options were exercised at the end of the period at an exercise
price of $10.00 per share, the pro forma net earnings per share would
be $0.43, $0.38, $0.34 and $0.31, respectively, and the pro forma
stockholders' equity per share would be $16.13, $14.99, $14.14 and
$13.40, respectively. See "Management of the Bank--Benefits--Stock-
Based Incentive Plan."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
(7) The total number of shares, including shares issued to the Foundation,
used in the calculation of historical and pro forma stockholders'
equity per share was 9,694,080, 11,404,800, 13,115,520 and 15,082,848
shares at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively.
(8) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range of
up to 15% as a result of regulatory considerations or changes in
market or general financial and economic conditions following the
commencement of the Subscription Offering.
24
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
13,965,600
8,976,000 10,560,000 12,144,000 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $10.00
AT $10.00 AT $10.00 AT $10.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM OF
OF ESTIMATED OF ESTIMATED OF ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(8)
--------------- ------------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................................. $ 89,760 $ 105,600 $ 121,440 $ 139,656
Plus: Shares issued to Foundation (equal to 8% of the
stock sold in the Conversion)....................... 7,181 8,448 9,715 11,172
---------- ----------- ----------- -----------
Pro forma market capitalization...................... $ 96,941 $ 114,048 $ 131,155 $ 150,828
========== =========== =========== ===========
Gross proceeds............................................. $ 89,760 $ 105,600 $ 121,440 $ 139,656
Less: Offering expenses and commission.............. (2,000) (2,000) (2,000) (2,000)
---------- ----------- ----------- -----------
Estimated net proceeds.............................. 87,760 103,600 119,440 137,656
Less: Common Stock acquired by the ESOP............. (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan............................... (3,878) (4,562) (5,246) (6,033)
---------- ----------- ----------- -----------
Estimated net proceeds, as adjusted................. $ 76,127 $ 89,914 $ 103,702 $ 119,557
========== =========== =========== ===========
Consolidated net earnings(1):
Historical........................................... $ 6,425 $ 6,425 $ 6,425 $ 6,425
Pro forma earnings on net proceeds................... 2,550 3,012 3,474 4,005
Less: Pro forma ESOP adjustment(2).................. (240) (283) (325) (374)
Pro forma Stock-Based Incentive Plan
adjustment(3)................................. (481) (566) (651) (748)
---------- ----------- ----------- -----------
Pro forma net earnings.............................. $ 8,254 $ 8,588 $ 8,923 $ 9,308
========== =========== =========== ===========
Per share net earnings(1)(4):
Historical........................................... $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma earnings on net proceeds................... 0.28 0.29 0.29 0.29
Less: Pro forma ESOP adjustment(2).................. (0.03) (0.03) (0.03) (0.03)
Pro forma Stock-Based Incentive Plan
adjustment(3)................................ (0.05) (0.05) (0.05) (0.05)
---------- ----------- ----------- -----------
Pro forma net earnings per share.................... $ 0.92 $ 0.82 $ 0.74 $ 0.67
========== =========== =========== ===========
Stockholders' equity:
Historical........................................... $ 80,073 $ 80,073 $ 80,073 $ 80,073
Estimated net proceeds............................... 87,760 103,600 119,440 137,656
Plus: Tax benefit of Foundation(1).................. 2,729 3,210 3,692 4,245
Less: Common Stock acquired by ESOP(2).............. (7,755) (9,124) (10,492) (12,066)
Common Stock to be acquired by Stock-Based
Incentive Plan(3)............................ (3,878) (4,562) (5,246) (6,033)
---------- ----------- ----------- -----------
Pro forma stockholders' equity(3)(5)(6)............. $ 158,929 $ 173,197 $ 187,467 $ 203,875
========== =========== =========== ===========
Stockholders' equity per share(7):
Historical........................................... $ 8.26 $ 7.02 $ 6.11 $ 5.31
Estimated net proceeds............................... 9.05 9.08 9.11 9.13
Plus: Tax benefit of Foundation..................... 0.28 0.28 0.28 0.28
Less: Common Stock acquired by ESOP(2).............. (0.80) (0.80) (0.80) (0.80)
Common Stock to be acquired by Stock-Based
Incentive Plan(3)............................ (0.40) (0.40) (0.40) (0.40)
---------- ----------- ----------- -----------
Pro forma stockholders' equity per share(3)(5)(6)... $ 16.39 $ 15.18 $ 14.30 $ 13.52
========== =========== =========== ===========
Offering price as a percentage of pro forma stockholders'
equity per share......................................... 61.01% 65.88% 69.93% 73.96%
Offering price to pro forma net earnings
per share................................................ 10.87 12.20 13.51 14.93
</TABLE>
(Footnotes on next page)
25
<PAGE>
_________________________
(1) Does not give effect to the non-recurring expense that will be
recognized in the fourth quarter of 1998 if the establishment of the
Foundation is approved. In that event, the Company will recognize an
after-tax expense for the amount of the contribution to the Foundation
which is expected to be $4.5 million, $5.2 million, $6.0 million and
$6.9 million at the minimum, midpoint, maximum, and maximum as
adjusted, of the Estimated Price Range, respectively, based on an
effective tax rate of 38%.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from
the Company. See "Use of Proceeds." The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to
make annual contributions to the ESOP in an amount at least equal to
the principal and interest requirement of the debt. The Bank's total
annual payment of the ESOP debt is based upon 20 equal annual
installments of principal, with an assumed interest rate at 8.5%. The
pro forma net earnings assume: (i) that the Bank's contribution to the
ESOP is equivalent to the debt service requirement for the year ended
December 31, 1997 and was made at the end of the period; (ii) that
38,776, 45,619, 52,462 and 60,331 shares at the minimum, the midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, were committed to be released during the year ended
December 31, 1997 at an average fair value of $10.00 per share in
accordance with Statement of Position (SOP") 93-6; and (iii) only the
ESOP shares committed to be released were considered outstanding for
purposes of the net earnings per share calculations. A tax rate of 38%
was used for all calculations. See "Management of the Bank--Benefits--
Employee Stock Ownership Plan and Trust."
(3) Gives effect to the Stock-Based Incentive Plan expected to be adopted
by the Company following the Conversion, and assumes any necessary
stockholder or regulatory approval of the Stock-Based Incentive Plan
has been received. The Stock-Based Incentive Plan intends to acquire
an amount of Common Stock equal to 4% of the shares of Common Stock
issued in the Conversion, including shares issued to the Foundation,
or 387,763, 456,192, 524,621 and 603,314 shares of Common Stock at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, either through open market purchases, if
permissible, or from authorized but unissued shares of Common stock or
treasury stock of the Company, if any. Funds used by the Stock-Based
Incentive Plan to purchase the shares will be contributed to the Stock
-Based Incentive Plan by the Bank. In calculating the pro forma effect
of the Stock-Based Incentive Plan, it is assumed that the shares were
acquired by the Stock-Based Incentive Plan at the beginning of the
period presented in open market purchases at the Purchase Price and
that 20% of the amount contributed was an amortized expense during
such period. The issuance of authorized but unissued shares of the
Company's Common Stock to the Stock-Based Incentive Plan instead of
open market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.90, $0.80, $0.72 and $0.65 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, and pro
forma stockholders' equity per share would be $15.76, $14.60, $13.74
and $13.00 at the minimum, midpoint, maximum, and 15% above the
maximum of the range, respectively. There can be no assurance that
stockholder approval of the Stock-Based Incentive Plan will be
obtained, or that the actual purchase price of the shares will be
equal to the Purchase Price. A tax rate of 38% was used for all
calculations. See "Management of the Bank--Benefits--Stock-Based
Incentive Plan."
(4) The number of shares used in the calculation of historical and pro
forma earnings per share was 8,957,330, 10,538,035, 12,118,740 and
13,936,551 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively.
(5) No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Stock-Based Incentive Plan expected to be
adopted by the Company following the Conversion. An amount equal to
10% of the Common Stock issued in the Conversion, including shares
issued to the Foundation, or 969,408, 1,140,480, 1,311,552 and
1,508,285 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, will be reserved
for future issuance upon the exercise of options to be granted under
the Stock-Based Incentive Plan. The issuance of Common Stock pursuant
to the exercise of options under the Stock-Based Incentive Plan will
result in the dilution of existing stockholders' interests. Assuming
all options were exercised at the end of the period at an exercise
price of $10.00 per share, the pro forma net earnings per share would
be $0.83, $0.74, $0.66 and $0.60, respectively, and the pro forma
stockholders' equity per share would be $15.81, $14.71, $13.90 and
$13.20, respectively. See "Management of the Bank--Benefits--Stock-
Based Incentive Plan."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Savings
Institution Regulation--Limitation on Capital Distributions."
(7) The total number of shares, including shares issued to the Foundation,
used in the calculation of historical and pro forma stockholders'
equity per share was 9,694,080, 11,404,800, 13,115,520 and 15,082,848
shares at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively.
(8) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range of
up to 15% as a result of regulatory considerations or changes in
market or general financial and economic conditions following the
commencement of the Subscription Offering.
26
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
If the Foundation were not being established as part of the Conversion,
FinPro has estimated that the pro forma market capitalization of the Bank
would be approximately $122.0 million at the midpoint, which is
approximately $8.0 million greater than the pro forma market capitalization
of the Bank if the Foundation is approved by members of the Bank and would
result in approximately a $16.4 million increase, or 15.5%, in the amount
of Common Stock offered for sale in the Conversion. The pro forma price to
book ratio and pro forma price to earnings ratio would be approximately the
same under both the current appraisal and the estimate of the value of the
Company without the Foundation. Further, assuming the midpoint of the
Estimated Price Range, pro forma stockholders' equity per share and pro
forma earnings per share would be essentially the same with the Foundation
as without the Foundation. This estimate by FinPro was prepared at the
request of the OTS and is solely for purposes of providing members with
sufficient information with which to make an informed decision on the
Foundation. There is no assurance that in the event the Foundation is not
approved at the Special Meeting of Members that the appraisal prepared at
that time would conclude that the pro forma market value of the Company
would be the same as that estimated herein. Any appraisal prepared at that
time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion
was completed at June 30, 1998.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM
-------------------------- ------------------------ ----------------------------
WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
----------- ------------ ----------- ----------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Estimated offering amount.......... $ 89,760 $103,700 $105,600 $122,000 $121,440 $140,300
Pro forma market
capitalization.................... 96,941 103,700 114,048 122,000 131,155 140,300
Total assets....................... 551,136 561,536 565,404 577,640 579,674 593,744
Total liabilities.................. 388,780 388,780 388,780 388,780 388,780 388,780
Pro forma stockholders'
equity............................ 162,356 172,756 176,624 188,860 190,894 204,964
Pro forma consolidated
net earnings.................... 4,235 4,429 4,402 4,631 4,569 4,833
Pro forma stockholders' equity
per share........................ 16.74 16.66 15.48 15.48 14.56 14.61
Pro forma consolidated net
earnings per share............... 0.47 0.47 0.42 0.42 0.37 0.38
Pro Forma Pricing Ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share............... 59.74% 60.02% 64.60% 64.60% 68.68% 68.45%
Offering price to pro forma net
earnings per share............. 10.64x 10.64x 11.90x 11.90x 13.51x 13.16x
Pro forma market capitalization
to total assets................ 17.59% 18.47% 20.17% 21.12% 22.63% 23.63%
Pro Forma Financial Ratios:
Return on total assets........... 1.54% 1.58% 1.56% 1.60% 1.58% 1.63%
Return on stockholders' equity
(annualized)................... 5.22% 5.13% 4.98% 4.90% 4.79% 4.72%
Stockholders' equity to
total assets.................... 29.46% 30.76% 31.24% 32.70% 32.93% 34.52%
<CAPTION>
AT THE MAXIMUM,
AS ADJUSTED
-----------------------------
WITH NO
FOUNDATION FOUNDATION
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated offering amount......... $139,656 $161,345
Pro forma market
capitalization................... 150,828 161,345
Total assets...................... 596,082 612,263
Total liabilities................. 388,780 388,780
Pro forma stockholders'
equity........................... 207,302 223,483
Pro forma consolidated
net earnings................... 4,762 5,065
Pro forma stockholders' equity
per share...................... 13.75 13.86
Pro forma consolidated net
earnings per share.............. 0.34 0.34
Pro Forma Pricing Ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share.............. 72.73% 72.15%
Offering price to pro
forma net
earnings per share............ 14.71x 14.71x
Pro forma market capitalization
to total assets............... 25.30% 26.35%
Pro Forma Financial Ratios:
Return on total assets.......... 1.60% 1.65%
Return on stockholders'
equity (annualized)............ 4.59% 4.53%
Stockholders' equity to
total assets................... 34.78% 36.50%
</TABLE>
27
<PAGE>
FREDERICKSBURG SAVINGS
STATEMENTS OF INCOME
The following Statements of Income for each of the years in the three-year
period ended December 31, 1997 have been audited by Cherry, Bekaert & Holland,
L.L.P., independent certified public accountants, whose report thereon is
included elsewhere in this Prospectus. With respect to the information for the
six months ended June 30, 1998 and 1997, which is unaudited, in the opinion of
management, all adjustments necessary for a fair presentation of such interim
periods have been included and are of a normal recurring nature. Results for the
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. These Statements of
Income should be read in conjunction with the Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
-------------------- ------------------------------
1998 1997 1997 1996 1995
--------- -------- -------- --------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable:
Mortgage loans.............................. $16,473 $16,300 $32,879 $32,170 $31,561
Consumer and other loans.................... 383 330 696 543 611
Investment securities.......................... 1,388 1,442 2,929 3,285 4,133
------- ------- ------- ------- -------
Total interest income....................... 18,244 18,072 36,504 35,998 36,305
------- ------- ------- ------- -------
Interest expense:
Deposit accounts............................... 9,375 9,262 18,816 19,076 18,432
FHLB advances and other borrowings............. 245 306 602 459 565
------- ------- ------- ------- -------
Total interest expense...................... 9,620 9,568 19,418 19,535 18,997
------- ------- ------- ------- -------
Net interest and dividend income before
provision for loan losses................. 8,624 8,504 17,086 16,463 17,308
Provision for loan losses......................... 269 241 375 325 412
------- ------- ------- ------- -------
Net interest and dividend income after 8,355 8,263 16,711 16,138 16,896
provision for loan losses................. ------- ------- ------- ------- -------
Noninterest income:
Fees and other service charges................. 147 155 318 240 198
Other income................................... 102 50 142 169 85
------- ------- ------- ------- -------
Total noninterest income.................... 249 205 460 409 283
------- ------- ------- ------- -------
Noninterest expense:
Compensation and benefits...................... 1,462 1,689 3,511 3,716 3,345
Occupancy and equipment........................ 343 343 717 762 608
Federal deposit insurance premiums............. 172 129 349 3,391 864
Net cost of foreclosed real estate operations.. 25 21 163 130 185
Other expense.................................. 1,067 877 2,054 1,566 1,449
------- ------- ------- ------- -------
Total noninterest expense................... 3,069 3,059 6,794 9,565 6,451
------- ------- ------- ------- -------
Income before income tax expense............ 5,535 5,409 10,377 6,982 10,728
------- ------- ------- ------- -------
Income tax expense:
Current........................................ 2,280 2,527 3,990 2,943 4,508
Deferred....................................... (65) (377) (38) (542) (438)
------- ------- ------- ------- -------
Net income.................................. $ 3,320 $ 3,259 $ 6,425 $ 4,581 $ 6,658
======= ======= ======= ======= =======
</TABLE>
(See notes to financial statements.)
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations. The Bank's results of operations are dependent
primarily on net interest income, which is the difference between the
income earned on its loan and investment portfolios and its cost of funds,
consisting of the interest paid on deposits and borrowings. Results of
operations are also affected by the Bank's provision for loan losses and
fees and other service charges. The Bank's noninterest expense principally
consists of compensation and employee benefits, office occupancy and
equipment expense, federal deposit insurance premiums, the cost of
foreclosed real estate operations, data processing, advertising and
business promotion and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact the Bank.
MANAGEMENT STRATEGY
Traditionally, management's primary goal has been to control growth
and maintain the Bank's profitability, market share, asset quality and its
capital position by: (i) investing primarily in one- to four-family loans
secured by properties located in its primary market area; (ii) investing in
non-residential and construction and development loans secured by
properties located in the Bank's primary market area, to the extent that
such loans meet the Bank's general underwriting criteria including, but not
limited to, satisfaction of certain loan-to-value ("LTV") and debt service
coverage ratios and satisfaction that the borrower is experienced in these
types of real estate projects; (iii) investing in consumer loans; (iv)
investing funds not utilized for loan investments in short-term U.S.
Treasury and agency obligations, including mortgage-backed and mortgage-
related securities as well as highly rated corporate notes and municipal
bonds; and (v) building capital while controlling operating expenses. See
"Business of the Bank--Lending Activities" and "--Securities Investment
Activities." In the future, management intends to seek growth opportunities
and intends to seek means of lessening its exposure to interest rate risk
while avoiding investments the Bank's management believes bear risks
inconsistent with the Bank's investment policies. Management intends to
grow by expanding the products and services it offers, as necessary, in
order to improve its market share in its primary market area as well as
seeking opportunities to expand its market share and product line through
acquisitions, including, possibly, the acquisition of a commercial bank,
although management has no current plans in that regard. Currently, the
Bank is seeking means to increase its total deposits, particularly checking
accounts, and has begun to implement 24 hour banking services and, in the
future, may expand its consumer retail products. Other products and
services are also being reviewed, including products that would attract
more local business to the Bank. Emphasis has been placed on increasing
the number of transaction accounts the Bank has through aggressive
advertising and expanding the variety of savings and checking accounts
available. The Bank will also seek to expand consumer loans, including
home equity loan originations. Finally, depending upon market conditions,
management may implement leverage strategies to enhance income. Such
strategies would be to increase borrowings and invest the borrowed funds in
secured investments to enhance income from the spread between the cost of
the borrowed funds and the investment yield.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
QUALITATIVE ANALYSIS
--------------------
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance
sheet accounts, determine the appropriate level of risk given the Bank's
business strategy, operating environment, capital and liquidity
requirements and performance objectives and manage the risk consistent with
the Board of Directors' approved guidelines. Through such management, the
Bank seeks to reduce the vulnerability of its operations to changes in
interest rates, while not subjecting the Bank to undue credit or investment
risk. The Bank monitors its interest rate risk as such risk relates to its
operating strategies. The Bank's Board of Directors has established an
Asset/Liability Committee, responsible for reviewing its asset/liability
policies
29
<PAGE>
and interest rate risk position, which meets on a regular basis, and
reports trends and interest rate risk position to the Board of Directors on
a quarterly basis. The extent of the movement of interest rates is an
uncertainty that could have a negative impact on the earnings of the Bank.
See "Risk Factors--Sensitivity to Changes in Interest Rates."
In recent years, the Bank has become subject to increasing risk in the
event interest rates begin to rise due to the substantial levels of fixed-
rate loans the Bank has been originating due to high customer demand for
such products in the Bank's primary market area. As discussed above, the
Bank has sought to offset the interest rate risk associated with
originating primarily fixed-rate loans in a low interest rate environment
by investing in short-term U.S. Treasury and agency obligations to enable
the Bank to reinvest relatively quickly in higher yielding investments if
interest rates rise. In the future, depending upon market conditions, the
Bank intends to seek opportunities to increase its investment in short-term
adjustable rate mortgage-backed securities and may evaluate opportunities
to sell long-term fixed-rate loans in the secondary market. Currently,
management believes that the Bank's strong capital position and level of
liquidity coupled with low operating expenses would enable the Bank to
continue operating profitably in the event of a rapid rise in interest
rates, as it would be positioned to invest in higher yielding investments
to offset the negative impact its high fixed-rate loan portfolio would have
on the Bank's earnings; however, depending upon the magnitude of any change
in interest rates, the Bank may not be able to react quickly enough to
reinvest such funds and therefore may experience a decrease in earnings
following a significant increase in interest rates. The Bank may also
increase non-deposit borrowings which would further enable the Bank to
invest in higher yielding instruments in an increasing rate
environment.
QUANTITATIVE ANALYSIS
---------------------
GAP ANALYSIS. The matching of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest
rate sensitive" and by monitoring a Bank's interest rate sensitivity "gap."
An asset and liability is said to be interest rate sensitive within a
specific time period if it will mature or reprice within that time period.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period. At June 30, 1998, the Bank's
cumulative one year interest rate gap (which is the difference between the
amount of interest-earning assets maturing or repricing within one year and
interest-bearing liabilities maturing or repricing within one year) as a
percentage of total assets, was negative 15.17%. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the
amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Accordingly, during a period of
rising interest rates, an institution with a negative gap position would be
in a worse position to invest in higher yielding assets as compared to an
institution with a positive gap position which, consequently, may result in
the cost of its interest-bearing liabilities increasing at a rate faster
than its yield on interest-earning assets than if it had a positive gap.
During a period of falling interest rates, an institution with a negative
gap position would tend to have its interest-bearing liabilities repricing
downward at a faster rate than its interest-earning assets as compared to
an institution with a positive gap which, consequently, may tend to
positively affect the growth of its net interest income.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or
mature in each of the future time periods shown (the "Gap Table"). Except
as stated below, the amount of assets and liabilities shown which reprice
or mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual maturity of the asset or
liability. The table sets forth an approximation of the projected
repricing of assets and liabilities at June 30, 1998, on the basis of
contractual maturities, and scheduled rate adjustments within a one year
period and subsequent selected time intervals. The loan amounts in the
table reflect principal balances expected to be redeployed and/or repriced
as a result of contractual amortization of adjustable-rate loans and fixed-
rate loans, and as a result of contractual rate adjustments on adjustable-
rate loans. Mortgage-backed securities were assumed to prepay at 30%
annually. Savings accounts were assumed to decay at 20%, 20%, 20%, 20%,
20% and 0%, and money market savings accounts were assumed to decay at 50%,
25%, 25%, 0%, 0% and 0%, for the periods of one year or less, more than one
year to two years, more than two years to three years, more than three
years to four years, more than four years to five years, and more than five
years, respectively. Certificate
30
<PAGE>
accounts are reflected at actual dates of maturity. These assumptions are
generally based on the FDIC's deposit decay guidelines and the Bank's historical
experience. Prepayment and deposit decay rates can have a significant impact on
the Bank's estimated gap. While the Bank believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity. See "Business of the Bank --Lending Activities," "-- Securities
Investment Activities" and "-- Sources of Funds."
<TABLE>
<CAPTION>
MORE MORE
THAN MORE MORE THAN
1 YEAR THAN THAN 4 YEARS MORE
1 YEAR TO 2 YEARS TO 3 YEARS TO TO THAN TOTAL
OR LESS 2 YEARS 3 YEARS 4 YEARS 5 YEARS 5 YEARS AMOUNT
---------- ----------- ----------- ---------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)...................... $124,398 $ 5,457 $ 5,631 $ 3,186 $ 5,081 $280,640 $424,393
Consumer and other loans............... 2,373 905 1,726 2,065 1,254 739 9,062
Mortgage-backed and related
securities........................... 357 357 357 119 -- -- 1,190
Overnight and short term
investments......................... 8,248 -- -- -- -- -- 8,248
Investments and interest-
earning deposits..................... 20,019 4,537 4,320 1,019 1,796 2,776 34,467
-------- --------- --------- --------- --------- -------- --------
Total interest-earning assets....... $155,395 $ 11,256 $ 12,034 $ 6,389 $ 8,131 $284,155 $477,360
======== ========= ========= ========= ========= ======== ========
INTEREST-BEARING LIABILITIES:
Money market deposit accounts
and other transaction accounts...... 22,810 11,406 11,406 -- -- -- 45,622
Savings accounts....................... 7,563 7,563 7,564 7,564 7,564 -- 37,818
Certificate accounts................... 196,666 48,743 23,783 8,988 12,099 -- 290,279
-------- --------- --------- --------- --------- -------- --------
Total interest-bearing deposits........... 227,039 67,712 42,753 16,552 19,663 -- 373,719
FHLB advances.......................... -- 3,000 -- 5,000 -- -- 8,000
-------- --------- --------- --------- --------- -------- --------
Total interest-bearing liabilities..... $227,039 $ 70,712 $ 42,753 $ 21,552 $ 19,663 $ -- $381,719
======== ========= ========= ========= ========= ======== ========
Interest sensitivity gap.................. $(71,644) $ (59,456) $ (30,719) $ (15,163) $ (11,532) $284,155 $ 95,641
======== ========= ========= ========= ========= ======== ========
Cumulative interest-rate
sensitivity gap......................... $(71,644) $(131,100) $(161,819) $(176,982) $(188,514) $ 95,641
======== ========= ========= ========= ========= ========
Cumulative interest-rate sensitivity gap
as a percentage of total assets...... (15.17)% (27.76)% (34.26)% (37.47)% (39.92)% 20.25%
Cumulative interest-rate gap as a
percentage of total interest-earning
assets................................. (15.01)% (27.46)% (33.90)% (37.08)% (39.49)% 20.04%
Cumulative interest-earning assets as a
percentage of cumulative interest-
bearing liabilities..................... (68.44)% (55.97)% (52.48)% (51.12)% (50.61)% 125.06%
</TABLE>
_____________________
(1)Excludes nonaccrual loans.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of borrowers to service
their adjustable-rate loans may decrease in the event of an interest rate
increase.
31
<PAGE>
NET PORTFOLIO VALUE. As part of its interest rate risk analysis, the Bank
uses an interest rate sensitivity model which generates estimates of the change
in the Bank's net portfolio value ("NPV") over a range of interest rate
scenarios and which is prepared by the OTS on a quarterly basis. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces such analysis using its own model, based upon data
submitted on the Bank's quarterly Thrift Financial Reports, including estimated
loan prepayment rates, reinvestment rates and deposit decay rates. See
"Regulation--Federal Savings Institution Regulation." The following table sets
forth the Bank's NPV as of June 30, 1998 (the latest NPV analysis prepared by
the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES
IN NPV AS % OF PORTFOLIO
BASIS POINTS (RATE SHOCK) NET PORTFOLIO VALUE VALUE OF ASSETS
- --------------------------- ------------------------------------- --------------------
NPV
AMOUNT $ CHANGE % CHANGE RATIO CHANGE(1)
--------- --------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400.......................... $39,029 $(42,383) (52.06)% 9.25% (803)
+300.......................... 50,125 (31,287) (38.43) 11.53 (574)
+200.......................... 61,264 (20,148) (24.75) 13.69 (358)
+100.......................... 72,073 (9,339) (11.47) 15.66 (161)
Static........................ 81,412 -- -- 17.27 --
- --100......................... 88,138 6,726 8.26 18.35 108
- --200......................... 91,203 9,791 12.03 18.75 148
- --300......................... 94,588 13,176 16.18 19.19 192
- --400......................... 99,342 17,930 22.02 19.84 257
</TABLE>
_________________
(1) Expressed in basis points.
As is the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
depends upon the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them.
AVERAGE BALANCE SHEETS. The following tables set forth certain information
relating to the Bank at June 30, 1998, the six months ended June 30, 1998 and
1997 and for the years ended December 31, 1997, 1996 and 1995. The average
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.
32
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------
AT JUNE 30, 1998 1998 1997
-------------------- ------------------------------- ----------------------
AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST
--------- ------- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans, net........................ $406,890 8.10% $402,658 $16,473 8.18% $397,809 $16,300
Consumer and other loans, net.............. 9,096 8.42 8,899 383 8.60 8,256 330
Mortgage-backed and related 1,190 9.71 1,243 103 16.58 1,438 118
securities...............................
Overnight and short-term deposits.......... 9,031 4.71 13,848 329 4.76 12,970 294
Investment securities(1)................... 34,467 4.96 34,234 956 5.58 35,158 1,030
-------- ---- -------- ------- ----- -------- -------
Total interest-earning assets.......... 460,674 7.92% 460,882 $18,244 7.90% 455,631 $18,072
---- ------- ----- -------
Noninterest-earning assets................... 11,606 13,127 13,186
-------- -------- --------
Total assets........................... $472,280 $474,009 $468,817
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Transaction accounts....................... $ 2,481 0.32% $ 3,524 $ 5 0.28% $ 3,113 $ 4
Savings accounts........................... 80,959 3.25 83,136 1,320 3.18 88,135 1,417
Certificates of deposit.................... 290,279 5.71 288,687 8,050 5.58 283,856 7,841
-------- ---- -------- ------- ----- -------- -------
Total deposits........................ 373,719 5.16 375,347 9,375 5.00 375,104 9,262
FHLB advances.............................. 8,000 6.19 8,000 245 6.12 10,000 306
-------- ---- -------- ------- ----- -------- -------
Total interest-bearing liabilities.... 381,719 5.16% 383,347 $ 9,620 5.02% 385,104 $ 9,568
---- ------- ----- -------
Other liabilities............................ 7,061 8,902 8,839
-------- -------- --------
Total liabilities..................... 388,780 392,249 393,943
Equity capital............................... 83,500 81,760 74,874
-------- -------- --------
Total liabilities and equity capital.. $472,280 $474,009 $468,817
======== ======== ========
Net interest income/Net interest 2.76% $ 8,624 2.88% $ 8,504
rate spread(2).............................. ==== ======= ===== =======
Net earning assets/Net interest $ 78,955 3.74% $ 77,535 3.74% $ 70,527
margin(3).................................. ======== ==== ======== ===== ========
Ratio of interest-earning assets to 120.68% 120.23% 118.31%
interest-bearing liabilities................ ======== ======== ========
<CAPTION>
1997
----------
AVERAGE
YIELD/
COST
----------
ASSETS: <C>
<S>
Interest-earning assets:
Mortgage loans, net................................. 8.18%
Consumer and other loans, net....................... 8.00
Mortgage-backed and related
securities........................................ 16.40
Overnight and short-term deposits................... 4.54
Investment securities(1)............................ 5.86
----
Total interest-earning assets................... 7.92%
----
Noninterest-earning assets............................
Total assets....................................
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Transaction accounts................................ 0.26%
Savings accounts.................................... 3.22
Certificates of deposit............................. 5.52
----
Total deposits................................. 4.94
FHLB advances....................................... 6.12
----
Total interest-bearing liabilities............. 4.96%
----
Other liabilities.....................................
Total liabilities..............................
Equity capital........................................
Total liabilities and equity capital
Net interest income/Net interest
rate spread(2)....................................... 2.96%
====
Net earning assets/Net interest
margin(3)........................................... 3.72%
====
Ratio of interest-earning assets
interest-bearing liabilities.........................
</TABLE>
_____________________________
(1) Includes investment securities available-for-sale and stock in FHLB-
Atlanta.
(2) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
33
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ BALANCE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST INTEREST COST BALANCE INTEREST COST
--------- -------- ------- ------- -------- ------- ------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net.... $399,924 $32,879 8.22% $388,750 $32,170 8.27% $368,360 $31,561 8.56%
Consumer and
loans, net............ 8,495 696 8.19 9,271 543 5 .86 10,703 611 5.71
Mortgage-backed and
related securities.... 1,396 237 16.98 1,652 277 16.77 2,009 320 15.93
Overnight and
short-term deposits... 13,076 623 4.76 14,685 661 4.50 12,304 659 5.36
Investment
securities(1)......... 34,851 2,069 5.94 40,868 2,347 5.74 53,907 3,154 5.85
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total
interest-earning
assets............. 457,742 $36,504 7.97% 455,226 $35,998 7.90% 447,283 $36,305 8.11%
------- ----- ------- ----- ------- -----
Noninterest-earning
assets.................. 13,052 13,724 11,649
-------- -------- --------
Total assets....... $470,794 $468,950 $458,932
======== ======== ========
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
Transaction accounts... $ 3,329 $ 7 0.21% $ 3,609 $ 6 0.17% $ 891 $ 8 0.90%
Savings accounts....... 86,907 2,818 3.24 94,856 2,977 3.14 101,574 3,329 3.28
Certificates of deposit 285,410 15,991 5.60 283,944 16,093 5.67 275,907 15,095 5.47
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total deposits...... 375,646 18,816 5.01 382,409 19,076 4.99 378,372 18,432 4.87
FHLB advances and
other borrowings...... 9,667 602 6.23 7,417 459 6.19 8,000 565 7.06
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total
interest-bearing
liabilities......... 385,313 $19,418 5.04% 389,826 $19,535 5.01% 386,372 $18,997 4.92%
------- ----- ------- ----- ------- -----
Other liabilities...... 8,897 7,719 7,062
-------- -------- --------
Total liabilities.... 394,210 397,545 393,434
Equity capital......... 76,584 71,405 65,498
-------- -------- --------
Total liabilities
and equity capital.. $470,794 $468,950 $458,932
======== ======== ========
Net interest income/Net
interest rate
spread(2).............. $17,086 2.93% $16,463 2.89% $17,308 3.19%
======= ===== ======= ===== ======= =====
Net earning assets/Net
interest
margin(3).............. $ 72,429 3.73% $ 65,400 3.61% $ 60,911 3.86%
======== ===== ======== ===== ======== =====
Ratio of
interest-earning assets
to interest-
bearing liabilities.... 118.80% 116.78% 115.77%
======== ======== ========
</TABLE>
(1)Includes investment securities available-for-sale and stock in FHLB-
Atlanta.
(2)Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3)Net interest margin represents net interest income as a percentage of
average interest-earning assets.
34
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO COMPARED TO
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------- ----------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
-------------------- -------------------- --------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
----------- ------- ------- -------- --------- -------- -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net...... $ 386 $(213) $173 $1,194 $(485) $ 709 $1,746 $(1,137) $ 609
Consumer and other loans. 51 2 53 (45) 198 153 (82) 14 (68)
Mortgage-backed and
related securities...... (32) 17 (15) (43) 3 (40) (57) 14 (43)
Overnight and short term
deposits................ 40 (5) 35 (72) 34 (38) 128 (126) 2
Investment and
interest-earning
deposits............... (54) (20) (74) (346) 68 (278) (763) (44) (807)
----- ----- ---- ------ ----- ----- ------ ------- -----
Total
interest-earning
assets.............. $ 391 $(219) $172 $ 688 $(182) $ 506 $ 972 $(1,279) $(307)
===== ===== ==== ====== ===== ===== ====== ======= =====
INTEREST-BEARING
LIABILITIES:
Transaction accounts..... $ 1 $ -- $ 1 $ -- $ 1 $ 1 $ 24 $ (26) $ ( 2)
Savings accounts......... (161) 64 (97) (250) 91 (159) (220) (132) (352)
Certificate of deposits.. 267 (58) 209 83 (185) (102) 440 558 998
Total
interest-bearing
deposits........... 107 6 113 (167) (93) (260) 244 400 644
FHLB advances............ (122) 61 (61) 139 4 143 (41) (65) (106)
----- ----- ---- ------ ----- ----- ------ ------- -----
Total
interest-bearing
liabilities......... $ (15) $ 67 $ 52 $ (28) $ (89) $(117) $ 203 $ 335 $ 538
===== ===== ==== ====== ===== ===== ====== ======= =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Assets totalled $472.3 million at June 30, 1998, an increase of $360,000, or
.08% from total assets of $471.9 million at December 31, 1997. The increase in
assets during the six month period was due primarily to a $3.0 million increase
in the Bank's loan portfolio, offset by reductions in cash and cash equivalents
of $2.3 million, investment securities of $223,000 and $101,000 in mortgage-
backed securities.
LOANS. The increase in total loans was primarily due to increases in real
estate mortgage and consumer installment loans, partially offset by a decrease
in non-residential real estate loans. Although total mortgage loans increased
$5.9 million, total mortgage loans, as a percentage of total loans, remained
relatively stable at 97.90%, decreasing from 97.93% at December 31, 1997. The
growth in the Bank's real estate mortgage loan portfolio is primarily a result
of the Bank's decision to continue to originate and retain real estate loans in
its portfolio. Real estate construction loans increased from $16.0 million
(3.72% of the portfolio) at December 31, 1997 to $20.0 million (4.57% of the
portfolio) at June 30, 1998. Non-residential real estate loans decreased by $5.6
million from $41.0 million at December 31, 1997 to $35.3 million at June 30,
1998. This was the result of large loan payoffs in this portfolio. Undisbursed
loan funds increased from $5.0 million at December 31, 1997 to $8.7 million at
June 30, 1998.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from $5.5
million at December 31, 1997 to $5.6 million at June 30, 1998, an increase of
$161,000. The relatively stable allowance during this period reflects the
economic stability in the market area as well as improvement in net charged off
loans. The adequacy of the allowance for loan losses is evaluated monthly by
management based upon a review of significant loans, with particular emphasis on
nonperforming and delinquent loans that management believes warrant special
35
<PAGE>
attention. At June 30, 1998, the allowance for loan losses provided coverage of
137.81% of total nonperforming loans, an increase from 98.60% at December 31,
1997. The balance of the allowance is maintained at a level which is, in
management's judgment, representative of the amount of risk inherent in the loan
portfolio. See "Business -- Allowance for Loan Losses."
INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.3 million and $31.2 million, respectively,
at December 31, 1997 to $1.2 million and $30.9 million, respectively, at June
30, 1998. These decreases were primarily due to redemptions and principal
payments of these securities totalling approximately $4.1 million during the six
months ended June 30, 1998. These repayments were offset by purchases of
securities totalling $3.7 million. Currently, management intends to continue
allowing the Bank's investment securities to mature and paydown and to reinvest
the proceeds primarily in securities to be classified by the Bank as available-
for-sale and in new loans.
DEPOSITS. Total deposits decreased $3.4 million, or 0.9%, from $377.1 million
at December 31, 1997 to $373.7 million at June 30, 1998. While time deposits
increased $1.0 million, or 0.34%, during the period, savings accounts decreased
$900,000, or 2.3%, money market accounts decreased $2.7 million, or 5.89%, and
noninterest-bearing accounts decreased $800,000, or 24.04%.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Assets totalled $471.9 million at December 31, 1997, an increase of $2.0
million, or 0.43%, from $469.9 million at December 31, 1996. Most of this
increase was concentrated in the loan portfolio which increased $7.9 million for
the year ending December 31, 1997 to $413.0 million, which increase was
partially offset by a reduction in cash and cash equivalents of $4.7 million.
Total deposits increased by $1.4 million, from $375.7 million at December 31,
1996 to $377.1 million at December 31, 1997. FHLB advances decreased $7.0
million from $15.0 million at December 31, 1996 to $8.0 million at December 31,
1997.
LOANS. The increase in total loans was primarily due to increases in
residential real estate loans and consumer loans, which were partially offset by
decreases in the Bank's construction and development loans and non-residential
real estate loans. Although, total real estate mortgage loans increased $2.9
million, or 0.69%, total real estate mortgage loans as a percentage of total
loans decreased from 98.12% at December 31, 1996 to 97.93% at December 31, 1997
due to the increase in consumer loans. Real estate construction loans declined
from $21.3 million, or 4.98% of the portfolio, at December 31, 1996 to $16.0
million, or 3.72% of the portfolio, at December 31, 1997. The decline in real
estate construction loans resulted from large payoffs for this type of
borrowing.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses decreased by $65,000
to $5.5 million at December 31, 1997 from December 31, 1996. This slight
reduction reflects the economic stability in the market area as well as
improvements in net charged off loans. The adequacy of the allowance for loan
losses is evaluated monthly by management based upon a review of significant
loans, with particular emphasis on nonperforming and delinquent loans that
management believes warrant special attention. At December 31, 1997, the
allowance for loan losses provided coverage of 98.60% of total nonperforming
loans, up from 61.89% at December 31, 1996.
INVESTMENT SECURITIES. The balances of securities held-to-maturity and
available-for-sale decreased from $1.5 million and $32.0 million, respectively,
at December 31, 1996 to $1.3 million and $31.2 million, respectively, at
December 31, 1997. These decreases were the result of redemptions and principal
payments of these securities, totalling approximately $7.1 million during the
year ended December 31, 1997. The repayments were offset by purchases of
securities totalling $5.4 million.
DEPOSITS. Total deposits increased $1.5 million, or 0.40%, from $375.7
million at December 31, 1996 to $377.1 million at December 31, 1997. Of this
total increase, certificates of deposit increased $6.4 million, or 2.2%, and
noninterest-bearing accounts increased $815,000. These increases were partially
offset by decreases in money market accounts of $4.8 million and passbook
accounts of $951,000. FHLB advances decreased from $15.0
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million at December 31, 1996 to $8.0 million at December 31, 1997, which was
funded through net cash provided by operations.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL. Net income for the six months ended June 30, 1998 increased $61,000
to $3.3 million compared to the six months ended June 30, 1997. This increase
was primarily a result of an increase in net interest income of $120,000, which
was partially offset by an increase in the provision for loan losses of $28,000,
an increase in noninterest expense of $10,000 and an increase of income tax
expense of $65,000. The Bank's return on average assets (ROA) was 1.40% for the
six months ended June 30, 1998, up from 1.39% for the same period in 1997. The
Bank's return on average equity (ROE) was 8.12% for the six months ended June
30, 1998, down from 8.71% for the six months ended June 30, 1997.
INTEREST INCOME. Interest income for the six months ended June 30, 1998
increased $172,000 to $18.2 million, from $18.1 million for the comparable
period in 1997 primarily due to an increase in the average balance of mortgage
loans of $4.8 million to $402.7 million for the six months ended June 30, 1998,
as compared to the same period in 1997. This increase was partially offset by a
decrease in the average yield on investment securities from 5.86% to 5.58% and a
decrease in the average balance of investment securities from $35.2 million for
the six months ended June 30, 1997 to $34.2 million for the six months ended
June 30, 1998.
INTEREST EXPENSE. Interest expense increased by $52,000 during the six months
ended June 30, 1998 to $9.6 million. Interest paid on certificates of deposit
for the six months ended June 30, 1998 was $8.0 million, up from $7.8 million
for the six months ended June 30, 1997, which was due primarily to an increase
in the average balance of time deposits, from $283.9 million for the six months
ended June 30, 1997 to $288.7 million for the six months ended June 30,
1998.
NET INTEREST INCOME. Net interest income for the six months ended June 30,
1998 increased $120,000 to $8.6 million from $8.5 million for the six months
ended June 30, 1997, which was primarily due to an increase in the average
balance of interest-earning assets from $455.6 million for the six months ended
June 30, 1997 to $460.9 million for the six months ended June 30, 1998, the
effect of which was partially offset by a decrease in the yield on average
interest-earning assets from 7.92% for the six months ended June 30, 1997 to
7.90% for the same period in 1998 and an increase in the cost of average
interest-bearing liabilities from 4.96% to 5.02%. The Bank's net interest margin
for the six months ended June 30, 1998 was 3.74%, up from 3.72% for the six
months ended June 30, 1997. As a result, the Bank's interest rate spread
decreased from 2.96% to 2.88%.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$241,000 for the six months ended June 30, 1997 to $269,000 for the six months
ended June 30, 1998. This increase is primarily the result of increases in
reserves for commercial mortgage loans during the six months ended June 30, 1998
due to several individual lending relationships in addition to continued growth
in the Bank's loan portfolio. Although management believes the current level of
allowance for loan losses is adequate, there can be no assurance that future
losses will not exceed estimated amounts or that the provision for loan losses
will not increase in future periods. See "Business of the Bank -- Allowance for
Loan Losses."
NONINTEREST INCOME. Total noninterest income increased $44,000 to $249,000
for the six months ended June 30, 1998 as compared to $205,000 for the same
period in 1997. Noninterest income is composed primarily of servicing fees and
deposit account service charges.
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NONINTEREST EXPENSE. Total noninterest expense was $3.1 million for both the
six months ended June 30, 1998 and 1997. Decreases in compensation and benefits
of $227,000 were offset by increases in Federal examination fees of $43,000, and
other expenses totalling $194,000. The decrease in compensation expense is
directly related to the Bank's attempts to increase the efficiencies in branch
and other operations. The increase in other expenses is the result of increased
legal and accounting fees related to litigation involving an employment matter
which was settled in 1998.
INCOME TAXES. Income tax expense increased by $65,000 to $2.2 million for the
six months ended June 30, 1998. The increase is primarily the result of the
increase of $126,000 in income before income tax expense to $5.5 million in 1998
from $5.4 million in 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL. Net income for the year ended December 31, 1997 increased by $1.8
million, or 40.3%, to $6.4 million compared to $4.6 million for the year ended
December 31, 1996. Net interest income for the years ended December 31, 1997 and
1996 was $17.1 million and $16.5 million, respectively, due to an increase of
$506,000 in interest income for 1997 coupled with a decrease in interest expense
of $117,000. Noninterest income increased by $51,000 in 1997. In addition,
noninterest expense decreased by $2.8 million to $6.8 million for the year ended
December 31, 1997 compared to $9.6 million for the prior year, reflecting the
one-time special SAIF assessment paid in 1996. The Bank's return on average
assets increased from 0.98% for the year ended December 31, 1996 to 1.36% for
the year ended December 31, 1997. The Bank's return on average equity also
increased from 6.42% for the year ended December 31, 1996 to 8.39% for the year
ended December 31, 1997.
INTEREST INCOME. Interest income for the year ended December 31, 1997 was
$36.5 million, an increase of $506,000 or 1.4% from $36.0 million for the year
ended December 31, 1996. The largest component of interest income is interest on
mortgage loans. Interest on mortgage loans increased from $32.2 million for the
year ended December 31, 1996 to $32.9 million for the year ended December 31,
1997. This increase of $709,000 or 2.2% is primarily the result of loan volume
increases. The average balance of mortgage loans increased $11.2 million to
$399.9 million, while the yield on mortgage loans decreased 5 basis points from
8.27% to 8.22%, partially offsetting the increase due to volume. The increase in
interest on loans was offset by a decrease in interest on investment securities.
Interest income on investment securities decreased $356,000. Substantially all
of the decrease in interest income on investment securities is attributable to
lower volume. The average balance of investment securities decreased from $40.9
million for the year ended December 31, 1996 to $34.9 million for the year ended
December 31, 1997. Average interest-earning assets were $457.7 million for the
year ended December 31, 1997, an increase of $2.5 million, or 0.55%, from $455.2
million for the year ended December 31, 1996. The average yield on earning
assets increased 7 basis points to 7.97% for the year ended December 31, 1997,
from 7.90% for the year ended December 31, 1996.
INTEREST EXPENSE. Interest expense decreased during the year ended December
31, 1997 to $19.4 million, from $19.5 million for the year ended December 31,
1996. Substantially all of the Bank's interest expense is from interest-bearing
deposits. The largest category of interest-bearing deposits is certificates of
deposits. Interest on certificates of deposits for the year ended December 31,
1997 was $16.0 million, down $102,000 from $16.1 million in 1996, which was
primarily the result of an increase in the average balance of certificates of
deposits, from $283.9 million in 1996 to $285.4 million in 1997, offset by a
decrease of 7 basis points in the rates paid on these deposits from 5.67% in
1996 to 5.60% in 1997. Interest expense on savings accounts decreased $159,000,
from $3.0 million for the year ended December 31, 1996 to $2.8 million for the
year ended December 31, 1997. This decrease is attributable to a decrease in the
average balance of
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savings accounts, which decreased $7.9 million during 1997, partially offset by
an increase of 10 basis points in the rates paid on these savings accounts, from
3.14% to 3.24%. Interest expense on FHLB advances increased $143,000 from
$459,000 for the year ended December 31, 1996 to $602,000 for the year ended
December 31, 1997. This increase is primarily attributable to the increase in
average advances outstanding from $7.4 million for the year ended December 31,
1996 to $9.7 million for the year ended December 31, 1997. The factors
contributing to a decrease in interest expense were slightly offset by a 4 basis
point increase in the average cost of FHLB advances.
NET INTEREST INCOME. Net interest income for the year ended December 31,
1997 was $17.1 million, compared to $16.5 million for the year ended December
31, 1996. The increase was primarily due to a decrease in average interest-
bearing liabilities of $4.5 million coupled with an increase in average
interest-earning assets of $2.5 million. The yield on average interest-earning
assets increased from 7.90% to 7.97%, while the average yield on interest-
bearing liabilities increased from 5.01% for the year ended December 31, 1996 to
5.04% for the year ended December 31, 1997. As a result, the Bank's interest
rate spread increased from 2.89% to 2.93% while the net interest margin
increased from 3.61% to 3.73%.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$325,000 for the year ended December 31, 1996 to $375,000 for the year ended
December 31, 1997. This increase is primarily the result of an increase in net
charge-offs from $262,000 for the year ended December 31, 1996 to $440,000 for
the year ended December 31, 1997. The average impairment of loans decreased from
$11.9 million for the year ended December 31, 1996 to $9.8 million for the year
ended December 31, 1997, mitigating the need for additional provisions for loan
losses. See "Business of the Bank -- Allowance for Loan Losses."
NONINTEREST INCOME. Total noninterest income increased $51,000, or 12.5% to
$460,000 for the year ended December 31, 1997, compared to $409,000 for the same
period in 1996. Noninterest income primarily consists of servicing fees and
deposit account service charges.
NONINTEREST EXPENSE. Total noninterest expense decreased $2.8 million to $6.8
million for the year ended December 31, 1997, down from $9.6 million for the
prior year. Decreases in compensation and benefits of $205,000, occupancy and
equipment of $45,000, and federal deposit insurance premium of $3.0 million
(reflecting the one-time SAIF assessment paid in 1996) were offset by an
increase in the net cost of foreclosed real estate operations of $33,000 and
increases in other expenses of $488,000.
The decrease in compensation expense to $3.5 million for the year ended
December 31, 1997 is directly related to the Bank's efforts to increase
efficiencies in branch-banking and other operations. The decrease in occupancy
and equipment expenses to $717,000 for the year ended December 31, 1997 reflects
the reduction in depreciation expense for fully depreciated assets. No
significant acquisitions of hardware or software were made in the year ended
December 31, 1997. The increase in the net cost of foreclosed real estate
operations is the result of several factors. During the year ended December 31,
1997, the Bank experienced a slight narrowing of the cost of foreclosed property
and the realized sale price. At the same time, the condition of foreclosed
property required additional reserves for deferred maintenance, offset by
decreased expenses in preparing foreclosed properties for sale. The resulting
net effect increased those expenses by $33,000 over those experienced for the
year ended December 31, 1996. The decrease in federal deposit premiums was due
primarily to the special SAIF assessment of $2.5 million paid in 1996. The
increase in other expenses is the result of increased legal and accounting fees
related to litigation regarding an employment matter. This litigation has been
settled and no further expenses will be incurred.
INCOME TAXES. Income tax expense increased from $2.4 million for the year
ended December 31, 1996 to $3.9 million for the year ended December 31, 1997.
The increase is primarily the result of a
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change in deferred income tax from $542,000 for the year ended December 31, 1996
to $38,000 for the year ended December 31, 1997, offset by additional income
before income tax expense of $3.4 million or 48.6% in 1997 compared to
1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. Net income for the year ended December 31, 1996 decreased by $2.1
million or 31.2% to $4.6 million from $6.7 million for the year ended December
31, 1995. Net interest income was $16.5 million for the year ended December 31,
1996, compared to $17.3 million for the year ended December 31, 1995.
Noninterest expense was $9.6 million for the year ended December 31, 1996,
compared to $6.5 million for the year ended December 31, 1995.
INTEREST INCOME. Interest income for the year ended December 31, 1996
decreased $307,000 or 0.84% to $36.0 million, from $36.3 million for 1995. The
largest component of interest income is interest on mortgage loans. Interest on
mortgage loans increased by $609,000 or 1.9% from $31.6 million for the year
ended December 31, 1995 to $32.2 million for the year ended December 31, 1996.
Interest income increased primarily due to an increase in the average balance of
interest-earning assets, the effect of which was partially offset by a decrease
in the average yield on such assets. The average balance of mortgage loans
increased $20.4 million to $388.7 million, while the average yield on mortgage
loans decreased 29 basis points from 8.56% to 8.27%. This decrease in the yield
earned on mortgage loans was driven primarily by decreases in the rates on the
fixed rate mortgage portfolio as refinances of higher rate mortgages were
experienced. See "Business of the Bank -- Mortgage Lending." The increase in
interest on mortgage loans was partially offset by a decreases in interest on
investment securities coupled with a decrease in the balance of investment
securities. Interest income on investment securities declined $807,000. In
addition, the average balance of such securities declined by $13.0 million. In
addition, the average balance of mortgage-backed securities decreased from $2.0
million for the year ended December 31, 1995 to $1.7 million for the year ended
December 31, 1996. This decrease was partially offset by an increase in the
average yield on mortgage-backed securities from 15.9% to 16.8%. Average
interest-earning assets were $455.2 million for the year ended December 31,
1996, an increase of $7.9 million from $447.3 million for the year ended
December 31, 1995, while the average yield on interest-earning assets was 7.9%
for the year ended December 31, 1996, a decline of 21 basis points from 8.11%
for 1995.
INTEREST EXPENSE. Interest expense increased during the year ended December
31, 1996 by $538,000 to $19.5 million from $19.0 million for the year ended
December 31, 1995. The largest category of interest-bearing deposits is
certificates of deposit. Interest on certificates of deposits for the year ended
December 31, 1996 was $16.1 million, up $1.0 million from $15.1 million in 1995.
This increase is the result of an increase in the average balance of
certificates of deposit, from $275.9 million in 1995 to $283.9 million in 1996,
combined with an increase of 20 basis points in the rates paid on these deposits
from 5.47% in 1995 to 5.67% in 1996. Interest expense on savings accounts
decreased $352,000 from $3.3 million in 1995 to $3.0 million in 1996. This
decrease resulted almost entirely from a $6.7 million decrease in the average
balances of savings accounts during this period from $101.6 million in 1995 to
$94.9 million in 1996. Interest expense on FHLB advances decreased $106,000 from
1995 to 1996, which was primarily attributed to lower interest rates during the
period. Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.
NET INTEREST INCOME. Net interest income for the year ended December 31, 1996
was $16.5 million, down $845,000 or 4.9% from $17.3 million for the year ended
December 31, 1995. The decrease was primarily the result of the effects of a 21
basis point decrease in the rates earned on earning assets from 8.11% in 1995 to
7.90% in 1996. This reduction in yield was compounded by the effects of a 9
basis point increase in the rates paid on average interest-bearing liabilities,
from 4.92% in 1995 to 5.01% in 1996. The Bank's net interest margin for the year
ended December 31, 1996 was 3.61%, down from 3.86% for the year ended December
31, 1995. The effect of the changes in rates were partially offset by increases
in volume. These increases were composed of an increase in average interest-
earning assets of $8.0 million, from $447.3 million in 1995 to $455.2 million
for the
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year ended December 31, 1996, offset by a $3.4 million increase in average
interest-bearing liabilities from $386.4 million for the year ended December 31,
1995 to $389.8 million for the same period in 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses of $325,000 for the
year ended December 31, 1996 decreased $87,000 from the $412,000 provision in
the year ended December 31, 1995. This decrease resulted from reduced chargeoffs
of loan balances and an improving economy in the Bank's market area.
NONINTEREST INCOME. Total noninterest income for the year ended December 31,
1996 was $409,000, an increase of $126,000 or 44.5% over noninterest income of
$283,000 for 1995. Increased income from loan servicing fees and deposit account
service charge increases aggregating $106,000 contributed to the increase in
noninterest income.
NONINTEREST EXPENSE. Total noninterest expense increased $3.1 million or
48.3% to $9.6 million for the year ended December 31, 1996, up from $6.5 million
for the year ended December 31, 1995. Increases in compensation and benefits of
$371,000 to $3.7 million, occupancy and equipment of $154,000, a special SAIF
assessment of $2.5 million, and other expenses of $117,000 were partially offset
by reductions in net cost of foreclosed real estate operations of $55,000. The
increase in compensation and benefits is the result of a nonfunded termination
agreement with the Bank's former chief executive officer completed during the
year ended December 31, 1996. The increase in occupancy and equipment was the
result of transferring data processing from an in-house system to a service
bureau during 1996. The conversion was completed in mid-year. The increase in
the FDIC assessment is the result of legislation which mandated that all thrift
institutions pay a special SAIF assessment.
INCOME TAXES. Income tax expense decreased from $4.1 million for the year
ended December 31, 1995 to $2.4 million for 1996. The decrease is primarily the
result of lower net income before income tax expense of $3.7 million in 1996
compared to 1995 and an increase in deferred taxes of $104,000.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's currently required liquidity
ratio is 4.00%. At June 30, 1998 and December 31, 1997, the Bank's liquidity
ratio was 8.58% and 9.58%, respectively. Management's current strategy is to
maintain liquidity as close as possible to the minimum regulatory requirement
and to invest any excess liquidity in higher yielding interest-earning assets.
The Bank manages its liquidity position and demands for funding primarily by
investing excess funds in short-term investments and utilizing FHLB advances in
periods when the Bank's demands for liquidity exceed funding from deposit
inflows.
The Bank's most liquid assets are cash and cash equivalents and securities
available-for-sale. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At June 30, 1998, cash and cash equivalents and securities available-for-sale
totalled $39.9 million, or 8.46% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises. At June 30, 1998, the Bank had $8.0 million in advances outstanding from
the FHLB and, at June 30, 1998, had an additional overall borrowing capacity
from the FHLB of $37.0 million. Depending on market conditions, the pricing of
deposit products and FHLB advances, the Bank may continue to rely on FHLB
borrowings to fund asset growth.
At June 30, 1998, the Bank had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $36.2 million. The Bank
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anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts, including IRA and Keogh
accounts, which are scheduled to mature in less than one year from June 30,
1998, totalled $196.7 million. Based upon experience, management believes the
majority of maturing certificates of deposit will remain with the Bank. In
addition, management of the Bank believes that it can adjust the rates offered
on certificates of deposit to retain deposits in changing interest rate
environments. In the event that a significant portion of these deposits are not
retained by the Bank, the Bank would be able to utilize FHLB advances to fund
deposit withdrawals, which would result in an increase in interest expense to
the extent that the average rate paid on such advances exceeds the average rate
paid on deposits of similar duration.
At June 30, 1998, the Bank exceeded all minimum regulatory capital
requirements with a tangible capital level of $79.9 million, or 17.05%, of total
adjusted assets, which is above the required level of $7.1 million, or 1.5%;
core capital of $79.9 million, or 17.05%, of total adjusted assets, which is
above the required level of $18.7 million, or 3.00%; and risk-based capital of
$83.4 million, or 28.52%, of risk-weighted assets, which is above the required
level of $22.4 million, or 8.00%. See "Regulatory Capital Compliance."
The primary investing activities of the Bank are the origination of
residential one- to four-family loans, non-residential real estate loans, real
estate construction and development loans, and the purchase of United States
Treasury and agency securities, mortgage-backed and mortgage-related investment
securities and other investment securities. During the six months ended June 30,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995, the Bank's
loan originations totalled $79.7 million, $51.9 million, $112.5 million, $88.0
million, and $79.8 million, respectively. Purchases of United States Treasury
and agency securities, mortgage-backed and mortgage related investment
securities and other investment securities totalled $3.6 million, $2.6 million,
$5.4 million, $8.3 million and $12.6 million for the six months ended June 30,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. These activities were funded primarily by principal repayments on
loans and mortgage-backed and mortgage related investment securities and other
investment securities, and to a minor extent deposit growth.
The Bank experienced a net increase (decrease) in total deposits of ($3.4
million), $2.0 million, $1.5 million, ($10.7 million) and $10.2 million for the
six months ended June 30, 1998 and 1997 and the years ended December 31, 1997,
1996 and 1995, respectively. Deposit flows are affected by the level of interest
rates, the interest rates and products offered by local competitors, interest
rates offered by the Bank and other factors.
YEAR 2000 COMPLIANCE
The Bank has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Bank's data
processing is performed under agreements with BISYS, Inc. ("BISYS"), a
nationwide financial service bureau, and consequently the Bank is very dependent
on this service bureau to conduct its business. The Bank has already contacted
BISYS, as well as each of its other vendors to request time tables for Year 2000
compliance and expected costs, if any, to be passed along to the Bank. To date,
the Bank has been informed that BISYS and other primary service providers
anticipate that all reprogramming efforts will be completed by December 31,
1998, allowing the Bank adequate time for testing. Certain other vendors have
not yet responded; however, the Bank will pursue other options if it appears
that these vendors will be unable to comply. The Bank believes that its costs
related to Year 2000 will be approximately $200,000, and has incurred $17,200
through June 30, 1998, and expects that substantially all costs related to Year
2000 will be capitalized as incurred and amortized over approximately five year
lives. Management does not expect these costs to have a significant impact on
the Bank's financial position or results of operations. However, there can be no
assurance that the vendors' systems will be Year 2000 compliant; consequently,
the Bank could incur incremental costs to convert to another vendor.
The Bank has determined that Year 2000 non-compliance by any loan customer
would have no material impact on the Bank. The risks associated with the Year
2000 issue, however, could go beyond the Bank's own ability to solve Year 2000
problems. Should suppliers of critical services fail in their efforts to be Year
2000 compliant, it could have significant adverse financial results for the
Bank. The Bank's risk management strategy for its mission-
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critical systems focuses on its highest priority system, BISYS, the
financial service bureau. Although the Bank has assessed the service
bureau's progress and believes it will be Year 2000 compliant, the Bank
will continue to review and test the service bureau's applications. BISYS'
failure to demonstrate Year 2000 compliance by December 31, 1998, would
result in the Bank's implementation of its primary contingency plan,
conversion to another financial service vendor. The relative percentages of
income affected under the plan would be nominal.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which provide for the measurement of
financial position and operating results generally in terms of historical
dollar amounts without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Bank
are monetary in nature. As a result, interest rates have a greater impact
on the Bank's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or
to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
REPORTING COMPREHENSIVE INCOME. In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for reporting
and displaying comprehensive income and its components within the financial
statements. Comprehensive income is defined in FASB Concepts Statement 6 as
the "change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners." The Statement is
effective for fiscal years beginning after December 15, 1997, and was
adopted by the Bank during 1998. The adoption of this Statement did not
have a material effect on the Bank's financial reporting.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way
that public business enterprises report information about operating
segments in annual financial statements. This Statement is effective for
financial statements for periods beginning after
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December 15, 1997, and was adopted by the Bank during 1998. This Statement
is a matter of disclosure only and does not effect the determination of
income and expense amounts. The adoption of this Statement did not have a
material effect on the Bank's financial reporting.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which
standardizes the disclosure requirements for pensions and other
postretirement benefits. This Statement supersedes FASB Statements No. 87,
"Employers' Accounting for Pensions," No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits other than Pensions." This Statement is effective
for fiscal years beginning after December 15, 1997, and was adopted by the
Bank during 1998. The adoption of this Statement did not have a material
effect on the Bank's financial reporting.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This Statement supersedes FASB
Statements No. 80, "Accounting for Futures Contracts," No. 105, "Disclosure
of Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," and No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." It amends Statement No. 107, "Disclosures about
Fair Value of Financial Instruments" to include in Statement 107 the
disclosure provisions about concentrations of credit risk from Statement
105. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management of the Bank is currently
assessing the impact of this Statement on the Bank's financial reporting
process. Management does not expect to adopt this Statement early, as
permitted by the Statement. At the initial application of this Statement,
the Bank may elect to transfer any security classified by the Bank as held-
to-maturity to the available-for-sale or trading classification. In
addition, the Bank may elect to transfer any security classified as
available-for-sale to the trading classification. Presently, management
does not expect to elect these options.
BUSINESS OF THE BANK
GENERAL
The Bank is a community oriented savings association whose principal
business has been and continues to be attracting retail deposits from the
general public in the areas surrounding its branch offices and investing
those deposits, together with funds generated from operations and
borrowings, primarily in one- to four-family residential mortgage loans. In
recent years, the Bank has originated primarily fixed-rate one- to four-
family loans with terms of 15 to 30 years. To a lesser extent, the Bank
invests in non-residential real estate loans, including loans to local
churches, construction and development loans, land and land development
loans, and consumer loans. The Bank operates through its four full service
banking offices located in the City of Fredericksburg and Stafford and
Spotsylvania Counties, Virginia. The Bank originates loans for investment.
The Bank's revenues are derived principally from interest on its mortgage
loans and, to a lesser extent, interest on its investments, which generally
include short-term U.S. Treasury bonds and U.S. Government Agency
obligations, short-term, highly rated corporate debt securities and
municipal bonds and from loan fee income. The Bank's primary sources of
funds are deposits, principal and interest payments on loans and
investments.
MARKET AREA AND COMPETITION
The Bank is headquartered in Fredericksburg, Virginia and has been,
and intends to continue to be, a community oriented financial institution.
The Bank's primary market area is comprised of the City of Fredericksburg
and Spotsylvania, Stafford and King George Counties, Virginia, which are
serviced through the Bank's main office and three other full service
banking offices. The Bank's main office is located in Fredericksburg, two
branch offices
44
<PAGE>
are located in Spotsylvania County and one is in Stafford County. Based on
the most recent information available, the Bank had approximately one-third
of the total bank and thrift deposits in its market area.
The Bank's primary market area consists principally of suburban and
rural communities with service, wholesale/retail trade, government and
manufacturing serving as the basis of the local economy. Service jobs
represent the largest type of employment in the Bank's primary market area,
with jobs in wholesale/retail trade accounting for the second largest
employment sector. Fredericksburg and surrounding communities are located
between Richmond, Virginia and Washington, D.C. and are easily accessible
from Interstate 95, a major Interstate running north to south along the
Eastern seaboard. The easy accessability to the Fredericksburg area and its
close proximity to these large cities has resulted in the Fredericksburg
area being among one of the fastest growing areas in the country in recent
years. Businesses that have moved to the area in recent years and invested
substantial capital into their new locations include Capital One Financial
Corp., Intuit, Inc., Dongsung America, Inc., Mapei Corporation, Vulcan
Materials Company, SEI Birchwood, Inc. and Greenhost, Inc. In addition,
GEICO insurance has significantly expanded its presence in the area and
currently employs over 2,000 people at its Stafford County location.
Management believes that its market area continues to show economic growth
with stable to moderately increasing real estate values. Management hopes
to capitalize on this high growth to expand its market share.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive
and the Bank faces direct competition from a significant number of
financial institutions, many with a state-wide or regional presence and, in
some cases, a national presence. Many of these financial institutions are
significantly larger and have greater financial resources than the Bank.
The Bank's competition for loans comes principally from commercial banks,
savings banks, credit unions, mortgage brokers, mortgage banking companies
and insurance companies. In addition, the Bank has recently faced
significant competition for first mortgage loans on new home construction
from builders who have been offering financing for purchases of new houses
in the builders' development projects. Its most direct competition for
deposits has historically come from savings, cooperative and commercial
banks and credit unions. In addition, the Bank faces significant
competition for deposits from non-bank institutions such as brokerage firms
and insurance companies in such instruments as short-term money market
funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. The
Bank has also experienced significant competition from credit unions which
have a competitive advantage as they do not pay state or federal income
taxes. Such competitive advantage has placed increased pressure on the Bank
with respect to its loan and deposit pricing.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of first mortgage loans secured by one-to four-family residences.
At June 30, 1998, gross loans totalled $437.2 million, of which $367.0
million, or 83.94% were one- to four-family, residential mortgage loans and
home equity loans. At such date, the remainder of the loan portfolio
consisted of: $35.3 million of non-residential loans, including church
loans totalling $12.1 million, or 8.08% of total loans; $20.0 million of
construction and development loans, including unadvanced loan amounts, or
4.57% of total loans; $2.3 million of land and land development loans or
0.53% of total loans; $3.4 million of multi-family loans, or 0.78% of total
loans; and $9.2 million of consumer loans, or 2.10% of total loans.
The types of loans that the Bank may originate are subject to federal
laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are,
in turn, affected by, among other things, economic conditions, monetary
policies of the federal government, including the Federal Reserve Board
("FRB") and legislative tax policies.
45
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the
dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
AT JUNE 30, 1998 1997 1996 1995 1994
-------------------- --------------------- ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
--------- -------- -------- ---------- ------- -------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family (1) $367,041 83.94% $358,561 83.19% $345,799 80.94% $329,589 79.69% $312,933 79.09%
Multi-family........... 3,396 0.78 3,455 0.80 3,453 0.81 2,340 0.57 4,407 1.11
Non-residential real 35,316 8.08 40,951 9.50 44,528 10.42 44,520 10.77 39,950 10.10
estate(2)................
Land and land development 2,321 0.53 3,091 0.72 4,136 0.97 6,398 1.55 4,375 1.12
Construction and
development............. 19,960 4.57 16,046 3.72 21,285 4.98 23,545 5.69 27,259 6.89
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans. 428,034 97.90 422,104 97.93 419,201 98.12 406,392 98.27 388,924 98.31
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer and other loans. 9,192 2.10 8,913 2.07 8,046 1.88 7,159 1.73 6,601 1.69
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans................ 437,226 100.00% 431,017 100.00% 427,247 100.00% 413,551 100.00% 395,525 100.00%
====== ====== ====== ====== ======
Less:
Participating interests.. 3,319 4,217 5,450 6,543 8,126
Undisbursed loan funds... 8,743 4,978 8,064 8,132 7,829
Unearned discounts and 3,539 3,312 3,045 2,855 2,764
deferred loan fees......
Allowance for loan losses 5,639 5,478 5,543 5,480 5,537
-------- -------- -------- -------- --------
Loans receivable, net.... $415,986 $413,032 $405,145 $390,541 $371,269
======== ======== ======== ======== ========
<CAPTION>
--------------------
1993
--------------------
AMOUNT PERCENT
OF TOTAL
--------------------
<S> <C> <C>
Mortgage loans:
Residential:
One- to four-family (1) $315,739 79.08%
Multi-family........... 9,315 2.33
Non-residential real 38,830 9.72
estate(2)................
Land and land development 5,454 1.37
Construction and
development............. 23,537 5.89
-------- ------
Total mortgage loans. 392,875 98.39
-------- ------
Consumer and other loans. 6,409 1.61
-------- ------
Total loans................ 399,284 100.00%
======
Less:
Participating interests.. 9,261
Undisbursed loan funds... 6,539
Unearned discounts and 2,900
deferred loan fees......
Allowance for loan losses 5,355
--------
Loans receivable, net.... $375,229
========
</TABLE>
________________________________________
(1) Includes home equity lines of credit.
(2) Includes 36 loans to local churches totalling $12.1 million at June 30,
1998.
46
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Bank's loans at June 30, 1998. The table does not include
the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------------------------------------------------------------------------
ONE- TO CONSTRUCTION LAND AND
FOUR- MULTI- NON- AND LAND TOTAL
FAMILY FAMILY RESIDENTIAL DEVELOPMENT DEVELOPMENT CONSUMER LOANS
---------- ------- --------------- --------------- -------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less...................... $ 2,168 $ -- $ 7 $19,960 (1) $1,651 $2,417 $ 26,203
After one year:
More than one year to three years.... 3,939 -- 49 -- 23 2,674 6,685
More than three years to five years.. 6,111 -- 603 -- 130 3,340 10,184
More than five years to ten years.... 46,811 809 6,940 -- 314 608 55,482
More than ten years to twenty years.. 153,263 975 21,103 -- 135 153 175,629
More than twenty years............... 154,749 1,612 6,614 -- 68 -- 163,043
-------- ------ ------- ------- ------ ------ --------
Total amount due.................. $367,041 $3,396 $35,316 $19,960 $2,321 $9,192 437,226
======== ====== ======= ======= ====== ======
Less:
Participating interests............................................................................................. 3,319
Allowance for loan losses........................................................................................... 8,743
Undisbursed loan funds.............................................................................................. 3,539
Allowance for loan losses............................................................................................ 5,639
--------
Loans, net............................................................................................................ $415,986
========
</TABLE>
(1) Includes construction and development loans which will convert to one- to
four-family mortgage loans upon the completion of the construction.
The following tables set forth at June 30, 1998, the dollar amount of loans
contractually due after June 30, 1999 and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1999
--------------------------------
FIXED ADJUSTABLE TOTAL
---------- ---------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
One- to four-family........... $263,356 $101,517 $364,873
Multi-family.................. 1,898 1,498 3,396
Non-residential............... 20,335 14,974 35,309
Construction and development.. -- -- --
Land and land development..... 557 113 670
-------- -------- --------
Total real estate loans..... 286,146 118,102 404,248
Consumer and other loans........ 5,252 1,523 6,775
-------- -------- --------
Total loans..................... $291,398 $119,625 $411,023
======== ======== ========
</TABLE>
ORIGINATION, SALE AND SERVICING OF LOANS. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its
four offices. In-market loan originations are generated by the Bank's
marketing efforts, which include print, radio and television advertising,
lobby displays and direct contact with local civic and religious
organizations, as well as by the Bank's present customers, walk-in customers
and referrals from real estate agents, brokers and builders. Loans
originated by the Bank are underwritten by the Bank pursuant to the Bank's
policies and procedures and are generally underwritten in accordance with
Fannie Mae ("FNMA") and Freddie Mac ("FHLMC") underwriting standards. The
Bank originates both adjustable-rate and fixed-rate loans. The Bank's
ability to originate fixed- or adjustable-rate loans is dependent upon the
relative customer demand for such loans, which is affected by the current and
expected future level of interest rates. In recent years, the Bank has
originated primarily fixed-rate loans as a result of low customer demand for
adjustable-rate loans given the prevailing low interest rate
environment.
47
<PAGE>
Generally, all loans originated by the Bank are held for investment,
although currently the Bank is exploring opportunities to sell fixed-rate
loans originated by the Bank through the secondary market. The Bank
generally does not originate mortgage loans insured by the FHA and VA.
During the years ended December 31, 1997 and December 31, 1996, the Bank
originated $85.1 million and $55.7 million of one- to four-family mortgage
loans, respectively, all of which were retained by the Bank. In the six
months ended June 30, 1998, the Bank originated $67.2 million of one- to
four-family mortgage loans. On January 1, 1996, the Bank implemented SFAS
No. 122 pursuant to which the value of servicing rights may be recognized as
an asset of the Bank. In the six months ended June 30, 1998 and in the year
ended December 31, 1997, the fair value of servicing rights under SFAS No.
122 and SFAS No. 125 were not material and were not recognized in the
financial statements for those periods.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR ENDED DECEMBER 31,
ENDED JUNE 30,
---------------------- ------------------------------------------
1998 1997 1997 1996 1995
---------- --------- ----------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans (gross):
Beginning balance....................................... $422,104 $419,201 $ 419,201 $406,392 $388,924
Mortgage loans originated:
One- to four-family................................... 67,249 35,948 85,099 55,724 43,807
Multi-family.......................................... -- -- -- 1,440 --
Non-residential real estate........................... 138 733 1,763 2,384 628
Construction and development.......................... 9,225 11,930 19,333 21,772 24,386
Land and land development............................. -- -- -- 503 3,473
-------- -------- --------- -------- --------
Total mortgage loans originated..................... 76,612 48,611 106,195 81,823 72,294
Transfer of mortgage loans to foreclosed real estate.. (604) 479 (937) (4,815) --
Principal repayments.................................. (70,078) (44,127) (102,355) (64,199) (54,826)
-------- -------- --------- -------- --------
Ending balance........................................ $428,034 $424,164 $ 422,104 $419,201 $406,392
======== ======== ========= ======== ========
Consumer and other loans (gross):
Beginning balance....................................... $ 8,913 $ 8,046 $ 8,046 $ 7,159 $ 6,601
Consumer and other loans originated................... 3,098 3,288 6,323 6,130 7,512
Principal repayments.................................. (2,819) (2,570) (5,456) (5,243) (6,954)
-------- -------- --------- -------- --------
Ending balance........................................ $ 9,192 $ 8,764 $ 8,913 $ 8,046 $ 7,159
======== ======== ========= ======== ========
</TABLE>
ONE-TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years
secured by one- to four-family residences. Most of the residences securing
these loans are located in the Bank's primary market area. One- to four-
family mortgage loan originations are generally obtained from the Bank's in-
house loan representatives, from existing or past customers, and through
referrals from members of the Bank's local communities. At June 30, 1998, the
Bank's one- to four-family mortgage loans totalled $367.0 million, or 83.94%,
of total loans. Of the one- to four-family mortgage loans outstanding at that
date, 72.34% were fixed-rate mortgage loans and 27.66% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms from ten to
30 years. The Bank retains all of the fixed-rate residential loans that it
originates. The Bank is considering selling fixed-rate loans originated by
the Bank, but to date has not established a policy for such sales. The Bank
does not purchase one- to four-family mortgage loans.
The Bank currently offers one-year residential ARM loans with an interest
rate that adjusts annually based on the change in the relevant United States
Treasury index. The Bank also offers loans that bear fixed rates of interest
for specified periods of time and, thereafter, adjust on an annual basis.
These loans provide for up to a 2.0% periodic cap and a lifetime cap of 6.0%
over the initial rate. As a consequence of using caps, the interest rates on
these loans may not be as rate sensitive as the Bank's cost of funds.
Borrowers of one-year residential ARM loans are generally qualified at a rate
of 2.0% above the initial interest rate. The Bank also offers ARM loans that
are convertible into fixed-rate loans with interest rates based upon the then
current market rates. ARM loans generally pose greater credit risks than
fixed-rate loans, primarily because as interest rates rise, the required
periodic payment by the borrower rises, increasing
48
<PAGE>
the potential for default. However, as of June 30, 1998, the Bank had not
experienced higher default rates on these loans relative to its other loans.
All one- to four-family mortgage loans are underwritten according to the
Bank's policies and guidelines. Generally, the Bank originates one- to four-
family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
97% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. The Bank requires fire,
casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Bank.
Included in the Bank's one- to-four family loan portfolio are home equity
loans. The Bank originates home equity loans that are secured by a lien on the
borrower's residence and generally do not exceed $250,000. The Bank uses the
same underwriting standards for home equity loans as it uses for one- to four-
family residential mortgage loans. Home equity loans are generally originated in
amounts which, together with all prior liens on such residence, do not exceed
80% of the appraised value of the property securing the loan. The interest rates
for home equity loans either float at a stated margin over the prime rate or
have fixed interest rates. As of June 30, 1998, the Bank had $2.8 million, or
0.64% of the Bank's total loan portfolio outstanding, in home equity loans.
NON-RESIDENTIAL AND MULTI-FAMILY LENDING. The Bank originates non-
residential real estate loans that are generally secured by properties used for
business purposes such as office buildings, schools, nursing homes, retail
stores and churches located in the Bank's primary market area. The Bank lends to
local churches to fund construction of or renovations to church facilities. Such
loans are generally fixed-rate loans with a maximum loan to value ratio of 80%.
The Bank currently has 36 church loans totalling $12.1 million in the aggregate.
All such loans are performing in accordance with their terms. Multi-family loans
are generally secured by 5 or more unit apartment buildings located in the
Bank's primary market area. The Bank's multi-family and non-residential real
estate underwriting policies provide that such real estate loans may be made in
amounts up to 75% of the appraised value of the property, subject to the Bank's
current internal loan-to-one-borrower limit, which at June 30, 1998 was $2.5
million.
Non-residential real estate loans and multi-family loans generally have
adjustable rates and terms to maturity that do not exceed 25 years. The Bank's
current lending guidelines generally require that the property securing
commercial real estate loans and multi-family loans generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not to exceed 75% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some non-residential real estate loans and multi-
family loans in the Bank's portfolio may exceed the initial loan-to-value ratio
and the current debt service ratio may exceed the initial debt service ratio.
Adjustable-rate non-residential real estate loans and multi-family loans provide
for interest at a margin over a designated index, often a designated prime rate,
with periodic adjustments, generally at frequencies of up to five years. In
underwriting non-residential real estate loans and multi-family loans, the Bank
analyzes the financial condition of the borrower, the borrower's credit history,
the reliability and predictability of the net income generated by the property
securing the loan and the value of the property itself. The Bank generally
requires personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing non-
residential real estate loans and multi-family loans originated by the Bank are
performed by independent appraisers approved by the Board of Directors. At June
30, 1998, the Bank's largest non-residential real estate loan was a $1.9 million
loan secured by a local church and was performing in accordance with its terms.
At June 30, 1998, the Bank's largest multi-family loan was a $1.4 million loan
secured by an apartment complex and was performing in accordance with its terms.
Non-residential real estate loans and multi-family loans generally present
a higher level of credit risk than loans secured by one- to four-family
residences. This greater credit risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate and multi-
family properties is typically dependent upon the successful operation of the
related real estate project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed, or a bankruptcy court modifies a
lease term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced. The Bank seeks to minimize these risks through its
underwriting standards.
49
<PAGE>
CONSTRUCTION AND DEVELOPMENT AND LAND AND LAND DEVELOPMENT LENDING. The
Bank originates construction loans for the development of residential and
commercial property. Construction loans are offered primarily to experienced
local developers operating in the Bank's market area. The majority of the Bank's
construction loans are originated to finance the construction by developers of
one- to four-family residential real estate and, to a lesser extent, multi-
family and commercial real estate properties located in the Bank's primary
market area. Construction loans are generally offered with terms of up to 12
months and may be made in amounts up to 75% of the appraised value of the
property on multi-family and commercial real estate construction and 80% on one-
to four-family residential construction. Land loans are made in amounts up to
60% of the appraised value of the land securing the loan. Construction loan
proceeds are disbursed periodically in increments as construction progresses and
as inspections by the Bank's inspecting officers warrant. At June 30, 1998, the
Bank's largest construction and development loan was a performing loan with a
$1.0 million outstanding principal balance secured by 19 units of single family
construction located in Stafford and Spotsylvania Counties.
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction
and other assumptions, including the estimated time to sell residential
properties. If the estimated value proves to be inaccurate, the Bank may be
confronted with a property, when completed, having a value which is insufficient
to assure full repayment. The Bank seeks to minimize this risk through its
underwriting standards.
CONSUMER AND OTHER LENDING. Consumer loans at June 30, 1998 amounted to
$9.2 million, or 2.1%, of the Bank's total loans and consisted primarily of
automobile loans (new and used) and loans secured by savings accounts. Such
loans are generally originated in the Bank's primary market area and generally
are secured by deposit accounts, personal property and automobiles. These loans
are typically shorter term and generally have higher interest rates than one- to
four-family mortgage loans. Historically, the Bank has not advertised its
consumer loans and has made these loans only to existing customers.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater credit risks than one- to four-family residential
mortgage loans. In such cases, repossessed collateral for a defaulted loan may
not provide an adequate source of repayment of the outstanding loan balance,
since there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections on these loans are
dependent on the borrower's continuing financial stability and, therefore, are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans in the event of a default. At June 30,
1998, the Bank had 30 consumer loans 90 days or more delinquent, whose balances
totalled $113,000.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors of the Bank
establishes the lending policies of the Bank. Such policies provide that the
Bank's President, Executive Vice President and Senior Lending Officer may
approve consumer loans up to $50,000. The Loan Committee approves all
residential loans up to $500,000. The Board approves loans in excess of
$500,000. All loans are submitted to the full Board of Directors for
ratification on a monthly basis.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 60 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and cause of delinquency and whether the borrower is habitually delinquent. When
a borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of non-
payment after the loan is first past due. The Bank's guidelines provide that
telephone, written correspondence and/or face-to-face contact will be attempted
to ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
usually attempts to obtain full payment, work out a repayment schedule with the
borrower to avoid foreclosure or, in some instances, accept a deed in lieu of
foreclosure. In the event payment is not then received or the loan not otherwise
satisfied, additional letters and telephone calls generally are made. If the
loan is still not brought current or satisfied and it becomes necessary for
50
<PAGE>
the Bank to take legal action, which typically occurs after a loan is 60 days or
more delinquent, the Bank will commence foreclosure proceedings against any real
property that secures the loan. If a foreclosure action is instituted and the
loan is not brought current, paid in full, or refinanced before the foreclosure
sale, the property securing the loan generally is sold at foreclosure and, if
purchased by the Bank, becomes real estate owned and is sold by the Bank as soon
as possible.
Federal regulations and the Bank's Asset Classification Policy require that
the Bank utilize an internal asset classification system as a means of reporting
problem and potential problem assets. The Bank has incorporated the OTS internal
asset classifications as a part of its credit monitoring system. The Bank
currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified "Substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions and
values, "highly questionable and improbable." Assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Bank's Asset/Liability Committee reviews and classifies the Bank's
assets on a regular basis and the Board of Directors reviews the results of the
reports on a quarterly basis. The Bank classifies assets in accordance with the
management guidelines described above. At June 30, 1998, the Bank had $7.8
million, or 1.65% of total assets, designated as Substandard. At such date, no
assets were classified as Doubtful or Loss (in accordance with OTS regulations).
As of June 30, 1998, the Bank had a total of $1.7 million, or 0.36% of total
assets, classified loans designated as Special Mention. At June 30, 1998, all of
the Bank's classified and Special Mention assets totalled $9.5 million,
representing 2.17% of loans.
51
<PAGE>
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT DECEMBER 31, 1997
---------------------------------------------------- --------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
----------------------- --------------------------- ------------------------ ------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ----------- --------- ------------ ----------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...... 11 $ 865 24 $1,253 13 $ 841 31 $1,596
Multi-family............. -- -- -- -- -- -- -- --
Non-residential real
estate.................. -- -- -- -- -- -- 1 488
Construction and
development............. -- -- 3 580 -- -- 3 604
Land and land development -- -- -- -- -- -- 1 1
---- ----- ---- ------ ---- ----- ---- ------
Total mortgage loans... 11 865 27 1,833 13 841 36 2,689
Consumer and other loans... 13 72 30 113 15 87 33 111
---- ----- ---- ------ ---- ----- ---- ------
Total loans................ 24 $ 937 57 $1,946 28 $ 928 69 $2,800
==== ===== ==== ====== ==== ===== ==== ======
Delinquent loans to total 0.35% 0.21% 0.83% 0.45% 0.41% 0.22% 1.01% 0.65%
loans..................... ==== ===== ==== ====== ==== ===== ==== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------------------------------- -------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ------------------------- ----------------------- ------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
---------- ----------- ----------- ------------- --------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family...... 17 $1,578 74 $3,827 22 $1,464 8 $ 681
Multi-family............. -- -- 2 389 -- -- -- --
Non-residential real
estate.................. 2 516 3 710 -- -- 2 265
Construction and
development............. -- -- 4 839 1 143 4 529
Land and land development 1 301 1 37 1 179 1 237
---- ------ ---- ------ ---- ------ ---- ------
Total mortgage loans... 20 2,395 84 5,802 24 1,786 15 1,712
Consumer and other loans.. 13 111 32 343 13 108 23 326
---- ------ ---- ------ ---- ------ ---- ------
Total loans................ 33 $2,506 116 $6,145 37 $1,894 38 $2,038
==== ====== ==== ====== ==== ====== ==== ======
Delinquent loans to total 0.49% 0.59% 1.71% 1.44% 0.52% 0.46% 0.54% 0.49%
loans..................... ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
52
<PAGE>
NON-PERFORMING ASSETS AND IMPAIRED LOANS. The following table sets forth
information regarding non-accrual loans and REO. At June 30, 1998, the Bank had
$1.9 million of REO net of a valuation allowance. It is the policy of the Bank
to cease accruing interest on loans with interest 90 days or more past due and
to charge-off all accrued interest. Management of the Bank believes that all
loans on nonaccrual status are well secured and has provided, when necessary,
for allocated reserves to bring specific loans to their net realizable value.
Each nonaccruing loan at June 30, 1998 is in process of collection. For the six
months ended June 30, 1998 and the years ended December 31, 1997 and 1996, no
interest income was recorded on non-accrual loans. For the six months ended June
30, 1998 and the years ended December 31, 1997 and 1996, the amount of
additional interest income that would have been recognized on non-accrual loans
if such loans had continued to perform in accordance with their contractual
terms was $114,000, $193,000 and $438,000, respectively. In 1993, the Bank
adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS
No. 114"), as amended by SFAS No. 118. There were $8.5 million that met the
definition of impaired loans, per SFAS 114 at June 30, 1998. This compares to
$10.7 million, $9.8 million, $11.9 million and $10.8 million for June 30, 1997,
December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------------ -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- ------- ------- ------
Non-accrual loans(1): (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.............. $2,008 $4,328 $3,282 $ 5,366 $3,959 $ 5,211 $2,143
Non-residential real estate...... 1,027 1,346 1,163 1,920 1,389 3,634 3,004
Construction and development..... -- -- -- 774 529 84 203
Land and development............. 606 528 493 558 653 1,332 1,165
Consumer and other loans........... 130 125 136 135 269 284 207
------ ------ ------ ------- ------ ------- ------
Total non-accrual loans.......... 3,771 6,327 5,074 8,753 6,799 10,545 6,722
Loans 90 days or more past due
and accruing:
Construction and development.... 186 507 -- 65 -- -- --
Land and land development....... 135 138 482 138 -- -- --
------ ------ ------ ------- ------ ------- ------
Total accruing loans 90 days
or more past due........... 321 645 482 203 -- -- --
------ ------ ------ ------- ------ ------- ------
Total non-performing loans...... 4,092 6,972 5,556 8,956 6,799 10,545 6,722
Total foreclosed real estate......... 1,883 1,882 1,959 1,611 2,135 1,082 2,030
------ ------ ------ ------- ------ ------- ------
Total non-performing assets.......... $5,975 $8,854 $7,515 $10,567 $8,934 $11,627 $8,752
====== ====== ====== ======= ====== ======= ======
Restructured loans................... $3,923 $2,914 $3,660 $ 2,546 $3,768 $ 2,239 $ 784
====== ====== ====== ======= ====== ======= ======
Non-performing loans to
total loans........................ 0.94% 1.61% 1.29% 2.10% 1.64% 2.67% 1.68%
Non-performing assets ====== ====== ====== ======= ====== ======= ======
to total assets.................... 1.27% 1.88% 1.59% 2.25% 1.91% 2.58% 1.95%
====== ====== ====== ======= ====== ======= ======
</TABLE>
- -------------------------
(1) Loans are presented before allowance for loan losses.
53
<PAGE>
Restructured loans totalled $3.9 million at June 30, 1998. Restructured
loans include loans that were modified while delinquent. Although the amount due
under these loans has not been modified from the terms of the loans when
originated, certain adjustments were made to these loans to help the borrower
make payments while the loans were delinquent and to enable the Bank to avoid
foreclosure proceedings. All outstanding restructured loans are single-family
loans with balances of less than $196,000 per loan. All restructured loans are
currently performing in accordance with their terms, however, there can be no
assurance that such loans will continue to be performing loans or that the Bank
will not experience losses on such loans in the future.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. As of June
30, 1998, the Bank's allowance for loan losses was 1.36% of net loans as
compared to 1.33% as of December 31, 1997. The Bank had non-performing loans of
$4.1 million and $5.6 million at June 30, 1998 and December 31, 1997,
respectively. The Bank will continue to monitor and modify its allowances for
loan losses as conditions dictate. While management believes the Bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
54
<PAGE>
The following table sets forth activity in the Bank's allowance for loan
losses for the periods as indicated.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- ---------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period...... $ 5,478 $5,543 $5,543 $5,480 $5,537 $5,355 $4,668
Provision for loan losses........... 269 241 375 325 412 1,010 1,129
Charge-offs:
Mortgage loans:
One- to four-family............. (79) (148) (260) (244) (17) (197) (412)
Non-residential real estate..... -- -- -- -- -- (619) --
Construction and development.... -- (32) (148) -- (469) -- --
Consumer loans.................... (29) (7) (32) (19) (3) (12) (38)
-------- ------ ------- ------ ------ ------ ------
Total charge-offs............. (108) (187) (440) (263) (489) (828) (450)
Recoveries.......................... -- -- -- 1 20 -- 8
-------- ------ ------- ------- ------- ------- -------
Balance at end of period............ $ 5,639 $5,597 $5,478 $5,543 $5,480 $5,537 $5,355
======== ====== ======= ======= ======= ======= =======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period.... 0.03% 0.05% 0.11% 0.07% 0.13% 0.22% 0.12%
======== ====== ======= ======= ======= ======= =======
Ratio of allowance for loan losses
to net loans receivable at the end
of the period..................... 1.36% 1.36% 1.33% 1.37% 1.40% 1.49% 1.43%
======== ====== ======= ======= ======= ======= =======
Ratio of allowance for loan losses
to non-performing loans at the end
of the period...................... 137.81% 80.28% 98.60% 61.89% 80.60% 52.50% 79.66%
======== ====== ======= ======= ======= ======= =======
</TABLE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loans losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------------------------
1998 1997
------------------------------------ --------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- ------------ -------- ---------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family............. $1,663 29.48% 83.94% $1,884 33.66% 81.22%
Multi-family................... 34 0.60 0.78 36 0.64 0.82
Non-residential real estate.... 682 12.10 8.08 1,014 18.12 10.24
Construction and development... 112 1.99 4.57 178 3.19 4.84
Land and land development...... 200 3.54 0.53 145 2.59 0.86
Consumer and other loans....... 262 4.64 2.10 261 4.67 2.02
Unallocated general allowance.. 2,686 47.65 -- 2,079 37.13 --
------ ------ ------ ------ ------ ------
Total allowance............ $5,639 100.00% 100.00% $5,597 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
----------------------------- ----------------------------- -----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family(1)............... $1,862 33.99% 83.19% $1,862 33.58% 80.94% $2,047 37.35% 79.69%
Multi-family........................ 35 0.63 0.80 287 5.17 0.81 276 5.04 0.57
Non-residential real estate......... 762 13.90 9.50 982 17.71 10.42 639 11.65 10.77
Construction and development........ 80 1.46 3.72 116 2.09 4.98 194 3.55 5.69
Land and land development........... 225 4.11 0.72 251 4.54 0.97 141 2.57 1.55
Consumer and other loans............ 252 4.61 2.07 229 4.12 1.88 208 3.79 1.73
Unallocated general reserves........ 2,262 41.30 -- 1,816 32.79 -- 1,975 36.05 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance................... $5,478 100.00% 100.00% $5,543 100.00% 100.00% $5,480 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------
1994 1993
------------------------------ -------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
----------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
One-to four-family(1)................ $1,738 31.40% 79.09% $1,529 28.56% 79.08%
Multi-family......................... 895 16.17 1.11 1,180 22.04 2.33
Non-residential real estate.......... 1,061 19.15 10.10 810 15.12 9.72
Construction and development......... 148 2.68 6.89 147 2.75 5.89
Land and land development............ 166 3.00 1.12 117 2.18 1.37
Consumer and other loans............. 203 3.66 1.69 204 3.81 1.61
Unallocated general reserves......... 1,326 23.94 -- 1,368 25.54 --
------ ------ ------ ------ ------ ------
Total allowance.................... $5,537 100.00% 100.00% $5,355 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
______________________
(1) Includes home equity lines of credit.
56
<PAGE>
REAL ESTATE OWNED. At December 31, 1997 and June 30, 1998, the Bank had
$2.0 million and $1.9 million of REO, respectively. At June 30, 1998, REO
consisted of 25 one- to four-family properties, one parcel of land, one non-
residential property and one multi-family property. When the Bank acquires
property through foreclosure or by deed in lieu of foreclosure, it is
initially recorded at the lower of the recorded investment in the
corresponding loan or the fair value of the related assets at the date of
foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific valuation allowance
and charges operations for the diminution in value. It is the policy of the
Bank to have obtained an appraisal on all real estate subject to foreclosure
proceedings prior to the time of foreclosure. It is the Bank's policy to
require appraisals on a periodic basis on foreclosed properties and conduct
inspections on foreclosed properties. The Bank seeks to sell its REO
properties to the tenants of those properties and encourages tenants to take
advantage of this opportunity by selling the properties at a favorable market
value and with favorable loan terms, including 100% financing. Management
believes this type of lending enhances the Bank's Community Reinvestment Act
("CRA") performance.
INVESTMENT ACTIVITIES
The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations with terms of five years or
less, U.S. Agency obligations, including mortgage-backed securities with
terms of five years or less, municipal bonds with terms of five years or less
rated by a highly regarded rating service, such as Standard & Poors, as AA or
better and certain certificates of deposit of insured banks and savings
institutions, corporate obligations up to a maximum of 1% of the Bank's total
assets that have terms of five years or less and are rated by a highly
regarded rating service, such as Standard & Poors, as AA or better. The Bank
is also authorized to invest in mutual funds whose assets conform to the
investments that the Bank is otherwise authorized to make directly. At June
30, 1998, all corporate obligations and state and local municipal obligations
owned by the Bank were in accordance with the types of investments the Bank
is authorized to invest in. In addition, at June 30, 1998, the Bank owned
approximately $4.7 million of equity securities. These securities are held
by the Bank for the non-qualified deferred compensation plan established by
the Bank. See Note 7 to the financial statements included in this prospectus
for a further description of this Plan. At June 30, 1998, the equity
securities consisted primarily of investments in equities traded on national
exchanges.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need
for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, and, to a much lesser extent, to provide collateral
for borrowings and to fulfill the Bank's asset/liability management policies.
To date, the Bank's investment strategy has been directed toward high-quality
assets (primarily U.S. Treasury obligations, federal agency obligations and
high grade corporate debt securities) with short and intermediate terms (five
years or less) to maturity. At June 30, 1998, the weighted average term to
maturity for investment securities available-for-sale and mortgage-backed and
related securities held-to-maturity was 1.93 years and 11.12 years,
respectively. See Notes to Financial Statements for information regarding
the maturities of the Bank's securities.
At June 30, 1998 the Bank had dual indexed consolidated bonds with a fair
value of $1.9 million, which was $587,000 below the Bank's amortized cost.
These instruments were purchased in 1993 and do not comply with the Bank's
current investment policy. The Bank does not intend to invest in this type
of instrument in the future and, based upon market conditions, intends to
evaluate opportunities to divest itself of these instruments. See "Notes to
Financial Statements" for information regarding dual indexed consolidated
bonds.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are
classified as trading securities and are reported at fair value with
unrealized holding gains and losses reflected in current earnings. All other
debt and marketable equity securities are classified as securities available
for sale and are reported at fair value, with net unrealized gains or losses
reported, net of income taxes, as a separate component of equity. As a
member of the FHLB of Atlanta, the Bank is required to hold FHLB of Atlanta
stock which is carried at cost since there is no readily available market
value. Historically, the Bank has not held any securities considered to be
trading securities.
57
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995
------------------- --------------------- --------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ------- ---------- ---------- ---------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities,
available-for-sale:(1)
U.S. Treasury and agency
obligations.................... $16,814 $16,875 $19,812 $19,836 $20,823 $20,803 $30,943 $31,147
Corporate obligations............ 4,856 4,906 3,345 3,413 3,995 4,094 6,514 6,694
Equity securities................ 3,717 4,665 3,596 4,343 3,394 3,610 3,115 3,288
State and local municipal bonds.. 1,290 1,301 350 371 350 373 350 381
Mutual funds..................... 1,293 1,268 1,262 1,242 1,199 1,175 1,136 1,104
Duel indexed consolidated bonds.. 2,500 1,913 2,500 1,946 2,500 1,924 7,500 6,643
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities...... $30,470 $30,928 $30,865 $31,151 $32,261 $31,979 $49,558 $49,257
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
______________________
(1) On December 31, 1995, the Bank transferred all investment securities that
were classified as held-to-maturity to the available-for-sale category.
The amortized cost of the amounts transferred was $49.6 million with an
unrealized gain of $684,000, and an unrealized loss of $985,026. The Bank
made this transfer in response to a one-time reassessment opportunity
granted in a special report by the FASB regarding the implementation of
SFAS 115.
The following table sets forth certain information regarding the
amortized cost and fair values of the Bank's mortgage-backed and mortgage-
related securities, all of which were classified as held-to-maturity at the
dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
AT JUNE 30, 1998 1997 1996 1995
------------------ ---------------------- --------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ------ --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related
securities held-to-maturity:
Fixed rate:
FNMA pass through securities.. $ 768 $ 768 $ 838 $ 838 $1,008 $1,008 $1,197 $1,197
GNMA certificates............. 422 458 453 497 494 537 682 741
------ ------ ------ ------ ------ ------ ------ ------
Total mortgage-backed $1,190 $1,226 $1,291 $1,335 $1,502 $1,545 $1,879 $1,938
and related securities.......... ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the Bank's mortgage-backed and mortgage-
related securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1997 1996 1995
----------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities:
At beginning of period.................. $1,291 $1,502 $1,502 $1,879 $2,109
Mortgage-backed securities purchased.. -- -- -- -- --
Mortgage-backed securities sold....... -- -- -- -- --
Amortization and repayments........... (101) (98) (211) (377) (230)
------ ------ ------ ------ ------
Balance of mortgage-backed and related $1,190 $1,404 $1,291 $1,502 $1,879
securities at end of period............ ====== ====== ====== ====== ======
</TABLE>
58
<PAGE>
The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of the Bank's
investment securities, and mortgage-related securities as of June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
------------------------------------------------------------------------------------------------
ONE THREE TO MORE THAN
ONE YEAR OR LESS TO THREE YEARS FIVE YEARS FIVE YEARS
---------------------- ---------------------- ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- -------- -------- ---------- -------- ---------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities,
available-for-sale:
U.S. Treasury and agency
obligations............ $ 9,514 5.80% $ 6,300 6.16% $ 500 6.49% $ 500 6.14%
Corporate obligations.... 1,000 9.75 2,500 6.08 1,356 6.40 -- 4.93
Equity securities.......... 3,717 1.96 -- -- -- -- -- --
State and local municipal
bonds..................... -- -- -- -- 940 9.71 350 4.93
Mutual funds............. 1,293 2.40 -- -- -- -- -- --
Duel indexed
consolidated bonds...... -- -- -- -- -- -- 2,500 2.92
------- ---- -------- -------- ------ ---- ------ ----
Total investment
securities............ $15,524 4.85% $ 8,800 6.14% $2,796 7.53% $3,350 3.61%
======= ==== ======== ======== ====== ==== ====== ====
Mortgage-backed and related
securities
held-to-maturity:
FNMA pass through
securities.............. $ -- $ -- $ -- $ 768 9.60%
GNMA certificates........ -- -- -- 422 9.91
------- -------- ------ ------ ----
Total mortgage-backed and
related securities..... $ -- $ -- $ -- $1,190 9.71%
======= ======== ====== ====== ====
<CAPTION>
-------------------------------------------
TOTAL
--------------------------------
AVERAGE
REMAINING WEIGHTED
YEARS TO CARRYING MARKET AVERAGE
MATURITY AMOUNT VALUE YIELD
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Investment securities,
available-for-sale:
U.S. Treasury and agency
obligations............ 1.15 $16,814 $16,875 5.97%
Corporate obligations.... 1.79 4,856 4,906 6.93
Equity securities.......... -- 3,717 4,665 1.96
State and local municipal
bonds..................... 1.79 1,290 1,301 2.17
Mutual funds............. 0.25 1,293 1,268 2.40
Duel indexed
consolidated bonds...... 7.18 2,500 1,913 2.92
------- ------- ----
Total investment
securities............ 1.93 $30,470 $30,928 5.33%
======= ======= ====
Mortgage-backed and related
securities
held-to-maturity:
FNMA pass through
securities.............. 7.50 $ 768 $ 768 9.60%
GNMA certificates........ 17.71 422 458 9.91
------- ------- ----
Total mortgage-backed and
related securities..... 11.12 $ 1,190 $ 1,226 9.71%
======= ======= ====
</TABLE>
59
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, maturities of
securities and cash flows generated from operations are the primary sources of
the Bank's funds for use in lending, investing and for other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of passbook and statement
savings accounts, money market accounts, transaction accounts and time deposits
currently ranging in terms from one to five years. At June 30, 1998, the balance
of core deposits (savings and money market accounts) represented 22.3% of total
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas
surrounding its branch offices. The Bank has historically relied primarily on
providing a higher level of customer service and long-standing relationships
with customers to attract and retain these deposits and also relies on
competitive pricing policies and advertising; however, market interest rates and
rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits. The Bank has become more
susceptible to short-term fluctuations in deposit flows, as customers have
become more interest rate conscious. The Bank manages the pricing of its
deposits in keeping with its asset/liability management, liquidity and
profitability objectives. Based on its experience, the Bank believes that its
passbook and statement savings, money market accounts and transaction accounts
are relatively stable sources of deposits. The Bank's time deposits have been a
relatively stable source of funds as well, including the $196.7 million of
certificates of deposit maturing in one year or less; however, the ability of
the Bank to attract and maintain time deposits and the rates paid on these
deposits has been and will continue to be significantly affected by market
conditions. The Bank is seeking opportunities to increase transaction deposit
accounts through aggressive advertising, offering ATM services, and offering
interest on such accounts. The Bank also intends to expand its deposit products
to attract new customers, including local businesses.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- ----------------------------------
1998 1997 1997 1996 1995
-------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net increase (decrease) before interest credited.. $(12,770) $(7,266) $(17,354) $(29,800) $ (8,139)
Interest credited................................. 9,375 9,262 18,816 19,076 18,432
-------- ------- -------- -------- --------
Net increase (decrease) in deposits............... $ (3,395) $ 1,996 $ 1,462 $(10,724) $ 10,293
======== ======= ======== ======== ========
</TABLE>
At June 30, 1998, the Bank had $45.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
- --------------- -------------
(IN THOUSANDS)
<S> <C>
3 months or less.................................................. $ 8,590
Over 3 through 6 months........................................... 8,190
Over 6 through 12 months.......................................... 14,500
Over 12 months.................................................... 14,066
-------
Total....................................................... $45,346
=======
</TABLE>
60
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts as of the dates indicated and the weighted average interest rates on
each category of deposits presented.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
AT
JUNE 30, 1998 1997 1996
--------------------------------- -------------------------------------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Transaction accounts......... $ 2,481 0.66% 0.32 $ 3,266 0.87% -- $ 2,451 0.65% --
Savings...................... 80,959 21.67 3.25 84,547 22.42 3.25 90,255 24.03 3.25
-------- ------ -------- ------ -------- ------
Total.................... 83,440 22.33 3.16 87,813 23.29 3.13 92,706 24.68 3.16
-------- ------ -------- ------ -------- ------
Certificate accounts(1)(2):
Within 12 months........... 196,666 52.62 5.60 192,592 51.07 5.74 206,995 55.10 5.57
Over 12 through 36 months.. 72,526 19.41 5.84 82,054 21.76 5.81 73,143 19.47 6.03
Over 36 months............. 21,087 5.64 6.29 14,655 3.88 6.32 2,808 0.75 6.21
-------- ------ -------- ------ -------- ------
Total certificate 290,279 77.67 5.71 289,301 76.71 5.79 282,946 75.32 5.70
accounts................ -------- ------ -------- ------ -------- ------
Total deposits........... $373,719 100.00% 5.16 $377,114 100.00% 5.17 $375,652 100.00% 5.07
======== ====== ======== ====== ======== ======
<CAPTION>
--------------------------------
1995
--------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
BALANCE DEPOSITS RATE
--------------------------------
<S> <C> <C> <C>
Transaction accounts......... $ 2,716 0.70% --
Savings...................... 97,696 25.29 3.25
-------- ------
Total.................... 100,412 25.99 3.16
-------- ------
Certificate accounts(1)(2):
Within 12 months........... 193,460 50.07 5.63
Over 12 through 36 months.. 92,504 23.94 5.60
Over 36 months............. -- -- 5.62
-------- ------
Total certificate 285,964 74.01 5.62
accounts................ -------- ------
Total deposits........... $386,376 100.00% 4.98
======== ======
</TABLE>
________________________
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.
61
<PAGE>
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1998
---------------------------------------------
LESS ONE
THAN TO OVER AT DECEMBER 31,
----------------------------
AT JUNE 30, ONE THREE THREE
1998 YEAR YEARS YEARS 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Certificate accounts:
0 to 4.00%.......... $ -- $ -- $ -- $ -- $ -- $ 18 $ 575
4.01% to 5.00%...... 19,299 19,299 -- -- 17,303 42,404 40,990
5.01% to 6.00%...... 243,579 166,483 72,486 4,610 233,582 183,490 139,919
6.01% to 7.00%...... 24,239 7,722 40 16,477 32,589 51,217 99,017
7.01% to 8.00%...... 3,162 3,162 -- -- 5,827 5,817 5,386
8.01% to 9.00%...... -- -- -- -- -- -- 77
Over 9.01%.......... -- -- -- -- -- -- --
-------- -------- ------- ------- -------- -------- --------
Total........... $ 290,279 $ 196,666 $ 72,526 $ 21,087 $289,301 $282,946 $285,964
======== ======== ======= ======= ======== ======== ========
</TABLE>
BORROWINGS. As part of its operating strategy, the Bank has utilized
advances from the FHLB as an alternative to retail deposits to fund its
operations when borrowings are less costly and can be invested at a positive
interest rate spread or when the Bank needs additional funds to satisfy loan
demand. By utilizing FHLB advances, which possess varying stated maturities, the
Bank can meet its liquidity needs without otherwise being dependent upon retail
deposits and revising its deposit rates to attract retail deposits, which have
no stated maturities (except for certificates of deposit), which are interest
rate sensitive and which are subject to withdrawal from the Bank at any time.
These FHLB advances are collateralized primarily by certain of the Bank's
mortgage loans and secondarily by the Bank's investment in capital stock of the
FHLB. FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. The maximum amount
that the FHLB will advance to member institutions, including the Bank,
fluctuates from time-to-time in accordance with the policies of the FHLB. See
"Regulation--Federal Home Loan Bank System." At June 30, 1998, the Bank had $8.0
million in outstanding advances from the FHLB as compared to $8.0 million at
December 31, 1997. The Bank has overnight borrowing capacity at the FHLB of
$45.0 million and additional borrowing capacity at June 30, 1998 of $37.0
million.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE SIX AT OR FOR THE YEAR ENDED
MONTHS ENDED JUNE 30, DECEMBER 31,
-------------------------------- ------------------------
1998 1997 1997 1996 1995
-------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding (monthly)............. $ 8,000 $10,000 $ 9,667 $ 7,417 $8,000
Maximum amount outstanding at any 8,000 10,000 10,000 15,000 8,000
month-end during the period....................
Balance outstanding at end of period.............. 8,000 10,000 8,000 15,000 8,000
Weighted average interest rate during the period.. 6.12% 6.12% 6.23% 6.19% 7.06%
Weighted average interest rate at end of period... 6.19% 6.19% 6.19% 6.23% 7.16%
</TABLE>
62
<PAGE>
PROPERTIES
The Bank currently conducts its business through its four full service
banking offices including its main banking office. The Bank owns all four
branches. The following table sets forth information regarding the Bank's
properties.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE TOTAL DEPOSITS
YEAR OF PROPERTY AT AT
LOCATION ACQUIRED JUNE 30, 1998 JUNE 30, 1998
- --------------------------- -------- -------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
EXECUTIVE/BRANCH OFFICE:
400 George Street
Fredericksburg, VA 22404.. 1962 $ 1,491 $ 244,106
BRANCH OFFICES:
Route Three Branch
3600 Plank Road
Fredericksburg, VA 22407.. 1983 $ 1,007 42,239
Four Mile Fork Branch
4535 Lafayette Boulevard
Fredericksburg, VA 22408.. 1972 $ 408 60,531
Aquia Branch
117 Garrisonville Road
P.O. Box 382
Stafford, VA 22555........ 1978 $ 274 26,843
</TABLE>
The Bank also owns property for possible branch expansion located on Route
17 North, in Stafford County. The net book value of this property, as of June
30, 1998, was $333,390.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of June 30, 1998, the Bank had 50 full-time employees and six part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good. See
"Management of the Bank--Benefits" for a description of certain compensation and
benefit programs offered to the Bank's employees.
63
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a fiscal
year basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS or the Virginia
Department of Taxation ("DOT") in the past five years.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interests in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase and
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continues to be subject to provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
DISTRIBUTIONS. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created by an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, presumably taxed at a 34%
corporate income tax rate (exclusive of state and local taxes). See "Regulation"
and "Dividend Policy" for limits on the payment of dividends of the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its bad debt reserve.
64
<PAGE>
CORPORATE ALTERNATIVE MINIMUM TAX ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The Bank does
not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
COMMONWEALTH OF VIRGINIA. The Commonwealth of Virginia imposes a tax at
the rate of 6.0% on the "Virginia taxable income" of the Bank and the Company.
Virginia taxable income is equal to federal taxable income with certain
adjustments. Significant modifications include the subtraction from federal
taxable income of interest or dividends on obligations or securities of the
United States that are exempt from state income taxes, and a recomputation of
the bad debt reserve deduction on reduced modified taxable income. Since the
Bank and the Company will recognize no taxable gain for federal tax purposes as
a result of the Conversion, the Bank and the Company will recognize no Virginia
taxable income as a result of the Conversion.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision
by the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to test the Bank's
compliance with various regulatory requirements. In addition, the FDIC may also
conduct examinations of the Bank, at the FDIC's discretion. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with and otherwise comply with the
rules and regulations of the OTS and of the Securities and Exchange Commission
(the "SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress has been considering the elimination of the federal thrift charter and
abolishment of the OTS. The results of such consideration, including possible
enactment of legislation is uncertain. Therefore, the Bank is unable to
determine the extent to which the results of consideration or possible
legislation, if enacted, would affect its business. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.
65
<PAGE>
FEDERAL SAVINGS INSTITUTION REGULATION
BUSINESS ACTIVITIES. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. In particular, certain lending authority for federal
savings associations, e.g., commercial, non-residential real property loans and
consumer loans, is limited to a specified percentage of the institution's
capital or assets.
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1998, the Bank's general limit on loans-to-
one borrower was $20.9 million. At June 30, 1998, the Bank's largest aggregate
amount of loans-to-one borrower consisted of one mortgage loan and two
installment loans to a local church with a combined carrying balance of $2.0
million, of which $1.9 million was secured by real estate and $64,523 was
unsecured. Management believes that the Bank is in compliance with all
applicable loans-to-one borrower limitations.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to either qualify as a
"domestic building and loan association," as defined in the Code, or maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least 9 months
out of each 12 month period. A savings association that fails the QTL test must
either convert to a bank charter or operate under certain restrictions. As of
June 30, 1998, the Bank maintained 99.99% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered as "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Institution") and has not been advised by the OTS
that it is in need of more than normal supervision, could, after prior notice
to, but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Bank's capital fell below its
capital requirements or the OTS notified it that it was in need of more than
normal supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (recently lowered to 4%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations formerly required each savings
institution to maintain an average daily balance of short-term liquid assets at
1% of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. However, this requirement was recently eliminated. Monetary
penalties may be imposed for failure to meet the liquidity requirements. The
Bank's average liquidity ratio for the six months ended June 30, 1998 was
10.23%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
66
<PAGE>
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, as reported in the Bank's latest quarterly Thrift Financial Report. The
assessments paid by the Bank for the year ended December 31, 1997 totalled
$108,000.
BRANCHING. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations. For a discussion of the impact of proposed legislation, see "Risk
Factors--Financial Institution Regulation and Possible Legislation."
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
governed by Section 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans to insiders made pursuant to a benefit or compensation program that are
widely available to all employees of the institution and do not give preference
to insiders over other employees. Regulation O also places individual and
aggregate limits on the amounts of loans the Bank may make to insiders based, in
part, on the Bank's capital position and requires that certain board approval
procedures be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness ("Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
67
<PAGE>
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital to total assets) ratio and an 8% risk based capital
standard. Core capital is generally defined as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and certain purchased credit card relationships. The OTS regulations
require that, in meeting the leverage ratio, tangible and risk-based capital
standards institutions generally must deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank. In addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of less than 4% (3%
for institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of at least 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed above. The
components of supplementary capital generally include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and, within specified limits,
the allowance for loan and lease losses. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed indefinitely the date that the
component will first be deducted from an institution's total capital.
At June 30, 1998, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. See "Regulatory Capital Compliance" for a table
which sets forth in terms of dollars and percentages the OTS tangible, leverage
and risk-based capital requirements, the Bank's historical amounts and
percentages at June 30, 1998 and pro forma amounts and percentages based upon
the issuance of the shares within the Estimated Price Range and assuming that a
portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital ratio of
less than 8.0% or a leverage ratio or a Tier 1 capital to risk-based assets
ratio that is less than 4.0% is considered to be undercapitalized. A savings
institution that has a total risk-based capital ratio less than 6.0%, a Tier 1
risk-based capital ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow
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<PAGE>
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth and capital distributions and limitations on expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates.
Deposits of the Bank are presently insured by the SAIF. Both the SAIF and
the BIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. Until recently, members of the SAIF and BIF were paying
average deposit insurance assessments of between 24 and 25 basis points. The BIF
met the required reserve in 1995, whereas the SAIF was not expected to meet or
exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential continued, it may have
had adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended September 30, 1996 and was generally tax
deductible. The SAIF Special Assessment recorded by the Bank amounted to $2.5
million on a pre-tax basis and $1.5 million on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. Most recently, the FDIC determined to continue the 0 to 27
basis point range for the second half of 1998. SAIF members will also continue
to make the FICO payments described above. Management cannot predict the level
of FDIC insurance assessments on an on-going basis, whether the federal thrift
charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
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<PAGE>
The Bank's assessment rate for 1997 ranged from 6.30 to 6.50 basis points
and the regular premium paid for this period was $240,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1998 of $3.5 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance. At June 30, 1998, the Bank had $8.0 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1997, 1996 and 1995,
dividends from the FHLB to the Bank amounted to approximately $247,000, $232,000
and $240,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8 million, the
reserve requirement is $1.43 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve discount window, but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See
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"--Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities authorized for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC Act"),
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. No multiple savings and loan holding company may acquire more
than 5% of the voting stock of a company engaged in impermissible activities.
Proposed legislation would, subject to certain grandfathering, limit the
activities of unitary savings and loan companies to those permissible for
multiple savings and loan holding companies. See "Risk Factors--Financial
Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS, and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described above. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
THRIFT RECHARTERING
The Funds Act provides that the BIF and the SAIF will merge on January 1,
1999, if there are no more savings associations as of that date. Several bills
have been introduced in Congress that would eliminate the federal thrift charter
and the OTS. A bill originally reported by the House Banking Committee would
have regained federal thrifts to become national banks or state banks within two
years of enactment or they would have become national banks by operation of law.
OTS would have been abolished and its functions transferred to the bank
regulatory agencies. The bill as passed by the House of Representatives,
however, did not provide for the elimination of the federal thrift charter or
OTS, but did provide that unitary stock savings and loan holding companies
existing or applied for after March 31, 1998 would not have the ability to
engage in unlimited activities but would be subject to the activities
restrictions applicable to multiple savings and loan holding companies. Unitary
stock holding companies existing or applied for before 1998 would be
grandfathered and could continue to engage in unlimited activities and could
transfer the grandfather rights to acquirors of the holding company. The Bank is
unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and BIF
will eventually be merged or the federal thrift charter eliminated, and what
effect, if any, such legislation would have on the Bank.
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FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company currently consists of nine members
each of whom is also a director of the Bank. The Board of Directors is divided
into three classes, each of which contains approximately one-third of the Board.
The directors shall be elected by the stockholders of the Company for staggered
three year terms, or until their successors are elected and qualified. One class
of directors, consisting of Messrs. Anderson, Beck and Donahoe has a term of
office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Ashby, Harding and Rowe has a term of office expiring at
the second annual meeting of stockholders and a third class, consisting of
Messrs. Hicks and McKann and Ms. Newman has a term of office expiring at the
third annual meeting of stockholders. Their names and biographical information
are set forth under "Management of the Bank--Directors."
The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
<TABLE>
<CAPTION>
EXECUTIVE POSITION(S) HELD WITH COMPANY
----------- -----------------------------------
<S> <C>
Samuel C. Harding, Jr........... President
Peggy J. Newman................. Executive Vice President, Secretary and
Treasurer
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
Except for directors' meeting fees, since the formation of the Company, none
of the executive officers, directors or other personnel has received
remuneration from the Company. Information concerning the principal occupations,
employment and other information concerning the directors and officers of the
Company during the past five years is set forth under "Management of the Bank--
Biographical Information."
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MANAGEMENT OF THE BANK
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
Board of Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- --- ----- ------------------------------ -------- --------
<S> <C> <C> <C> <C>
H. Smith McKann 84 Chairman of the Board 1955 2001
Ronald G. Beck 62 Vice Chairman of the Board 1988 1999
Samuel C. Harding, Jr. 56 Director and President 1987 2000
Peggy J. Newman 57 Director, Executive Vice President, Secretary 1988 2001
and Treasurer
William M. Anderson, Jr. 56 Director 1988 1999
O'Conor Ashby 51 Director 1992 2000
Ernest N. Donahoe, Jr. 61 Director 1982 1999
DuVal Q. Hicks, Jr. 78 Director 1958 2001
Charles S. Rowe 73 Director 1956 2000
</TABLE>
- ---------------------------
(1)As of June 30, 1998.
Each of the executive officers of the Bank will retain his or her office
after the Conversion until his or her re-election at the annual meeting of the
Board of Directors of the Bank, held immediately after the first annual meeting
of stockholders subsequent to the Conversion, and until their successors are
elected and qualified or until they are removed or replaced. Officers are
subject to re-election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
H. Smith McKann is the President and owner of General Products Company,
Fredericksburg, Virginia. Mr. McKann has served as a director of the Bank since
1955 and has been Chairman since 1996.
Ronald G. Beck is the President of Clayborne C. Beck & Sons, Inc.,
Fredericksburg, Virginia, which sells furniture grade lumber worldwide. Mr. Beck
has served as a director of the Bank since 1988 and currently serves as Vice
Chairman of the Board.
Samuel C. Harding, Jr. serves as President of the Bank and has held that
position since 1992. Mr. Harding has been with the Bank since 1972 and was
elected director in 1987.
Peggy J. Newman serves as Executive Vice President, Secretary and
Treasurer of the Bank and has held these positions since 1992. Ms. Newman has
been with the Bank for 33 years and was elected director in 1988.
William M. Anderson, Jr. was elected to the Board in 1988 and is
currently the President of Mary Washington College, Fredericksburg, Virginia. He
has served in that position since 1982.
O'Conor Ashby is a partner in the law firm of Willis & Ashby. He has
been a partner with that firm since 1975. Mr. Ashby, who has served on the Board
of the Bank since 1992 also is currently on the Board of Medicorp Services, Inc.
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<PAGE>
Ernest N. Donahoe, Jr. Is an engineer and has been a partner with
Sullivan, Donahoe & Ingalls, P.C. since 1968. Mr. Donahoe has been a Board
member of the Bank since 1982.
DuVal Q. Hicks, Jr. is a retired attorney, formerly with Hicks, Baker and
Peterson. Mr. Hicks has been a director of the Bank since 1958.
Charles S. Rowe is a retired Editor and Co-publisher of the Free Lance-
Star, Fredericksburg, Virginia and a former director of the Associated Press. He
has served as a director of the Bank since 1956.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Bank's Board of Directors meets twice per month and may have
additional special meetings called in the manner specified in the Bylaws. During
1997, no current Director attended less than 75% of the aggregate of the total
number of Board meetings and the total number of committee meetings of the Board
of Directors on which they served.
The Board of Directors of the Bank has established the following
committees:
The Executive Committee consists of Messrs. McKann, Beck and Harding, and
Ms. Newman. The purposes of this committee are to evaluate issues of major
importance to the Bank between regularly scheduled Board meetings. The Executive
Committee meets as the members deem necessary and met one time in 1997.
The Audit Committee consists of Messrs. Andersen, Ashby and Rowe. The
purpose of this committee is to oversee both internal and external audit
activities. The Audit Committee meets as the members deem necessary and met one
time in 1997.
The Loan Committee consists of Messrs. Beck, Donahoe and Harding. The
purpose of this committee is to review and approve all loan requests of less
than $500,000. The Loan Committee meets once a week.
Additionally, the Bank has a number of other management committees
including the Asset/Liability Committee, Advertising Committee, the Compensation
Committee, the Investment Committee, the Pension Committee and the Proxy
Committee.
The Board of Directors of the Company has established the following
committees: the Audit and Compliance Committee consisting of Messrs. Anderson,
Rowe and Ashby; the Pricing Committee consisting of the entire Board of
Directors; and the Compensation Committee consisting of Messrs. Beck, Hicks and
Harding.
COMPENSATION OF DIRECTORS OF THE BANK AND COMPANY
All directors of the Bank receive a fee of $1,700 for each regularly
scheduled monthly meeting attended. Effective August 1, 1998, such fees were
increased to $2,000 for each regularly scheduled monthly meeting attended.
Messrs. Beck and Donohoe additionally receive $400 per month for Loan Committee
meetings attended.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as other compensation paid or accrued for
services rendered in all capacities during the year ended December 31, 1997, to
the Chief Executive Officer and the highest paid executive officer of the Bank
who received salary and bonus in excess of $100,000 ("Named Executive
Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
------------------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITIONS YEAR ($) ($) ($)(2) ($)(3)
- ------------------------------- -------- ----------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Samuel C. Harding, Jr.......... 1997 $204,800 $20,000 -- $33,109
President (principal
executive officer)
Peggy J. Newman................ 1997 199,800 20,000 -- 37,884
Executive Vice President,
Secretary and Treasurer
(principal financial officer)
</TABLE>
- --------------------
(1) Under Annual Compensation, the column titled "Salary" includes
directors' fees for Mr. Harding and Ms. Newman.
(2) For 1997, there were no (a) perquisites over the lesser of $50,000 or 10% of
the individual's total salary and bonus for the year; (b) payments of above-
market preferential earnings on deferred compensation; (c) payments of
earnings with respect to long-term incentive plans prior to settlement or
maturation; (d) tax payment reimbursements; or (e) preferential discounts on
stock. For 1997, the Bank had no restricted stock or stock related plans in
existence.
(3) Includes deferred compensation of 28,612 and 33,387 for Mr. Harding and Ms.
Newman, respectively under the Management Security Plan. Also includes
matching contributions of 4,497 and 4,497 to the accounts of Mr. Harding and
Ms. Newman, respectively, under the Bank's 401(k) Plan.
EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Bank and the Company intend to
enter into employment agreements (collectively, the "Employment Agreements")
with Mr. Harding and Ms. Newman (individually, the "Executive"). The Employment
Agreements are subject to the review and approval of the OTS and may be amended
as a result of such OTS review. Review of compensation arrangements by the OTS
does not indicate, and should not be construed to indicate, that the OTS has
passed upon the merits of such arrangements. The Employment Agreements are
intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of both Mr. Harding and Ms. Newman.
The Employment Agreements provide for a three-year term for each
Executive and shall become effective upon consummation of the Conversion. The
Bank Employment Agreements provide that, commencing on the first anniversary
date of the agreement and continuing each anniversary date thereafter, the Board
of Directors of the Bank may extend each of the agreements for an additional
year so that the remaining term shall be three years unless written notice of
non-renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. The terms of the Company Employment Agreements
shall be extended on a daily basis unless written notice of non-renewal is given
by the Board of Directors of the Company. The Bank and the Company Employment
Agreements provide that the Executive's base salary will be reviewed annually.
The base salaries, which will be effective for such Employment Agreements for
Mr. Harding and Ms. Newman will be $194,775 and $189,525, respectively. In
addition to the base salary, the Employment Agreements provide for, among other
things, participation in various employee benefit plans and stock-based
compensation programs, as well as furnishing certain fringe benefits available
to similarly situated executive personnel. The Employment Agreements provide for
termination by the Bank or the Company for cause (as described in the
agreements) at any time. In the event the Bank or the Company chooses to
terminate the Executive's employment for reasons other than for cause, or in the
event of the Executive's resignation
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from the Bank and the Company upon (i) the failure to re-elect the Executive to
his/her current offices; (ii) a material change in the Executive's functions,
duties or responsibilities; (iii) a relocation of the Executive's principal
place of employment by more than 25 miles; (iv) liquidation or dissolution of
the Bank or the Company; or (v) a breach of the Employment Agreements by the
Bank or the Company; the Executive or, in the event of death, the Executive's
beneficiary would be entitled to receive an amount generally equal to the
remaining base salary and bonus payments that would have been paid to the
Executive during the remaining term of the Employment Agreements. In addition,
the Executive would receive a payment attributable to the contributions that
would have been made on the Executive's behalf to any employee benefit plans of
the Bank or the Company during the remaining term of the Employment Agreements,
together with the value of certain stock-based incentives previously awarded to
the Executive. The Bank and the Company would also continue and pay for the
Executive's life and disability coverage for the remaining term of the
Employment Agreement, as well as provide medical and hospitalization coverage
until the Executive at least attains eligible Medicare age. Upon any termination
of the Executive, the Executive is subject to a covenant not to compete with the
Company or the Bank for one year.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company, the Executive or, in the event of
the Executive's death, the Executive's beneficiary would be entitled to a
severance payment generally equal to the greater of: (i) the payments due for
the remaining terms of the agreement, including the value of certain stock-based
incentives previously awarded to the Executive; or (ii) three times the average
of the five preceding taxable years' annual compensation. The Bank and the
Company would also continue the Executive's life, health, and disability
coverage for thirty-six months (except medical and hospitalization would be
provided at least until the Executive attains eligible Medicare age).
Notwithstanding that both Employment Agreements provide for a severance payment
in the event of a change in control, the Executive would only be entitled to
receive a severance payment under one agreement. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on the base salaries to be paid to Mr. Harding and Ms.
Newman effective upon the consummation of the Conversion, and excluding any
benefits under any employee benefit plan which may be payable, would equal
approximately $_____ million.
Payments to the Executive under the Bank Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company Employment Agreements would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under federal and
Virginia law, respectively.
EMPLOYEE SEVERANCE COMPENSATION PLAN
Upon consummation of the Conversion, the Bank's Board of Directors
intends to, upon consummation of the Conversion, establish the Fredericksburg
Savings Bank Employee Severance Compensation Plan (the "Severance Plan") which
will provide eligible employees with severance pay benefits in the event of a
change in control of the Bank or the Company. Management personnel with
Employment Agreements are not eligible to participate in the Severance Plan.
Generally, employees are eligible to participate in the Severance Plan if they
have completed at least six months of service with the Bank. Under the Severance
Plan, in the event of a change in control of the Bank or the Company, eligible
employees who are terminated from or terminate their employment within one year
after the change in control (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. A participant, whose employment
has terminated, will be entitled to a cash severance payment equal to one-
twelfth of his or her current annual compensation for each year of service up to
a maximum of 199% of current annual compensation. In the event the provisions of
the Severance Plan were triggered, the total amount of payments that would be
due thereunder, based solely upon current salary levels, would equal
approximately $____ million.
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<PAGE>
INSURANCE PLANS
All full-time employees of the Bank, upon completion of the applicable
introductory period, may elect coverage for comprehensive hospitalization,
including major medical, and are covered with long-term disability insurance.
BENEFITS
401(K) PLAN. The Bank maintains the Fredericksburg Savings and Loan
Association, F.A. Salary Savings Plan (the "401(k) Plan"), a tax-qualified
profit sharing plan with a qualified cash or deferred arrangement under Section
401(k) of the Code. The 401(k) Plan currently provides participants with savings
and retirement benefits based on employee deferrals of compensation, as well as
matching and other discretionary contributions made by the Bank. Eligible
employees may begin participating in the 401(k) Plan upon the completion of one-
half of one "Year of Service" (as defined in the 401(k) Plan) and attainment of
age 21. Participants currently may make salary reduction contributions to the
401(k) Plan up to the lesser of 20% of their compensation or the legally
permissible limit ($10,000 for 1998). A participant is always 100% vested in his
or her salary reduction contributions to the 401(k) Plan. Participants become
vested in employer contributions to the 401(k) Plan at the rate of 33 1/3% per
each completed year of service. Participants also become 100% vested in their
accounts under the 401(k) Plan upon death or incurring disability (as described
in the 401(k) Plan) or attainment of their "Normal Retirement Age" (as defined
in the 401(k) Plan).
Currently, participants may invest their accounts under the 401(k) Plan
in and among four funds. The Bank may add or eliminate investment options
available under the 401(k) Plan in the future.
Generally, distributions from the 401(k) Plan may commence upon a
participant's separation from service, death, or disability. However,
participants may request hardship withdrawals from the 401(k) Plan under certain
circumstances. Distributions from the 401(k) Plan are generally subject to
federal and state income taxes and distributions made prior to a participant
attaining age 59 1/2 are also generally subject to a federal excise tax.
PENSION PLAN. The Bank also maintains a tax-qualified defined benefit
pension plan for its employees (the "Pension Plan"). Eligible employees begin
participating in the Pension Plan following the completion of one year of
service (as described in the Plan) and attainment of the age 21. A participant
in the Pension Plan generally becomes vested in his accrued benefit under the
plan upon completing five years of service. Participants also become 100% vested
in their accrual benefit under the Pension Plan upon incurring a disability (as
described in the plan) and upon the attainment of their "normal retirement age"
(as described in the Plan). The Pension Plan is funded solely through
contributions made by the Bank.
A participant's accrued benefit under the Pension Plan is actuarially
determined based on his or her years of service with the Bank and his or her
average monthly compensation (as described in the Plan), including average
monthly compensation in excess of an integration to the Social Security Taxable
Wage Base.
The table below reflects the annual pension benefit payable to a
participant in the Pension Plan, assuming various levels of "Average Monthly
Compensation" (as defined in the Pension Plan) and years of service credited as
of the participant's normal retirement age. As of January 1, 1998, Mr. Harding
and Ms. Newman had 25 and 32 years of service with the Bank, respectively, for
purposes of the Pension Plan.
77
<PAGE>
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
--------------------------------------------------
AVERAGE ANNUAL 15 20 25 30 35
EARNINGS(1)
- -------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 19,833 $ 26,444 $ 33,055 $ 33,055 $ 33,055
$ 75,000 $ 31,271 $ 41,694 $ 52,118 $ 52,118 $ 52,118
$100,000 $ 42,708 $ 56,944 $ 71,180 $ 71,180 $ 71,180
$125,000 $ 54,146 $ 72,194 $ 90,243 $ 90,243 $ 90,243
$150,000 $ 65,583 $ 87,444 $109,305 $109,305 $109,305
$175,000 $ 77,021 $102,694 $128,368 $128,368 $128,368
$200,000 $ 88,458 $117,944 $147,430 $147,430 $147,430
$250,000 $111,333 $148,444 $185,555 $185,555 $185,555
$300,000 $134,208 $178,944 $223,680 $223,680 $223,680
$350,000 $157,083 $209,444 $261,805 $261,805 $261,805
$400,000 $179,958 $239,944 $299,930 $299,930 $299,930
</TABLE>
- ------------------------
(1) Code Section 401(a)(17) limits the amount of compensation the Bank may
consider in computing benefits under the Pension Plan to $150,000,
effective with respect to the Pension Plan for plan years beginning on or
after January 1, 1994, as periodically adjusted ($160,000 for 1998).
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to establish
a tax-qualified employee stock ownership plan (the "ESOP") in connection with
the Conversion. Generally, eligible employees will become participants in the
ESOP upon the completion of one-half of one year of service with the Bank (with
credit given for service with the Bank prior to adoption of the plan) and
attainment of age 21. With the consent of the Bank, an affiliate of the Bank may
also adopt the ESOP for the benefit of its employees.
The Bank expects a committee of the Board of Directors to serve as the
administrative committee of the ESOP (the "ESOP Committee"). The ESOP Committee
will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the related trust agreement. The Bank expects
the ESOP to purchase 8% of the Common Stock issued in the Conversion. As part of
the Conversion, and in order to fund the ESOP's purchase of the Common Stock
issued in the Conversion, the ESOP will borrow 100% of the aggregate purchase
price of the Common Stock from either the Company or a third-party lender.
The trustee of the ESOP will repay the loan principally from the Bank's
annual contributions to the ESOP over an expected period of 20 years. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since some participants in
the ESOP will be employees of the Bank or, alternatively, the Bank may reimburse
the Company for contributions made by the Company with respect to employees of
the Bank. The Bank expects the initial interest rate (which may be fixed or
variable) for the loan to be at or near the prime rate on or about the date of
Conversion.
The trustee of the ESOP will pledge the shares of Common Stock
purchased by the ESOP in connection with the Conversion as collateral for the
loan and will hold the shares in a suspense account under the plan. As the
trustee repays the loan, the trustee will release a portion of the shares from
the suspense account and allocate them to the accounts of active participants in
the ESOP based on each participant's compensation (as determined under the terms
of the plan) relative to all participants' compensation for the plan year. In
the event of a change in control of the Bank or the Company prior to complete
repayment of the loan, the ESOP trustee, in accordance with the terms of the
plan document, will sell enough shares of Common Stock held in the suspense
account to repay the loan in full. Upon repayment of the loan, the ESOP trustee
will then allocate all remaining shares of Common Stock held in the suspense
account to the accounts of active participants based on each participant's
account balance as of a specific date or based on some other method set forth in
the plan document.
78
<PAGE>
Participants will become vested in contributions made to the ESOP by
the Bank at the rate of 33 1/2% per year of service with the Bank (with credit
given for service with the Bank prior to its adoption of the ESOP). Accordingly,
participants will become fully vested in their accounts under the ESOP after
completing three years of vesting service. The Bank expects that participants
will also become fully vested in their accounts under the ESOP upon the
attainment of their normal retirement age while an employee of the Bank, upon
their death or incurring a disability, upon a change in control of the Bank or
the Company, or upon termination of the plan. Benefits generally become
distributable under the ESOP and potentially become subject to income tax upon
death, retirement, disability or other separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most accurately
reflect the instructions it receives from participants regarding the allocated
stock. In the event no shares have been allocated under the ESOP at the time
such shares are to be voted, each participant shall be deemed to have one share
allocated to his or her account for voting purposes.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Bank may consider in providing benefits under its tax-qualified
retirement plans, such as the 401(k) Plan, the Pension Plan and the ESOP. The
Code further limits the amount of benefit accruals and annual contributions
under such plans on behalf of any employee. The Bank has previously taken action
to separately provide benefits to Mr. Harding and Ms. Newman that would have
accrued under the Pension Plan but for the limitation on compensation the Bank
may consider under the Pension Plan less benefits that actually accrue under the
Pension Plan for the benefit of Mr. Harding and Ms. Newman. Upon Conversion, the
Bank also intends to provide for similar benefits with respect to the 401(k)
Plan and ESOP, as well as benefits otherwise limited by other provisions of the
Code or the terms of the ESOP loan.
To provide for such benefits, the Bank intends to implement a non-
qualified deferred compensation arrangement known as a "Supplemental Executive
Retirement Plan" ("SERP"). The SERP will generally provide benefits to eligible
individuals (designated by the Board of Directors of the Bank or its affiliates)
that cannot be provided under the Pension Plan, 401(k) Plan and/or ESOP as a
result of the limitations imposed by the Code, but that would have been provided
under the Pension Plan, 401(k) Plan and/or ESOP but for such limitations. In
addition to providing for benefits lost under tax-qualified plans as a result of
limitations imposed by the Code, the SERP will also make up lost ESOP benefits
to designated individuals who retire, who terminate employment in connection
with a change in control, or whose participation in the ESOP ends due to
termination of the ESOP in connection with a change in control (regardless of
whether the individual terminates employment) prior to the complete scheduled
repayment of the ESOP loan. Generally, upon the retirement of an eligible
individual or upon a change in control of the Bank or the Company prior to
complete repayment of the ESOP Loan, the SERP will provide the individual with a
benefit equal to what the individual would have received under the ESOP had he
remained employed throughout the term of the ESOP or had the ESOP not been
terminated prior to the scheduled repayment of the ESOP loan less the benefits
actually provided under the ESOP on behalf of such individual. An individual's
benefits under the SERP will generally become payable upon the participant's
retirement (in accordance with the standard retirement policies of the Bank),
upon the change in control of the Bank or the Company or as determined under the
applicable tax-qualified retirement plans sponsored by the Bank.
The Bank may establish a grantor trust in connection with the SERP to
satisfy the obligations of the Bank with respect to the SERP. The assets of the
grantor trust would remain subject to the claims of the Bank's general creditors
in the event of the Bank's insolvency until paid to the individual pursuant to
the terms of the SERP.
MANAGEMENT SECURITY PLAN. The Bank currently sponsors a non-tax
qualified deferred compensation arrangement for approximately ten employees,
including Mr. Harding and Ms. Newman, known as the Fredericksburg Savings and
Loan Association, F.A. Management Security Plan (the "Management Security
Plan"). The Management Security Plan generally provides a payment to each
covered individual upon his or her death, disability, retirement, or termination
of employment after five or more years of service. Benefits under the Management
Security Plan are based on a flat dollar amount (specified for each individual
in a separate "Benefit Agreement") multiplied by the
79
<PAGE>
individual's years of service with the Bank. Participants become fully vested in
benefits under the Management Security Plan after the completion of five years
of service with the Bank. The annual benefits for Mr. Harding and Ms. Newman are
$3,685 and $4,000, respectively, multiplied by each individual's respective
years of service with the Bank. As of January 1, 1998, Mr. Harding and Ms.
Newman had completed 27 and 33 years of service, respectively.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the granting of options to purchase Common Stock ("Stock
Options"), Common Stock ("Stock Awards"), Limited Option Rights and Limited
Stock Rights to eligible officers, employees, and directors of the Company and
Bank. The Company may provide such stock based benefits under the Stock-Based
Incentive Plan or may establish one or more separate plans which would provide
for the benefits described herein.
In the event the Stock-Based Incentive Plan (or any separate plan(s))
is adopted within one year after conversion, OTS regulations require such plan
to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company intends to grant
Stock Options in an amount equal to 10% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (1,311,552 shares
based upon the maximum of the Estimated Price Range), and intends to grant Stock
Awards in an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (524,621 shares based upon
the maximum of the Estimated Price Range). Any Common Stock awarded under the
Stock-Based Incentive Plan will be awarded at no cost to the recipients. The
plan may be funded through the purchase of Common Stock by a trust established
in connection with the Stock-Based Incentive Plan (or any separate plan(s)) or
from authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data." Assuming the market value of the Common Stock is $10.00 per share
at the time stock awards are made under the Stock-Based Incentive Plan, the
estimated value of the total Stock Awards available for grant under the Plan
would be approximately $4.6 million, assuming shares are issued at the midpoint
of the Estimated Price Range in the Conversion.
The grants of Stock Options and Stock Awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based Incentive
Plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether Stock Options will be Incentive or Non-Statutory Stock
Options, as defined below, the number of shares subject to each stock option and
Stock Award, the exercise price of each Non-Statutory Stock Option, whether
Stock Options may be exercised by delivering other shares of Common Stock, and
when Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Therefore, under the Stock-Based
Incentive Plan, directors may receive only grants of Non-Statutory Stock
Options. If such plan is adopted within one year after conversion, OTS
regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the stock options available under the Stock-Based
Incentive Plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the Stock-Based Incentive Plan
(or any separate plan for directors). OTS regulations also provide that no
individual officer or employee of the Bank may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the Stock-Based Incentive Plan (or any separate
plan for directors).
The Stock-Based Incentive Plan will provide for the grant of: (i)
Stock Options intended to qualify as incentive Stock Options under Section 422
of the Code ("Incentive Stock Options"); (ii) Stock Options that do not so
qualify ("Non-Statutory Stock Options"); and (iii) limited option rights
("Limited Option Rights"). Limited Option
80
<PAGE>
Rights are exercisable only upon a change in control of the Bank or the Company.
Subject to OTS regulations, upon exercise of Limited Option Rights, the
recipient will be entitled to receive a lump sum cash payment equal to the
difference between the exercise price of any unexercised Stock Option, whether
exercisable or unexercisable at such time, and the fair market value of the
shares of Common Stock subject to the Stock Option on the date of exercise of
the right in lieu of purchasing the Common Stock underlying the Stock Option. It
is anticipated that all Stock Options granted contemporaneously with stockholder
approval of the Stock-Based Incentive Plan will qualify as Incentive Stock
Options to the extent permitted under Section 422 of the Code. Unless sooner
terminated, the Stock-Based Incentive Plan will be in effect for a period of ten
years from the earlier of adoption by the Board of Directors or approval by the
Company's Stockholders. Subject to stockholder approval, the Company intends to
grant Stock Options with Limited Option Rights under the plan at an exercise
price equal to at least the fair market value of the underlying Common Stock on
the date of grant.
An individual will not be deemed to have received taxable income upon
the grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a Non-
Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to OTS regulations, upon the exercise of a Limited Stock Right,
the recipient will be entitled to receive a cash payment equal to the fair
market value of all unvested Stock Awards in exchange for any rights to such
unvested Stock Awards. Grants of Stock Awards and Limited Stock Rights to
officers and employees may be made in the form of base grants and/or performance
grants (the vesting of which would be contingent upon performance goals
established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Bank, actual performance of the Bank as compared to targeted goals such as the
ratio of the Bank's net worth to total assets, the Bank's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan
will be determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and, thereafter, vest at a rate of no more than 20% per
year and may not be accelerated except in the case of death or disability. Stock
Options could be exercisable for three months following
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<PAGE>
the date on which the employee or director ceases to perform services for
the Bank or the Company, except that in the event of death or disability,
options accelerate and become fully vested and could be exercisable for up
to one year thereafter or such longer period as determined by the Company.
In the case of death or disability, Stock Options may be exercised for a
period of 12 months. However, any Incentive Stock Options exercised more
than three months following the date the employee ceases to perform
services as an employee would be treated as a Non-Statutory Stock Option.
In the event of retirement, if the optionee continues to perform services
as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a
consultant or director. In the event of death, disability or normal
retirement, the Company, if requested by the optionee, or the optionee's
beneficiary, could elect, in exchange for vested options, to pay the
optionee, or the optionee's beneficiary in the event of death, the amount
by which the fair market value of the Common Stock exceeds the exercise
price of the options on the date of the employee's termination of
employment.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in
the event of a change in control of the Company or the Bank. A change in
control would generally be considered to occur when a person or group of
persons acting in concert acquires beneficial ownership of 20% or more of
any class of equity security of the Company or the Bank or in the event of
a tender or exchange offer, merger or other form of business combination,
sale of all or substantially all of the assets of the Company or the Bank
or contested election of directors which resulted in the replacement of a
majority of the Board of Directors by persons not nominated by the
directors in office prior to the contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable
features. In addition, loans made to a director or executive officer in
excess of the greater of $25,000 or 5% of the Bank's capital and surplus
(up to a maximum of $500,000) must be approved in advance by a majority of
the disinterested members of the Board of Directors.
Prior to FIRREA, the Bank made loans to its executive officers and
Directors which were secured by their primary residences. The rates of
interest charged by the Bank on such loans were the Bank's cost of funds.
Pursuant to FIRREA, in 1989, the Bank discontinued its practice of making
such preferential loans to its officers and Directors. However, all such
pre-FIRREA preferential loans were "grandfathered" under FIRREA. Since the
enactment of FIRREA, the Bank has not made any loans to its executive
officers or Directors. The Bank intends to implement a policy whereby it
will begin to again offer loans to executive officers and Directors. Such
loans, as well as loans made to Bank employees, will be made on the same
terms and conditions offered to the general public. If the Bank implements
a policy of extending credit to executive officers and Directors, such
policy will provide that all such loans will be made in the ordinary course
of business, on substantially the same terms, including collateral, as
those prevailing at the time for comparable transactions with other persons
and may not involve more than the normal risk of collectibility or present
other unfavorable features. As of June 30, 1998, the Bank had $572,673 of
loans to executive officers or Directors all of which had balances of less
than $60,000 as of June 30, 1998 or were made by the Bank in the ordinary
course of business with no favorable terms and do not involve more than the
normal risk of collectibility or present unfavorable features.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of
the shares of any class of its common stock and affiliates thereof, will
contain terms no less favorable to the Company than could have been
obtained by it in arm's length negotiations with unaffiliated persons and
will be approved by a majority of independent outside directors of the
Company not having any interest in the transaction.
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SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming
shares of Common Stock are issued at the minimum and maximum of the
Estimated Price Range, including the effect of shares issued to the
Foundation, and that sufficient shares will be available to satisfy their
subscriptions. The table also sets forth the total expected beneficial
ownership of Common Stock as to all directors and executive officers as a
group.
<TABLE>
<CAPTION>
AT AT
THE MINIMUM THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE PRICE RANGE
--------------------- -------------------
AS A AS A
NUMBER PERCENT NUMBER PERCENT
OF OF SHARES OF OF SHARES
NAME AMOUNT SHARES ISSUED SHARES ISSUED
- ---- ------ ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
H. Smith McKann..................... $ 300,000 30,000 0.31% 30,000 0.23%
Ronald G. Beck...................... 300,000 30,000 0.31 30,000 0.23
Samuel C. Harding, Jr............... 300,000 30,000 0.31 30,000 0.23
Peggy J. Newman..................... 300,000 30,000 0.31 30,000 0.23
O'Conor Ashby....................... 100,000 10,000 0.10 10,000 0.08
Ernest N. Donahoe, Jr............... 100,000 10,000 0.10 10,000 0.08
DuVal Q. Hicks, Jr.................. 300,000 30,000 0.31 30,000 0.23
Charles S. Rowe..................... 300,000 30,000 0.31 30,000 0.23
William M. Anderson, Jr............. 10,000 1,000 0.01 1,000 0.01
---------- ------- ---- ------- ----
All Directors and Executive Officers
as a Group (9 persons).......... $2,010,000 201,000 2.07% 201,000 1.55%
========== ======= ==== ======= ====
</TABLE>
- -------------------
83
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN
OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO
VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH
OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT
OF THE PLAN BY SUCH AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE
ESTABLISHMENT OF THE FOUNDATION.
GENERAL
On July 14, 1998, the Bank's Board of Directors unanimously adopted
the Plan, pursuant to which the Bank will be converted from a federally-
chartered mutual savings and loan association to a federally-chartered
capital stock savings bank. It is currently intended that all of the
outstanding capital stock of the Bank will be held by the Company, which is
incorporated under Virginia law. The Plan was approved by the OTS, subject
to, among other things, approval of the Plan by the Bank's members. A
special meeting of members has been called for this purpose to be held on
___________, 199_.
The Company has applied for and expects to receive approval from the
OTS to become a savings and loan holding company and to acquire all of the
common stock of the Bank to be issued in the Conversion. The Company plans
to purchase the shares of issued and outstanding capital stock of the Bank
in exchange for up to 50% of the net proceeds and retain the remaining net
proceeds. The Conversion will be effected only upon completion of the sale
of all of the shares of Common Stock of the Company to be issued pursuant
to the Plan.
The Plan provides generally that (i) the Bank will convert from a
mutual savings and loan association to a capital stock savings bank and
(ii) the Company will offer shares of Common Stock for sale in the
Subscription Offering to the Bank's Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and Other Members. Upon completion of
the Subscription Offering, the Company will offer any shares of Common
Stock not subscribed for in the Subscription Offering in a Community
Offering with preference given to natural persons residing in the Bank's
Local Community. It is anticipated that shares not subscribed for in the
Subscription and Community Offerings will be offered for sale by the
Company to the general public in a Syndicated Community Offering. The Bank
has the right to accept or reject, in whole or in part, any orders to
purchase shares of the Common Stock received in the Community Offering or
in the Syndicated Community Offering. See "--Community Offering" and "--
Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be
between $89.8 million and $121.4 million, will be determined based upon an
independent appraisal of the estimated pro forma market value of the Common
Stock of the Company. All shares of Common Stock to be issued and sold in
the Conversion will be sold at the same price. The independent appraisal
will be affirmed or, if necessary, updated at the completion of the
Subscription Offering, if all shares are subscribed for, or at the
completion of the Community and/or the Syndicated Community Offerings. The
appraisal has been performed by FinPro, a consulting firm experienced in
the valuation and appraisal of savings institutions. See "--Stock Pricing"
for additional information as to the determination of the estimated pro
forma market value of the Common Stock.
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL ASPECTS OF THE
CONVERSION. THE SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
PROVISIONS OF THE PLAN. A COPY OF THE PLAN IS AVAILABLE FOR INSPECTION AT
EACH OFFICE OF THE BANK AND AT THE SOUTHEAST REGIONAL AND WASHINGTON, D.C.
OFFICES OF THE OTS.
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PURPOSES OF CONVERSION
The Bank, as a federally-chartered mutual savings and loan
association, does not have shareholders and has no authority to issue
capital stock. By converting to the capital stock form of organization, the
Bank will be structured in the form used by commercial banks, other
business entities and a growing number of savings institutions. The
Conversion will enhance the Bank's ability to access capital markets,
expand its current operations, acquire other financial institutions or
branch offices, provide affordable home financing opportunities to the
communities it serves or diversify into other financial services to the
extent allowable by applicable law and regulation.
The holding company form of organization will provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there
are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to
take advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. At June 30, 1998, the Bank had retained earnings, determined
in accordance with GAAP, of $83.5 million, or 17.7% of total assets.
Assuming that the Company uses 50% of the net proceeds at the maximum of
the Estimated Price Range to purchase the capital stock of the Bank, the
Bank's GAAP capital will increase to $127.5 million or a ratio of GAAP
capital to adjusted assets, on a pro forma basis, of 24.7% after the
Conversion. The investment of the net proceeds from the sale of the Common
Stock is expected to provide the Bank with additional income to increase
further its capital position.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Articles of Incorporation will permit the
Company, subject to market conditions and regulatory approval of an
offering, to raise additional equity capital through further sales of
securities and to issue securities in connection with possible
acquisitions. At the present time, the Company has no plans with respect to
additional offerings of securities, other than the issuance of additional
shares upon exercise of stock options under the Stock-Based Incentive Plan
or the possible issuance of authorized but unissued shares to fund the
Stock-Based Incentive Plan. Following the Conversion, the Company will also
be able to use stock-based incentive programs to attract and retain
executive and other personnel for itself and its subsidiaries. See
"Management of the Bank--Executive Compensation."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Bank's long-standing commitment to its
local community, the Bank's Plan of Conversion provides for the
establishment of a charitable foundation in connection with the Bank's
Conversion. The Plan provides that the Bank and the Company will establish
the Foundation, which will be incorporated under Delaware law as a non-
stock corporation, and will fund the Foundation with Common Stock of the
Company, as further described below. The Company and the Bank believe that
the funding of the Foundation with Common Stock of the Company is a means
of establishing a common bond between the Bank and the communities in which
the Bank operates and thereby enables such communities to share in the
potential growth and success of the Company and the Bank over the long
term. By further enhancing the Bank's visibility and reputation in the
communities in which it operates, the Bank believes that the Foundation
will enhance the long-term value of the Bank's community banking franchise.
The Foundation will be dedicated to the promotion of charitable
purposes within the communities in which the Bank operates, including, but
not limited to, providing grants or donations to support housing
assistance, not-for-profit medical facilities, community groups and other
types of organizations or projects. Establishment of the Foundation is
subject to the approval of a majority of the total outstanding votes of the
Bank's members eligible to be cast at the Special Meeting. The Foundation
will be considered as a separate matter from approval of the Plan of
Conversion. If the Bank's members approve the Plan of Conversion, but not
the Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the establishment of
the Foundation may materially affect the pro forma market value of the
Common Stock. See "Comparison of Valuation and Pro Forma Information With
No Foundation." In such an event, the Bank may establish a new Estimated
Price
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Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors,
as described elsewhere herein. See "--Stock Pricing."
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the
Bank operates. The Bank has long emphasized community lending and community
development activities and currently has a "Satisfactory" CRA rating. The
Foundation is being formed as a complement to the Bank's existing community
activities, not as a replacement for such activities. The Bank intends to
continue to emphasize community lending and community development
activities following the Conversion. However, such activities are not the
Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of
charitable causes and may be able to support such activities in ways that
are not presently available to the Bank. The Bank believes that the
Foundation will enable the Company and the Bank to assist their local
community in areas beyond community development and lending. In this
regard, the Board of Directors believes the establishment of a charitable
foundation is consistent with the Bank's commitment to community service.
The Boards of Directors of the Bank and Company also believe that the
funding of the Foundation with Common Stock of the Company is a means of
enabling the communities in which the Bank operates to share in the
potential growth and success of the Company long after completion of the
Conversion. The Foundation accomplishes that goal by providing for
continued ties between the Foundation and Bank, thereby forming a
partnership with the Bank's community. The establishment of the Foundation
would also enable the Company and the Bank to develop a unified charitable
donation strategy and would centralize the responsibility for
administration and allocation of corporate charitable funds. The Bank,
however, does not expect the contribution to the Foundation to take the
place of the Bank's traditional community lending and charitable
activities. The Bank expects in future periods to continue making its
ordinary charitable contributions within its communities. Such ordinary
contributions typically range between $75,000 and $100,000 per year.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's
bylaws, the Foundation's board of directors will be comprised of four
members, all of whom must be officers of, or members of the Board of
Directors of, the Company or the Bank or an affiliate or subsidiary of the
Company or the Bank. A person who is a director, officer or employee of the
Bank, or has the power to direct its management or policies, or otherwise
owes a fiduciary duty to the Bank, and who will also serve as a director or
employee of the Foundation would be subject to the requirements of OTS
Conflicts of Interest Regulations. The initial board of directors of the
Foundation will be comprised of Messrs. Anderson, Harding and Hicks and Ms.
Newman. Such persons intend to purchase 1,000, 30,000, 30,000 and 30,000
shares of Common Stock in the Conversion, respectively. At the maximum of
the Estimated Price Range, such purchases equal 0.01%, 0.23%, 0.23% and
0.23%, respectively, or 0.70% in the aggregate, of the total number of
shares to be issued in the Conversion, including shares issued to the
Foundation. In addition, the Foundation will reserve one board seat for an
individual who is not an officer and/or director of the Company or the Bank
and who is a civic or community leader within Fredericksburg, Virginia or
its neighboring communities and is not an associate of any officer or
director of the Company or the Bank. On an on-going basis, a Nominating
Committee of the board of directors of the Foundation, will nominate
individuals eligible for election to the board of directors of the
Foundation. The members of the Foundation, who are comprised of its board
members, will elect the directors at the annual meeting of the Foundation
from those nominated by the Nominating Committee. Only persons serving as
directors of the Foundation qualify as members of the Foundation with
voting authority. Directors will be divided into three classes with each
class appointed for three-year terms. The certificate of incorporation of
the Foundation provides that the corporation is organized exclusively for
charitable purposes as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further provides that no part of
the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members.
The authority for the affairs of the Foundation will be vested in the
board of directors of the Foundation. The directors of the Foundation will
be responsible for establishing the policies of the Foundation with respect
to grants or donations by the Foundation, consistent with the stated
purposes for which the Foundation was established. Although no formal
policy governing Foundation grants exists at this time, the Foundation's
board of directors will adopt such a policy upon establishment of the
Foundation. The directors will also be responsible for directing the assets
of the Foundation. Pursuant to the terms of the contribution as mandated by
the OTS, all shares of Common Stock held by the Foundation must be voted in
the same ratio as all other shares of the Company's Common Stock on all
proposals considered by stockholders of the Company; provided, however,
that the OTS will waive this voting restriction under certain circumstances
if compliance with the restriction would: (i) cause a violation of the law
of the State of Delaware and the OTS determines that federal law would not
preempt the application of the laws of the State
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of Delaware to the Foundation; (ii) cause the Foundation to lose its tax-
exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) cause the Foundation to be subject to an excise
tax under Section 4941 of the Code. In order for the OTS to waive such
voting restriction, the Company's or the Foundation's legal counsel must
render an opinion satisfactory to OTS that compliance with the voting
restriction would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the OTS will grant a waiver of the voting
restriction upon submission of such legal opinion(s) by the Company or the
Foundation. In the event that the OTS waived the voting restriction, the
directors would direct the voting of the Common Stock held by the
Foundation. However, a condition to the OTS approval of the Conversion
provides that in the event such voting restriction is waived or becomes
unenforceable, the Director of the OTS, or his designees, at that time may
impose conditions on the composition of the board of directors of the
Foundation or such other conditions or restrictions relating to the control
of the Common Stock held by the Foundation, any of which could limit the
ability of the board of directors of the Foundation to control the voting
of the Common Stock held by the Foundation. There will be no agreements or
understandings with directors of the Foundation regarding the exercise of
control, directly or indirectly, over the management or policies of the
Company or the Bank, including agreements related to voting, acquisition or
disposition of the Company's stock. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by
their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with
the charitable purpose for which the Foundation is established.
The Company will provide office space and administrative support
services to the Foundation. Initially, the Foundation is expected to have
no employees. The board of directors of the Foundation will appoint such
officers as may be necessary to manage the operations of the Foundation. It
is anticipated that initially such officers will be selected from the board
of directors of the Foundation. Any transaction between the Bank and the
Foundation will comply with the affiliate transaction restrictions set
forth in Sections 23A and 23B of the Federal Reserve Act, as amended.
The Company and the Bank determined to fund the Foundation with Common
Stock rather than cash because it desired to form a bond with its community
in a manner that would allow the community to share in the potential growth
and success of the Company and the Bank over the long term. The funding of
the Foundation with stock also provides the Foundation with a potentially
larger endowment than if the Company contributed cash to the Foundation
since, as a shareholder, the Foundation will share in the potential growth
and success of the Company. As such, the contribution of stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Company, if it were not making
the stock contribution, would have to contribute to the Foundation in
future years in order to maintain a level amount of charitable grants and
donations.
The Foundation will receive working capital from any dividends that
may be paid on the Common Stock in the future and, subject to applicable
federal and state laws, loans collateralized by the Common Stock or from
the proceeds of the sale of any of the Common Stock in the open market from
time-to-time as may be permitted to provide the Foundation with additional
liquidity. As a private foundation under Section 501(c)(3) of the Code, the
Foundation will be required to distribute annually in grants or donations,
a minimum of 5% of the average fair market value of its net investment
assets. One of the conditions imposed on the gift of Common Stock by the
Company is that the amount of Common Stock that may be sold by the
Foundation in any one year shall not exceed 5% of the average market value
of the assets held by the Foundation, except where the board of directors
of the Foundation determines that the failure to sell an amount of Common
Stock greater than such amount would result in a long-term reduction of the
value of the Foundation's assets or would otherwise jeopardize the
Foundation's capacity to carry out its charitable purposes. While there may
be greater risk associated with a one-stock portfolio in comparison to a
diversified portfolio, the Company believes any such risk is mitigated by
the ability of the Foundation's directors to sell more than 5% of its stock
in such circumstances. Upon completion of the Conversion and the
contribution of shares to the Foundation immediately following the
Conversion, the Company would have 9,694,080, 11,404,800 and 13,115,520
shares issued and outstanding at the minimum, midpoint and maximum,
respectively, of the Estimated Price Range. Because the Company will have
an increased number of shares outstanding, the voting and ownership
interests of shareholders in the Company's common stock would be diluted by
7.4%, as compared to their interests in the Company if the Foundation was
not established. For additional discussion of the dilutive effect, see
"Comparison of Valuation and Pro Forma Information With No Foundation" and
"Pro Forma Data."
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COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS
NOT ESTABLISHED AS PART OF THE CONVERSION. The Company proposes to
capitalize the Foundation with Common Stock in an amount up to 8% of the
total amount of Common Stock sold in connection with the Conversion. At the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, the contribution to the Foundation would equal 718,080, 844,800,
971,520 and 1,117,248 shares, respectively, which would have a market value
of $7.2 million, $8.4 million, $9.7 million and $11.2 million,
respectively, based on the Purchase Price of $10.00 per share. Such
contribution, once made, will not be recoverable by the Company or the
Bank. As a result of the establishment of the Foundation, the Estimated
Price Range, as estimated by FinPro, has decreased and the amount of stock
available for sale in the Offerings has also correspondingly decreased. The
amount of the decrease is 1,394,000, 1,640,000, 1,886,000 and 2,168,900
shares, or $13.9 million, $16.4 million, $18.9 million and $21.7 million,
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively. See "Pro Forma Data" and "Comparison
of Valuation and Pro Forma Data Information with No Foundation."
TAX CONSIDERATIONS. The Company and the Bank have been advised by
their independent accountants that an organization created for the above
purposes will qualify as a 501(c)(3) exempt organization under the Code and
will be classified as a private foundation rather than a public charity. A
private foundation typically receives its support from one person or one
corporation whereas a public charity receives its support from the public.
The Foundation will submit a request to the IRS to be recognized as an
exempt organization after approval of the Foundation by the Bank's members
at the Special Meeting being held to consider the Conversion. As long as
the Foundation files its application for tax-exempt status within 15 months
from the date of its organization and provided the IRS approves the
application, the effective date of the Foundation's status as a Section
501(c)(3) organization will be the date of its organization.
A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general
rule funds contributed to a charitable foundation should not exceed the
deductible limitations set forth in the Code and if an association's
contributions exceed the deductible limit, such action must be justified by
the board of directors. Under the Code, the Company may deduct up to 10% of
its taxable income in any one year and any contributions made by the
Company in excess of the deductible amount will be deductible for federal
tax purposes over each of the five succeeding taxable years. The Company
and the Bank believe that the Conversion presents a unique opportunity to
establish and fund a charitable foundation given the substantial amount of
additional capital being raised in the Conversion. In making such a
determination, the Company and the Bank considered the dilutive impact of
the Foundation on the amount of Common Stock available to be offered for
sale in the Conversion. See "Comparison of Valuation and Pro Forma
Information with No Foundation." Based on such consideration, the Company
and Bank believe that the contribution to the Foundation in excess of the
10% annual limitation is justified given the Bank's capital position and
its earnings, the substantial additional capital being raised in the
Conversion and the potential benefits of the Foundation to the Bank's
community. In this regard, assuming the sale of the Common Stock at the
midpoint of the Estimated Price Range, the Company would have pro forma
consolidated capital of $176.6 million, or 31.2%, of consolidated assets
and the Bank's pro forma tangible, core and risk-based capital ratios would
be 23.5%, 23.5% and 40.96%, respectively. See "Regulatory Capital
Compliance," "Capitalization" and "Comparison of Valuation and Pro Forma
Information with No Foundation." Thus, the amount of the contribution will
not adversely impact the financial condition of the Company and the Bank.
The Company and the Bank therefore believe that the amount of the
charitable contribution is reasonable given the Company's and the Bank's
pro forma capital positions. As such, the Company and the Bank believe that
the contribution does not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the
Foundation will not constitute an act of self-dealing and that the Company
will be entitled to a deduction in the amount of the fair market value of
the stock at the time of the contribution, subject to a limitation based on
10% of the Company's annual taxable income. The Company, however, would be
able to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made for federal tax
purposes. Thus, while the Company expects to receive a charitable
contribution deduction of approximately $850,000 in 1998, the Company is
permitted under the Code to carry over the excess contribution over a five-
year period for federal income tax purposes. Assuming the close of the
Offerings at the midpoint of the Estimated Price Range, the Company
estimates that substantially all of the deduction should be deductible over
the six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five year period
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following the year in which the contribution is made to fully utilize the
carryover related to the excess contribution. Neither the Company nor the
Bank expect to make any further contributions to the Foundation within the
first five years following the initial contribution. After that time, the
Company and the Bank may consider future contributions to the Foundation.
Any such decisions would be based on an assessment of, among other factors,
the financial condition of the Company and the Bank at that time, the
interests of shareholders and depositors of the Company and the Bank and
the financial condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, the Company's contribution
to the Foundation would be expensed without tax benefit, resulting in a
reduction in earnings in the year in which the IRS makes such a
determination. See "Risk Factors--Establishment of the Charitable
Foundation." In cases of willful, flagrant or repeated acts or failures to
act which result in violations of the IRS rules governing private
foundations, a private foundation's status as a private foundation may be
involuntarily terminated by the IRS. In such event, the managers of a
private foundation could be liable for excise taxes based on such
violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that
it shall have a perpetual existence. In the event, however, the Foundation
were subsequently dissolved as a result of a loss of its tax exempt status,
the Foundation would be required under the Code and its certificate of
incorporation to distribute any assets remaining in the Foundation at that
time for one or more exempt purposes within the meaning of Section
501(c)(3) of the Code, or to distribute such assets to the federal
government, or to a state or local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and
capital gains, will be subject to a federal excise tax of 2.0%. The
Foundation will be required to make an annual filing with the IRS within
four and one-half months after the close of the Foundation's fiscal year to
maintain its tax-exempt status. The Foundation will be required to publish
a notice that the annual information return will be available for public
inspection for a period of 180 days after the date of such public notice.
The information return for a private foundation must include, among other
things, an itemized list of all grants made or approved, showing the amount
of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of
each grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i)
the Foundation will be subject to examination by the OTS, at the
Foundation's own expense; (ii) the Foundation must comply with supervisory
directives imposed by the OTS; (iii) the Foundation will provide annual
reports to the OTS describing grants made and grant recipients; (iv) the
Foundation will operate in accordance with written policies adopted by the
board of directors, including a conflict of interest policy; (v) the
Foundation will not engage in self-dealing and will comply with all laws
necessary to maintain its tax-exempt status; (vi) any purchases of common
stock by the Foundation following the Conversion will be subject to OTS
regulations on stock repurchases; and (vii) any shares of Common Stock of
the Company held by the Foundation must be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive
this voting restriction under certain circumstances if compliance with the
voting restriction would: (a) cause a violation of the law of the State of
Delaware and the OTS determines the federal law does not preempt the
application of the laws of the State of Delaware to the Foundation; (b)
cause the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation; or (c) cause the
Foundation to be subject to an excise tax under Section 4941 of the Code.
In order for the OTS to waive such voting restriction, the Company's or the
Foundation's legal counsel must render an opinion satisfactory to OTS that
compliance with the voting restriction would have the effect described in
clauses (a), (b) or (c) above. Under those circumstances, the OTS will
grant a waiver of the voting restriction upon submission of such opinion(s)
by the Company or the Foundation. There can be no assurances that either a
legal or tax opinion addressing these issues will be rendered, or if
rendered, that the OTS will grant an unconditional waiver of the voting
restriction. In this regard, a condition to the OTS approval of the
Conversion provides that in the event such voting restriction is waived or
becomes unenforceable, the Director of the OTS, or his designees, at that
time may impose conditions on the composition of the board of directors of
the Foundation or such other conditions or restrictions relating to the
control of the Common Stock held by the Foundation, any of which could
limit the ability
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of the board of directors of the Foundation to control the voting of Common
Stock held by the Foundation. In no event will the voting restriction
survive the sale of shares of the Common Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the special meeting being held to consider the
Conversion. The Foundation will be considered as a separate matter from
approval of the Plan of Conversion. If the Bank's members approve the Plan
of Conversion, but not the Foundation, the Bank intends to complete the
Conversion without the establishment of the Foundation. Failure to approve
the Foundation may materially increase the pro forma market value of the
Common Stock being offered for sale in the Offerings since the Valuation
Range, as set forth herein, takes into account the dilutive impact of the
issuance of shares to the Foundation. See "Comparison of Valuation and Pro
Forma Information With No Foundation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the
net worth of the institution based upon the balance in his or her account,
which interest may only be realized in the event of a liquidation of the
institution or in the event the institution declares a capital distribution
to depositors, subject to applicable regulations of the OTS. However, this
ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of
the institution without any additional payment beyond the amount of the
deposit. A depositor who reduces or closes his account receives a portion
or all of the balance in the account but nothing for his ownership interest
in the net worth of the institution, which is lost to the extent that the
balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no
way to realize the value of their ownership interest, which has realizable
value only in the unlikely event that the mutual savings institution is
liquidated or in the event the institution declares a capital distribution
to depositors, subject to applicable regulations of the OTS. In such event,
the depositors of record at that time, as owners, would share pro rata in
any residual surplus and reserves after other claims, including claims of
depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM
DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
capital stock. The stock certificates are transferable and, therefore, the
stock may be sold or traded if a purchaser is available with no effect on
any account the seller may hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by
the OTS and the FDIC. After the Conversion, the Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of
the Company will consist initially of individuals currently serving on the
Board of Directors of the Bank. All officers of the Bank at the time of
Conversion will retain their positions immediately after Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank
at the time of Conversion will automatically continue as a depositor after
the Conversion and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms. Each such
account will be insured by the FDIC to the same extent as before the
Conversion (i.e., up to $100,000 per depositor). Depositors will continue
to hold their existing certificates, passbooks and other evidences of their
accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by
the Conversion and the amount, interest rate, maturity and security for
each loan will remain as they were contractually fixed prior to the
Conversion.
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EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in,
the Bank as to all matters requiring membership action. Upon Conversion,
depositors and borrowers will cease to be members and will no longer be
entitled to vote at meetings of the Bank. Upon Conversion, all voting
rights in the Bank will be vested in the Company as the sole stockholder of
the Bank. Exclusive voting rights with respect to the Company will be
vested in the holders of Common Stock. Depositors and borrowers of the Bank
will not have voting rights after the Conversion except to the extent that
they become stockholders of the Company through the purchase of Common
Stock.
TAX EFFECTS. The Bank has received an opinion from Muldoon, Murphy &
Faucette with regard to federal income taxation and an opinion from Cherry
Bekaert & Holland with regard to Virginia taxation which provide that the
adoption and implementation of the Plan of Conversion set forth herein will
not be taxable for federal or Virginia tax purposes to the Bank, its
Eligible Account Holders, or its Supplemental Eligible Account Holders or
the Company, except as discussed below. See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were
any assets remaining, depositors would be entitled to such remaining
assets, pro rata, based upon the deposit balances in their deposit accounts
immediately prior to liquidation. In the unlikely event that the Bank were
to liquidate after Conversion, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also be paid
first, followed by distribution of the "liquidation account" to certain
depositors (see "--Liquidation Rights"), with any assets remaining
thereafter distributed to the Company as the holder of the Bank's capital
stock. Pursuant to the rules and regulations of the OTS, a post-Conversion
merger, consolidation, sale of bulk assets or similar combination or
transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation
account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock must be based on the appraised pro forma market value of
the Common Stock, as determined on the basis of an independent valuation.
The Bank and the Company have retained FinPro to make such valuation. For
its services in making such appraisal, FinPro will receive a fee of
$31,000, plus reasonable expenses. The Bank and the Company have agreed to
indemnify FinPro and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where
FinPro liability results from its negligence or willful misconduct.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Financial Statements. FinPro
also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the
Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information
relating to the Bank; a comparative evaluation of the operating and
financial statistics of the Bank with those of other similarly situated
publicly-traded savings banks and savings institutions located in the
Bank's primary market area; the aggregate size of the offering of the
Common Stock; the impact of the Conversion on the Bank's net worth and
earnings potential; the proposed dividend policy of the Company and the
Bank; and the trading market for securities of comparable institutions and
general conditions in the market for such securities.
On the basis of the foregoing, FinPro has advised the Company and the
Bank that, in its opinion, dated September 9, 1998, the estimated pro forma
market value of the Common Stock being sold in connection with the
Conversion ranged from a minimum of $89.8 million to a maximum of $121.4
million with a midpoint of $105.6 million. Based upon the Valuation Range
and the Purchase Price of $10.00 per share for the Common Stock established
by the Board of Directors, the Board of Directors has established the
Estimated Price Range of $89.8 million to $121.4 million, with a midpoint
of $105.6 million, based on the issuance of 8,976,000 to 12,144,000 shares
of Common Stock. The Board of Directors of the Company and the Bank have
reviewed the appraisal of FinPro and in determining the reasonableness and
adequacy of such appraisal consistent with OTS regulations and policies,
have reviewed the methodology and reasonableness of the assumptions
utilized by FinPro in the preparation of such
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appraisal. The Estimated Price Range may be amended with the approval of
the OTS (if required), if necessitated by subsequent developments in the
financial condition of the Company or the Bank or market conditions
generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED,
AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON
STOCK IN THE OFFERINGS. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO
VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL
CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER
OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME-TO-TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE
CONVERSION WILL THEREAFTER BE ABLE TO SELL COMMON STOCK AT PRICES AT OR
ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE
PRO FORMA MARKET VALUE THEREOF. SEE "RISK FACTORS--ABSENCE OF MARKET FOR
COMMON STOCK."
Prior to the completion of the Conversion, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares
of Common Stock to be issued in the Conversion may be increased to
13,965,600 shares due to regulatory considerations, changes in the market
and general financial and economic conditions, without the resolicitation
of subscribers. See "--Limitations on Common Stock Purchases" as to the
method of distribution and allocation of additional shares that may be
issued in the event of an increase in the Estimated Price Range to fill
unfilled orders in the Subscription Offering.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, FinPro confirms to the Bank and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, would cause FinPro to conclude
that the value of the Common Stock at the price so determined is
incompatible with its estimate of the pro forma market value of the Common
Stock at the conclusion of the Conversion.
If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Price Range or less than the minimum
of the Estimated Price Range, the Bank and the Company, after consulting
with the OTS, may terminate the Plan and return all funds promptly with
interest at the Bank's passbook rate of interest on payments made by check,
bank draft or money order, extend or hold a new Subscription and/or
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by
the OTS in order to complete the Conversion. In the event that a
resolicitation is commenced, unless an affirmative response is received
within a reasonable period of time, all funds will be promptly returned to
investors as described above. A resolicitation, if any, following the
conclusion of the Subscription Offering would not exceed 45 days unless
further extended by the OTS for periods of up to 90 days not to extend
beyond ________, 2000.
If the minimum number of shares of Common Stock are not sold through
the Subscription Offering or Community Offering, then the Bank and the
Company expect to offer the remaining shares in a Syndicated Community
Offering which would occur as soon as practicable following the close of
the Community Offering. All shares of Common Stock will be sold at the same
price per share in the Syndicated Community Offering as in the Subscription
and Community Offerings. See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, FinPro confirms to the Bank, the Company and the OTS
that, to the best of its knowledge, nothing of a material nature has
occurred which, taking into account all relevant factors, including those
which would be involved in a cancellation of the Syndicated Community
Offering, would cause FinPro to conclude that the aggregate value of the
Common Stock at the Purchase Price is incompatible with its estimate of the
pro forma market value of the Common Stock of the Company at the time of
the Syndicated Community Offering. Any change which would result in an
aggregate purchase price which is below or more than 15% above the
Estimated Price Range would be subject to OTS approval. If such
confirmation is not received, the Bank may extend the Conversion, extend,
reopen or commence new Subscription Offering, Community Offering or
Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS
or take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change
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so as to cause the aggregate purchase price of the shares to be below the
minimum of the Estimated Price Range or more than 15% above the maximum of
such range and the Company and the Bank determine to continue the
Conversion, subscribers will be resolicited (i.e., be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the
Bank's passbook rate of interest, or be permitted to decrease or cancel
their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. A resolicitation, if any, following the conclusion of
the Subscription Offering would not exceed 45 days, or if following the
Syndicated Community Offering, 90 days, unless further extended by the OTS
for periods up to 90 days not to extend beyond ____________. If such
resolicitation is not effected, the Bank will return all funds promptly
with interest at the Bank's passbook rate of interest on payments made by
check, bank draft or money order.
Copies of the appraisal report of FinPro, including any amendments
thereto and the detailed memorandum of the appraiser setting forth the
method and assumptions for such appraisal are available for inspection at
the main office of the Bank and the other locations specified under
"Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares to be
issued in the Conversion may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total
number of shares times the price per share is not below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range. Based on a fixed purchase price of $10.00 per share and
FinPro's estimate of the pro forma market value of the Common Stock ranging
from a minimum of $89.8 million to a maximum, as increased by 15%, of
$139.7 million, the number of shares of Common Stock expected to be issued
in the Conversion is between a minimum of 8,976,000 shares and a maximum,
as adjusted by 15%, of 13,965,600 shares. The actual number of shares
issued between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to OTS approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range, if the Plan is not terminated by the Company and the Bank
after consultation with the OTS, purchasers will be resolicited (i.e.,
permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly
refunded, or be permitted to modify or rescind their subscriptions). Any
change in the Estimated Price Range must be approved by the OTS. If the
number of shares issued in the Conversion is increased due to an increase
of up to 15% in the Estimated Price Range to reflect changes in market or
financial condition, persons who subscribed for the maximum number of
shares will not be given the opportunity to subscribe for an adjusted
maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares up to 8% of the Common
Stock sold in the Conversion to fund the Foundation. Assuming the sale of
shares in the Offerings at the maximum of the Estimated Price Range, the
Company will issue 971,520 shares of its Common Stock from authorized but
unissued shares to the Foundation immediately following the completion of
the Conversion. In that event, the Company will have total shares of Common
Stock outstanding of 13,115,520 shares. Of that amount, the Foundation will
own 7.4%. Funding the Foundation with authorized but unissued shares will
have the effect of diluting the ownership and voting interests of persons
purchasing shares in the Conversion by 7.4% since a greater number of
shares will be outstanding upon completion of the Conversion than would be
if the Foundation were not established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as
a result of an increase in the estimated pro forma market value would
decrease both a subscriber's ownership interest and the Company's pro forma
net earnings and stockholders' equity on a per share basis while increasing
pro forma net earnings and stockholders' equity on an aggregate basis. A
decrease in the number of shares to be issued in the Conversion would
increase both a
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subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while decreasing pro forma
net earnings and stockholder's equity on an aggregate basis. For a
presentation of the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1)
holders of deposit accounts including all withdrawable deposits in the
Bank, including non-interest bearing demand deposits in the Bank with a
balance of $50 or more as of June 30, 1997 ("Eligible Account Holders");
(2) the ESOP; (3) holders of deposit accounts with a balance of $50 or more
as of __________, 199_ ("Supplemental Eligible Account Holders"); and (4)
members of the Bank, consisting of depositors of the Bank as of
_____________, 199_, the Voting Record Date, and borrowers with loans
outstanding as of September 2, 1986, which continue to be outstanding as of
the Voting Record Date other than Eligible Account Holders and Supplemental
Eligible Account Holders ("Other Members"). All subscriptions received will
be subject to the availability of Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription
Offering and to the maximum and minimum purchase limitations set forth in
the Plan of Conversion and as described below under "--Limitations on
Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
will receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering
(currently $300,000 of Common Stock), one-tenth of one percent (.10%) of
the total offering of shares of Common Stock or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the total
number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Eligible Account Holder's Qualifying Deposit
(defined by the Plan as any deposit account in the Bank with a balance of
$50 or more as of June 30, 1997) and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders ($________), in each
case on the Eligibility Record Date, subject to the overall purchase
limitation and exclusive of an increase in the shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. See "--Limitations on
Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total
number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Eligible Account Holders so
as to permit each subscribing Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his or her
total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Eligible Account Holder. Any
shares remaining after that allocation will be allocated among the
subscribing Eligible Account Holders whose subscriptions remain unsatisfied
in the proportion that the amount of the Qualifying Deposit of each
Eligible Account Holder whose subscription remains unsatisfied bears to the
total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds
the amount subscribed for by any one or more Eligible Account Holders, the
excess shall be reallocated (one or more times as necessary) among those
Eligible Account Holders whose subscriptions are still not fully satisfied
on the same principle until all available shares have been allocated or all
subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder
must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights of Eligible Account Holders who are also Directors or Officers of
the Bank or their associates will be subordinated to the subscription
rights of other Eligible Account Holders to the extent attributable to
increased deposits in the 12 months preceding June 30, 1997.
PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there
are sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second
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priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including
shares issued to the Foundation, and any increase in the number of shares
of Common Stock to be issued in the Conversion after the date hereof as a
result of an increase of up to 15% in the maximum of the Estimated Price
Range. The ESOP intends to purchase 8% of the shares to be issued in the
Conversion, including shares issued to the Foundation, or 775,526 shares
and 1,049,242 shares, based on the issuance of 9,694,080 shares and
13,115,520 shares, respectively. Subscriptions by the ESOP will not be
aggregated with shares of Common Stock purchased directly by or which are
otherwise attributable to any other participants in the Subscription and
Community Offerings, including subscriptions of any of the Bank's
directors, officers, employees or associates thereof. See "Management of
the Bank--Benefits--Employee Stock Ownership Plan and Trust."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering (currently $300,000 of Common Stock),
one-tenth of one percent (.10%) of the total offering of shares of Common
Stock or fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the
Supplemental Eligible Account Holder's Qualifying Deposit and the
denominator is the total amount of Qualifying Deposits of all Supplemental
Eligible Account Holders, in each case on the Supplemental Eligibility
Record Date, subject to the overall purchase limitation and exclusive of an
increase in the shares issued pursuant to an increase in the Estimated
Price Range of up to 15%. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of
the total number of such shares eligible for subscription, the shares of
Conversion Stock shall be allocated among the subscribing Supplemental
Eligible Account Holders so as to permit each subscribing Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by
the Supplemental Eligible Account Holder. Any shares remaining after that
allocation will be allocated among the subscribing Supplemental Eligible
Account Holders whose subscriptions remain unsatisfied in the proportion
that the amount of the Qualifying Deposit of each Supplemental Eligible
Account Holder whose subscription remains unsatisfied bears to the total
amount of the Qualifying Deposits of all Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more Supplemental Eligible
Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his subscription order form all accounts in
which he has an ownership interest. Failure to list an account could result
in less shares being allocated than if all accounts had been disclosed. The
subscription rights received by Eligible Account Holders will be applied in
partial satisfaction to the subscription rights to be received as a
Supplemental Eligible Account Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible
Account Holders, the ESOP and the Supplemental Eligible Account Holders,
each Other Member will receive, without payment therefor, fourth priority
nontransferable subscription rights to subscribe for Common Stock in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering (currently $300,000 of Common Stock),
or one-tenth of one percent (.10%) of the total offering of shares of
Common Stock, subject to the overall purchase limitation and exclusive of
an increase in shares issued pursuant to an increase in the Estimated Price
Range of up to 15%.
In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock
subscribed for by the Eligible Account Holders, the Employee Plans and the
Supplemental Eligible Account Holders is in excess of the total number of
shares of Conversion Stock being issued, the subscriptions of such Other
Members will be allocated among the subscribing Other Members so as to
permit each subscribing Other Member, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of
Conversion Stock equal to the lesser of 100 shares or the number of shares
subscribed for by the Other Member. Any shares remaining after that
allocation will be allocated among the subscribing Other Members whose
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subscriptions remain unsatisfied pro rata in the same proportion that the
number of votes of a subscribing Other Member on the Voting Record Date
bears to the total votes on the Voting Record Date of all subscribing Other
Members whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more remaining Other
Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire on ___________, 199_, at __________, Eastern time,
unless extended for up to 45 days by the Bank or such additional periods
with the approval of the OTS. Subscription rights which have not been
exercised prior to the Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock have
been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless
such period is extended with the consent of the OTS, all funds delivered to
the Bank pursuant to the Subscription Offering will be returned promptly to
the subscribers with interest and all withdrawal authorizations will be
canceled. If an extension beyond the 45 day period following the Expiration
Date is granted, the Bank will notify subscribers of the extension of time
and of any rights of subscribers to modify or rescind their subscriptions
and have their funds returned promptly with interest and of the time period
within which subscribers must affirmatively notify the Bank of their
intention to confirm, modify, or rescind their subscription. If an
affirmative response to any resolicitation is not received by the Company
from a subscriber, such order will be rescinded and all subscription funds
will be promptly returned with interest. Such extensions may not go beyond
_______________.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the
ESOP, the Supplemental Eligible Account Holders and Other Members, the Bank
has determined to offer shares pursuant to the Plan to certain members of
the general public. The Community Offering, if conducted, may begin
concurrently with, during or promptly after the Subscription Offering. In
the event a community offering is held, a preference will be given to
natural persons residing in the City of Fredericksburg and Stafford and
Spotsylvania Counties, subject to the right of the Company to accept or
reject any such orders, in whole or in part, in their sole discretion.
Persons purchasing stock in the Community Offering, together with
associates of and persons acting in concert with such persons, may purchase
up to $300,000 of Common Stock subject to the maximum purchase limitation
and exclusive of shares issued pursuant to an increase in the Estimated
Price Range by up to 15%. See "--Limitations on Common Stock Purchases."
This amount may be increased to up to a maximum of 5% or decreased to less
than $170,000 at the sole discretion of the Company and the Bank. THE
OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN
ITS SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN
PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE
FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers after completion
of the Subscription Offering and Community Offering, such stock will be
allocated first to each Preferred Subscriber whose order is accepted by the
Bank, in an amount equal to the lesser of 100 shares or the number of
shares subscribed for by each such Preferred Subscriber, if possible.
Thereafter, unallocated shares will be allocated among the Preferred
Subscribers whose order remains unsatisfied on a 100 shares per order basis
until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to
other persons of the general public who purchase in the Community Offering
applying the same allocation described above for Preferred Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons
entitled to subscribe for stock pursuant to the Plan reside. However, the
Plan provides that the Bank and the Company are not required to offer stock
in the Subscription Offering to any person who resides in a foreign country
or resides in a state of the United States with respect to which both of
the following apply:
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(i) a small number of persons otherwise eligible to subscribe for shares of
Common Stock reside in such state; and (ii) the Company or the Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited
to a request that the Company and the Bank or their officers, directors or
trustees register as a broker, dealer, salesman or selling agent, under the
securities laws of such state, or a request to register or otherwise
qualify the subscription rights or Common Stock for sale or submit any
filing with respect thereto in such state. Where the number of persons
eligible to subscribe for shares in one state is small, the Bank and the
Company will base their decision as to whether or not to offer the Common
Stock in such state on a number of factors, including the size of accounts
held by account holders in the state, the cost of registering or qualifying
the shares or the need to register the Company, its officers, directors or
employees as brokers, dealers, salesmen or selling agents.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Trident as a consultant and
financial advisor in connection with the offering of the Common Stock and
Trident has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between the Bank and the Company concerning the fee structure,
Trident will receive a fixed fee of $525,000. In the event that a selected
dealers agreement is entered into in connection with a Syndicated Community
Offering, the Bank will pay a fee (to be negotiated at such time under such
agreement) to such selected dealers, any sponsoring dealers fees and a
management fee to Trident of ___% for shares sold by a National Association
of Securities Dealers, Inc. member firms pursuant to a selected dealers
agreement; provided, however, that any fees payable to Trident for Common
Stock sold by them pursuant to such a selected dealers agreement shall not
exceed ____% of the Purchase Price and provided further, however, that the
aggregate fees payable to Trident and the selected dealers will not exceed
7% of the aggregate Purchase Price of the Common Stock sold by selected
dealers. Fees to Trident and to any other broker-dealer may be deemed to be
underwriting fees and Trident and such broker-dealers may be deemed to be
underwriters. Trident will also be reimbursed for its reasonable out-of-
pocket expenses incurred in its capacity as consultant and financial
advisor, as well as conversion agent, including legal fees, in an amount
not to exceed $55,000. Notwithstanding the foregoing, in the event the
Offerings are not consummated or Trident ceases, under certain
circumstances after the subscription solicitation activities are commenced,
to provide assistance to the Company, Trident will be reimbursed for its
reasonable out-of-pocket expenses as described above. The Company and the
Bank have agreed to indemnify Trident for reasonable costs and expenses in
connection with certain claims or liabilities, including certain
liabilities under the Securities Act. Trident has received advances towards
its fees totaling $10,000. See "Pro Forma Data" for the assumptions used to
arrive at these estimates.
_____________ will perform proxy solicitation services, conversion
agent services and records management services for the Bank in the
Conversion and will receive a fee for these services of $_______.
Directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock.
Questions of prospective purchasers will be directed to executive officers
or registered representatives. Other employees of the Bank may participate
in the Offering in ministerial capacities or provide clerical work in
effecting a sales transaction. Such other employees have been instructed
not to solicit offers to purchase Common Stock or provide advice regarding
the purchase of Common Stock. The Company will rely on Rule 3a4-1 under the
Exchange Act and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Common Stock. No officer, director
or employee of the Company or the Bank will be compensated in connection
with his participation by the payment of commissions or other remuneration
based either directly or indirectly on the transactions in the Common
Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no prospectus will be mailed any later than five days prior to such
date or hand delivered any later than two days prior to such date.
Execution of the stock order form and certification form will confirm
receipt or delivery in accordance with Rule 15c2-8. Stock order and
certification forms will only be distributed with a prospectus.
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To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for,
or with appropriate authorization for withdrawal from the Bank's deposit
account (which may be given by completing the appropriate blanks in the
stock order form), must be received by the Bank at any of its offices by
_________, Eastern Time, on ___________, 1998, with respect to the
Subscription Offering, or by the date set for the termination of the
Community Offering, which date shall be within 45 days after the close of
the Subscription Offering, or ___________, 1998, unless extended by the
Bank and the Company with the approval of the OTS, if necessary. Stock
order forms which are not received by such time or are executed defectively
or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. Certificates representing
shares of Common Stock purchased in the Subscription Offering must be
registered in the name of Eligible Account Holder or Supplemental Eligible
Account Holder, as the case may be. Joint stock registration will be
allowed only if the qualifying deposit account is so registered. In
addition, the Bank and Company are not obligated to accept orders submitted
on photocopied or facsimilied stock order forms and will not accept stock
order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company shall have the right, in its
sole discretion, to permit institutional investors to submit irrevocable
orders together with a legally binding commitment for payment and to
thereafter pay for the shares of Common Stock for which they subscribe in
the Community Offering at any time prior to 48 hours before the completion
of the Conversion. The Company and the Bank have the right to waive or
permit the correction of incomplete or improperly executed forms, but do
not represent that they will do so. Once received, an executed stock order
form may not be modified, amended or rescinded without the consent of the
Bank unless the Conversion has not been completed within 45 days after the
end of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are properly identified as to
their stock purchase priorities, depositors as of the Eligibility Record
Date (June 30, 1997) and/or the Supplemental Eligibility Record Date
(____________, 199_) and/or the Voting Record Date (____________, 199_)
must list all accounts on the stock order form giving all names in each
account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in
person at any branch office of the Bank, (ii) by check, bank draft or money
order, or (iii) by authorization of withdrawal from deposit accounts
maintained with the Bank. Orders for Common Stock submitted by subscribers
in the Subscription Offering which aggregate $50,000 or more must be paid
by official bank or certified check, a check issued by a NASD-registered
broker-dealer or by withdrawal authorization from a deposit account of the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate
of interest from the date payment is received until the completion or
termination of the Conversion. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from
a deposit account will continue to accrue interest at the contractual rates
until completion or termination of the Conversion, but a hold will be
placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the
effective date of the Conversion. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum
balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of
the withdrawal, without penalty, and the remaining balance will earn
interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering,
the ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but rather, may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Subscription
Offering, if all shares are sold, or upon consummation of the Community
Offering or Syndicated Community Offering if shares remain to be sold in
such offerings; provided, that there is in force from the time of its
subscription until such time, a loan commitment from an unrelated financial
institution or the Company to lend to the ESOP, at such time, the aggregate
Purchase Price of the shares for which it subscribed.
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Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to
purchase shares of Common Stock in the Offerings, provided that such IRAs
are not maintained at the Bank. Persons with IRAs and Qualified Plans
maintained at the Bank must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in
the Offerings. In addition, the provisions of ERISA and IRS regulations
require that officers, directors and ten percent shareholders who use self-
directed IRA funds and Qualified Plans to purchase shares of Common Stock
in the Offerings, make such purchases for the exclusive benefit of the IRAs
and Qualified Plans.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the address specified in properly completed stock
order forms, as soon as practicable following consummation of the sale of
all shares of Common Stock. Any certificates returned as undeliverable will
be disposed of in accordance with applicable law. Shares sold prior to the
receipt of a stock certificate are the responsibility of the purchaser.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the
Eligible Account Holders, the ESOP, the Supplemental Eligible Account
Holders and Other Members of the Bank, from transferring or entering into
any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Such rights may be exercised
only by the person to whom they are granted and only for his account. Each
person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no
agreement or understanding regarding the sale or transfer of such shares.
The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of
the Conversion. For a discussion on post-Conversion restrictions of
directors and executive officers of the Bank, see "--Certain Restrictions
on Purchase or Transfer of Shares After Conversion."
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE
TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO
INVOLVE THE TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if
feasible, all shares of Common Stock not purchased in the Subscription and
Community Offerings, if any, will be offered for sale to the general public
in a Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Trident acting as agent of the
Company to assist the Company and the Bank in the sale of the Common Stock.
The Company and the Bank have the right to reject orders in whole or in
part in their sole discretion in the Syndicated Community Offering. Neither
Trident nor any registered broker-dealer shall have any obligation to take
or purchase any shares of the Common Stock in the Syndicated Community
Offering, however, Trident has agreed to use its best efforts in the sale
of shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing."
Subject to overall purchase limitations, no person, together with any
associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community Offering for more than $300,000 of
the Common Stock; provided, however, that shares of Common Stock purchased
in the Community Offering by any persons, together with associates of or
persons acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering and be subject to an overall
maximum purchase limitation of 1.0% of the shares offered, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price
Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Bank's passbook rate of interest from the
date such payment is actually received by the Bank until completion or
termination of the Conversion.
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In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community
Offering, a purchaser may pay for his shares with funds held by or
deposited with a selected dealer. If an order form is executed and
forwarded to the selected dealer or if the selected dealer is authorized to
execute the order form on behalf of a purchaser, the selected dealer is
required to forward the order form and funds to the Bank for deposit in a
segregated account on or before noon of the business day following receipt
of the order form or execution of the order form by the selected dealer.
Alternatively, selected dealers may solicit indications of interest from
their customers to place orders for shares. Such selected dealers shall
subsequently contact their customers who indicated an interest and seek
their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their
selected dealer or authorize the selected dealer to execute such forms. The
selected dealer will acknowledge receipt of the order to its customer in
writing on the following business day and will debit such customer's
account on the third business day after the customer has confirmed his
intent to purchase (the "debit date") and on or before noon of the next
business day following the debit date will send order forms and funds to
the Bank for deposit in a segregated account. Although purchasers' funds
are not required to be in their accounts with selected dealers until the
debit date in the event that such alternative procedure is employed once a
confirmation of an intent to purchase has been received by the selected
dealer, the purchaser has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified
in the order form, as soon as practicable following consummation of the
sale of the Common Stock. Any certificates returned as undeliverable will
be disposed of in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the
approval of the OTS. Such extensions may not be beyond _____________. See
"--Stock Pricing" above for a discussion of rights of subscribers, if any,
in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently
$300,000 of Common Stock, one-tenth of one percent (.10%) of the
total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders in each case on the Eligibility Record
Date subject to the overall maximum purchase limitation in (8)
below;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of
the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, including shares issued in the
event of an increase in the Estimated Price Range of 15% and
intends to purchase 8% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the
amount permitted to be purchased in the Community Offering,
currently $300,000 of Common Stock, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen
times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible
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Account Holders in such case on the Supplemental Eligibility
Record Date subject to the overall maximum purchase limitation in
(8) below;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted
to be purchased in the Community Offering, currently $300,000 of
Common Stock, or one-tenth of one percent (.10%) of the total
offering of shares of Common Stock subject to the overall maximum
purchase limitation in (8) below;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of groups of persons acting in
concert with such persons, may purchase in the Community Offering
up to $300,000 of Common Stock subject to the overall maximum
purchase limitation in (8) below;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of or persons acting
in concert with such persons, may purchase in the Syndicated
Community Offering up to $300,000 of Common Stock subject to the
overall maximum purchase limitation in (8) below, provided
further that shares of Common Stock purchased in the Community
Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering in applying the
$300,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members may purchase stock in the Community Offering
and Syndicated Community Offering subject to the purchase
limitations described in (6) and (7) above, provided that, except
for the ESOP, the overall maximum number of shares of Common
Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of or groups
of persons acting in concert with such persons, shall not exceed
1.0% of the shares of Common Stock offered in the Conversion and
exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%; and
(9) No more than 25% of the total number of shares offered for sale
in the Conversion may be purchased by directors and officers of
the Bank and their associates in the aggregate, excluding
purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the
members of the Bank, both the individual amount permitted to be subscribed
for and the overall maximum purchase limitation may be increased to up to a
maximum of 5% at the sole discretion of the Company and the Bank. If such
amount is increased, subscribers for the maximum amount will be, and
certain other large subscribers in the sole discretion of the Bank may be,
given the opportunity to increase their subscriptions up to the then
applicable limit. In addition, the Boards of Directors of the Company and
the Bank may, in their sole discretion, increase the maximum purchase
limitation referred to above up to 9.99%, provided that orders for shares
exceeding 5% of the shares being offering in the Subscription Offering
shall not exceed, in the aggregate, 10% of the shares being offered in the
Subscription Offering. Requests to purchase additional shares of Common
Stock under this provision will be determined by the Boards of Directors
and, if approved, allocated on a pro rata basis giving priority in
accordance with the priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less
than 1.0% but the individual amount permitted to be subscribed for may be
reduced by the Bank to less than 0.10%, subject to paragraphs (2), (4) and
(5) above without the further approval of members or resolicitation of
subscribers. An individual Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member may not purchase individually in the
Subscription Offering the overall maximum purchase limit of 1.0% of the
shares offered, but may make such purchase, together with associates of and
persons acting in concert with such person, by also purchasing in other
available categories of the Conversion, subject to availability of shares
and the overall maximum purchase limit for purchases in the Conversion.
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In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion at the
Adjusted Maximum number of shares, including shares issued to the Foundation;
(ii) in the event that there is an oversubscription by Eligible Account Holders,
to fill unsatisfied subscriptions of Eligible Account Holders, exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unsatisfied subscriptions of
Supplemental Eligible Account Holders, exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unsatisfied subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unsatisfied subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum, with preference to
institutional investors then a preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any
corporation or organization (other than the Bank or a majority-owned subsidiary
of the Bank) of which such person is an officer, partner or directly or
indirectly a 10% stockholder; (ii) any trust or other estate in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; provided, however, such term shall not include any
employee stock benefit plan of the Bank in which such person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary capacity;
and (iii) any relative or spouse of such person, or any relative of such spouse,
who either has the same home as such person or who is a director or officer of
the Bank. Directors are not treated as associates of each other solely because
of their Board membership. For a further discussion of limitations on purchases
of a converting institution's stock at the time of Conversion and subsequent to
Conversion, see "Management of the Bank--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
The term "Acting in Concert" means: (i) knowing participation in a
joint activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; (ii) a combination or pooling
of voting or other interests in the securities of an issuer for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise; or (iii) a person or company which
acts in concert with another person or company ("other party") shall also be
deemed to be acting in concert with any person or company who is also acting in
concert with that other party, except that any tax-qualified employee stock
benefit plan will not be deemed to be acting in concert with its trustee or a
person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the plan will be aggregated.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Bank remaining after payment of claims of all creditors (including
the claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank above
that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts and certificates of deposit, with a balance of $50 or more held
in the Bank on June 30, 1997 and __________, 199_, respectively. Each Eligible
Account
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Holder and Supplemental Eligible Account Holder will have a pro rata interest in
the total liquidation account based on the proportion that the balance of his
Qualifying Deposits on the Eligibility Record Date or Supplemental Eligibility
Record Date, respectively, bore to the total amount of all Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders in the
Bank. For deposit accounts in existence at both dates separate subaccounts shall
be determined on the basis of the Qualifying Deposits in such deposit accounts
on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time-to-time by the proportion of any
such reduction and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the
receipt by the Bank of either a favorable ruling from the IRS or an opinion of
counsel with respect to federal income taxation and an opinion of an independent
accountant with respect to Virginia taxation, to the effect that the Conversion
will not be a taxable transaction to the Company, the Bank, Eligible Account
Holders, or Supplemental Eligible Account Holders except as noted below. The
federal and Virginia tax consequences will remain unchanged in the event that a
holding company form of organization is not utilized.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the Conversion;
(v) the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; (vi) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of nontransferable subscription
rights to purchase shares of the Common Stock, provided that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefor and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. Cherry, Bekaert &
Holland, L.L.P. has opined that the Conversion will not be a taxable transaction
to the Company, the Bank, Eligible Account Holders or Supplemental Eligible
Account Holders for Virginia income and/or franchise tax purposes. Certain
portions of both the federal and the state and local tax opinions are based upon
the assumption that the subscription rights issued in connection with the
Conversion will have no economic value at the time of distribution or at the
time the subscriptions are exercised.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or DOT and the IRS or DOT could
disagree with conclusions reached therein. In the event of such disagreement,
there can be no assurance that the IRS or DOT would not prevail in a judicial or
administrative proceeding.
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FinPro has issued an opinion stating that, pursuant to its valuation,
FinPro is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS or DOT. If the subscription rights granted to Eligible Account Holders
or Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account Holders
or Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Bank will be final. The Plan provides that the Bank's Board of Directors shall
have the discretion to interpret and apply the provisions of the Plan to
particular circumstances and that such interpretation or application shall be
final. This includes any and all interpretations, applications and
determinations made by the Board of Directors on the basis of such information
and assistance as was then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Bank's members will
be deemed to have authorized amendment of the Plan under the circumstances
described above.
The establishment of the Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the creation of the Foundation, the Bank intends
to complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation. In
such an event, the Bank may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See "--
Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an executive officer of the Bank will be subject to a
restriction that the shares not be sold for a period of one year following the
Conversion, except in the event of the death of such director or executive
officer. Each certificate for restricted shares will bear a legend giving notice
of this restriction on transfer and instructions will be issued to the effect
that any transfer within such time period of any certificate or record ownership
of such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of the Bank will
also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
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negotiated transactions involving more than 1.0% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to any stock option plan to be
established after the Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations,
will be prohibited from repurchasing any shares of the Common Stock for three
years except: (i) for an offer to all stockholders on a pro rata basis; or (ii)
for the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion the Company
may repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a twelve-month period; (ii) the
repurchases do not cause the Company to become undercapitalized; and (iii) the
Company provides to the Regional Director of the OTS no later than 10 days prior
to the commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. In addition, under current OTS policies, repurchases
may be allowed in the first year following Conversion and in amounts greater
than 5% in the second and third years following Conversion, provided there are
valid and compelling business reasons for such repurchases and the OTS does not
object to such repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank
from the mutual to the stock form of organization and, in connection therewith,
a new Federal Stock Charter and Bylaws to be adopted by members of the Bank. The
Plan also provides for the concurrent formation of a holding company, which form
of organization may or may not be utilized at the option of the Board of
Directors of the Bank. See "The Conversion--General." In the event that the
holding company form of organization is utilized, as described below, certain
provisions in the Company's Articles of Incorporation and Bylaws and in its
management remuneration entered into in connection with the Conversion, together
with provisions of Virginia corporate law, may have anti-takeover effects. In
the event that the holding company form of organization is not utilized, the
Bank's Stock Charter and Bylaws and management remuneration entered into in
connection with the Conversion may have anti-takeover effects as described
below. In addition, regulatory restrictions may make it difficult for persons or
companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Articles of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Articles of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Articles of Incorporation and Bylaws of the
Company is necessarily general and reference should be made in each case to such
Articles of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Articles of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act and includes shares beneficially owned by such person or any of his
affiliates (as defined in the Articles of Incorporation), shares which
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such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Bank or Company or shares that are subject to a revocable proxy and that are
not otherwise beneficially owned, or deemed by the Company to be beneficially
owned, by such person and his affiliates. The Articles of Incorporation of the
Company further provides that this provision limiting voting rights may only be
amended upon the vote of 80% of the outstanding shares of voting stock (after
giving effect to the limitation on voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Company's Articles of Incorporation and Bylaws provide that the size
of the Board shall be determined by a majority of the directors. The Articles of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Company. The Articles of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon the
vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Articles of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Articles of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Articles of Incorporation authorizes the
issuance of 75,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates and liquidation preferences. As
a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of shares in the Conversion,
including shares contributed to the Foundation, and the issuance of additional
shares pursuant to the terms of the Stock-Based Incentive Plan and upon exercise
of stock options to be issued pursuant to the terms of the Stock-Based Incentive
Plan or Master Stock-Based Benefit Plan, which are to be established and
presented to stockholders at the first annual meeting after the Conversion.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH
PRINCIPAL STOCKHOLDERS. The Articles of Incorporation requires the approval of
the holders of at least 80% of the Company's outstanding shares of voting stock
to approve certain "Business Combinations," as defined therein, and related
transactions. Under Virginia law, absent this provision, Business Combinations,
including mergers, consolidations and sales of all or substantially all of the
assets of a corporation must, subject to certain exceptions, be approved by the
vote of the holders of only two-thirds of the votes entitled to be cast. Under
the Articles of Incorporation, at least 80% approval of shareholders is required
in connection with any transaction involving an Interested Stockholder (as
defined below) except (i) in cases where the proposed transaction has been
approved in advance by a majority of those members of the Company's Board
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of Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the Interested Stockholder became an Interested
Stockholder or (ii) if the proposed transaction meets certain conditions set
forth therein which are designed to afford the shareholders a fair price in
consideration for their shares in which case, if a stockholder vote is required,
approval of only a majority of the outstanding shares of voting stock would be
sufficient. The term "Interested Stockholder" is defined to include any
individual, a group acting in concert, corporation, partnership or other entity
(other than the Company or its subsidiaries) which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of the Company. This provision of the Articles of Incorporation
applies to any "Business Combination," which is defined to include (i) any
merger or consolidation of the Company or any of its subsidiaries with or into
any Interested Stockholder or Affiliate (as defined in the Articles of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or combined
assets of the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Stockholder or its Affiliate by the Company (or any subsidiary) of
any securities of the Company in exchange for any assets, cash or securities the
value of which equals or exceeds 25% of the fair market value of the Common
Stock of the Company; (iv) the adoption of any plan for the liquidation or
dissolution of the Company proposed by or on behalf of any Interested
Stockholder or Affiliate thereof; and (v) any reclassification of securities,
recapitalization, merger or consolidation of the Company which has the effect of
increasing the proportionate share of Common Stock or any class of equity or
convertible securities of the Company owned directly or indirectly by an
Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 1.55% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the Stock-
Based Incentive Plan and expects to issue an amount equal to 10% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation, under the Stock-Based Incentive Plan or Master Stock-Based Benefit
Plan to directors, officers and employees. As a result, assuming the Stock-Based
Incentive Plan is approved by Stockholders, directors, officers and employees
have the potential to control the voting of approximately ____% of the Company's
Common Stock, thereby enabling them to prevent the approval of the transactions
requiring the approval of at least 80% of the Company's outstanding shares of
voting stock described hereinabove.
EVALUATION OF OFFERS. The Articles of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity, or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Bank and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Bank's present and future account holders, borrowers and
employees; on the communities in which the Company and the Bank operate or are
located; and on the ability of the Company to fulfill its corporate objectives
as a savings and loan holding company and on the ability of the Bank to fulfill
the objectives of a federally-chartered stock savings and loan association under
applicable statutes and regulations. By having these standards in the Articles
of Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the
Company's Articles of Incorporation must be approved by a majority vote of its
Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Articles of Incorporation, including the provision limiting voting rights, the
provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Articles of Incorporation. The Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a duly
constituted meeting of stockholders.
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CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, Employee Severance Compensation Plan,
Stock-Based Incentive Plan, Stock-Based Incentive Plan to be established may
also discourage takeover attempts by increasing the costs to be incurred by the
Bank and the Company in the event of a takeover. See "Management of the Bank--
Employment Agreements" and "--Benefits--Stock-Based Incentive Plan."
The Company's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
VIRGINIA CORPORATE LAW
The Commonwealth of Virginia has a statute designed to provide
Virginia corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Article 14 of the Virginia Stock
Corporation Act ("Article 14"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Article 14 provides that a "Person" (as defined therein)
who owns 10% or more of the outstanding voting stock of a Virginia corporation
(an "Interested Shareholder") may not consummate a merger or other affiliated
transaction with such corporation at any time during the three-year period
following the date such "Person" became an Interested Shareholder. The term
"affiliated transaction" is defined broadly to cover a wide range of corporate
transactions including mergers, share exchanges, dispositions of corporate
assets with an aggregate fair market value in excess of 5% of the corporation's
net worth, disposition of voting shares of the corporation with an aggregate
fair market value in excess of 5% of the aggregate fair market value of all
outstanding voting stock of the corporation, and any reclassification of
securities, including a reverse stock split, recapitalization or merger of the
corporation with its subsidiaries which increases the percentage of voting
shares owned beneficially by an Interested Shareholder by more than 5%.
The statute exempts the following transactions from the requirements
of Article 14: (i) any affiliated transaction that is approved by a majority of
the disinterested directors (as defined therein) and by two-thirds of the voting
shares other than those shares beneficially owned by the Interested Shareholder;
or (ii) any affiliated transaction with an Interested Shareholder whose
acquisition of shares making such person an Interested Shareholder receive prior
approval of a majority of the corporation's disinterested directors (as defined
therein). A corporation may exempt itself from the requirements of the statute
by adopting an amendment to its Articles of Incorporation or Bylaws electing not
to be governed by Article 14. At the present time, the Board of Directors does
not intend to propose any such amendment.
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In addition, Virginia Stock Corporation Act, Article 14.1 ("Article
14.1") limits the voting rights of shares acquired in "Control Share
Acquisitions" by providing that shares acquired in a transaction that would
cause the acquiring person's voting strength to meet or exceed any of three
thresholds (one-fifth, one-third or a majority of voting shares) have no voting
rights unless granted by a majority vote of shares not owned by the acquiring
person or any officer or employee-director of the Virginia corporation. A
Virginia corporation may exempt itself from the requirements of the statute by
adopting an amendment to its Articles of Incorporation or Bylaws electing not to
be governed by Article 14.1. At the present time, the Board of Directors does
not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the Board
of Directors believes that it is appropriate to adopt certain provisions
permitted by federal regulations to protect the interests of the converted Bank
and its stockholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of the Company, as the Bank's sole stockholder. See
"Risk Factors--Certain Anti-Takeover Provisions Which May Discourage Takeover
Attempts."
The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of the
issued and outstanding shares of any class of equity securities of the Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of five years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the Federal Stock Charter provision will not be counted
as outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event that
holders of revocable proxies for more than 10% of the shares of the Common Stock
of the Company seek, among other things, to elect one-third or more of the
Company's Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Federal Stock Charter against such holders. Although the Board of Directors of
the Bank is not currently able to determine when and if it would assert this
provision of the Bank's Federal Stock Charter, the Board of Directors, in
exercising its fiduciary duty, may assert this provision if it were deemed to be
in the best interests of the Bank, the Company and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of the Bank indirectly through a change in control of the Company.
Finally, for five years, stockholders will not be permitted to call a special
meeting of stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Bank in the years immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of undesignated
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Bank with increased flexibility
in structuring possible future financings and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender offer
or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Directors does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interest of the
Bank and its then existing stockholders.
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REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion
or understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by the OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions; (b) would be manipulative or deceptive; (c)
would subvert the fairness of the conversion; (d) would be likely to result in
injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. In the event that any person, directly or indirectly, violates this
regulation, the securities beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matters submitted to a
vote of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations. Persons holding revocable or
irrevocable proxies may be deemed to be beneficial owners of such securities
under OTS regulations and therefore prohibited from voting all or the portion of
such proxies in excess of the 10% aggregate beneficial ownership limit. Such
regulatory restrictions may prevent or inhibit proxy contests for control of the
Company or the Bank which have not received prior regulatory approval.
In addition, the Change in Bank Control Act provides that no person,
acting directly or indirectly or through or in concert with one or more other
persons, may acquire control of a savings and loan holding company unless the
OTS has been given 60 days' prior written notice and has not objected to the
transaction. The HOLA provides that no company may acquire "control of a savings
and loan holding company without the prior approval of the OTS." Any company
that acquires such control becomes a "savings and loan holding company" subject
to registration, examination, and regulation by the OTS. Pursuant to federal
regulations, "control" of a savings and loan holding company is conclusively
deemed to have been acquired by, among other things, the acquisition of more
than 25% of any class of voting stock of the company or irrevocable proxies
representing more than 25% of any class of voting stock of the company or the
ability to control the election of a majority of the directors. The regulations
also establish a rebuttable presumption of "control" upon the acquisition of
more than 10% of any class of voting stock, or of more than 25% of any class of
stock, of a savings and loan holding company, where certain enumerated "control
factors" are also present in the acquisition. The OTS may prohibit an
acquisition by a person of "control" if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person or (iv) the proposed acquisition would
have an adverse effect on the deposit insurance funds. Applications by a company
to acquire "control" of a savings and loan holding company are evaluated by OTS
based upon factors such as the financial and managerial resources and future
prospects of the acquirer and the institution involved, competitive factors and
the convenience and needs of the community involved. The foregoing restrictions
do not apply to the acquisition of the Company's capital stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security of the Company.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 75,000,000 shares of Common Stock
having a par value of $.01 per share and 5,000,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). Based on the sale
of Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount up to 8% of the Common Stock issued in the
Conversion to the Foundation, the Company currently expects to issue up to
13,115,520 shares of Common Stock (or 15,082,848 in the event of an increase of
15% in the Estimated Price Range) and no shares of Preferred Stock in the
Conversion. Except as discussed above in "Restriction on Acquisition of the
Company and the Bank," each share of the Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan, all such stock will be duly authorized, fully paid
and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE AND WILL NOT BE INSURED BY
THE FDIC.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Virginia law or the Company's Articles of Incorporation
or as are otherwise presented to them by the Board of Directors. Except as
discussed in "Restrictions on Acquisition of the Company and the Bank," each
holder of Common Stock will be entitled to one vote per share and will not have
any right to cumulate votes in the election of directors. If the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
Certain matters require an 80% shareholder vote. See "Restrictions on
Acquisition of the Company and the Bank."
As a federal mutual savings and loan association, corporate powers and
control of the Bank are vested in its Board of Directors, who elect the officers
of the Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding
up of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
111
<PAGE>
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time-to-time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 18,000,000
shares of common stock, par value $1.00 per share, and 2,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common stock
of the Bank will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. After the Conversion, the Board
of Directors will be authorized to approve the issuance of common stock up to
the amount authorized by the Federal Stock Charter without the approval of the
Bank's stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the
Bank's common stock will possess exclusive voting rights in the Bank. Each
holder of shares of common stock will be entitled to one vote for each share
held, subject to the right of shareholders to cumulate their votes for the
election of directors. During the five-year period after the effective date of
the Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the Company's
Articles of Incorporation and Bylaws and Management Remuneration Adopted in
Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit accounts
and accrued interest thereon) and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If preferred stock is issued subsequent to the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is
___________________________.
112
<PAGE>
EXPERTS
The financial statements of the Bank and its subsidiary as of December
31, 1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997, have been included in this Prospectus, in reliance upon the
report of Cherry Bekaert & Holland, L.L.P., independent certified public
accountants, appearing elsewhere herein, and given on the authority of said firm
as experts in accounting and auditing.
FinPro has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its valuation with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank and the Company
by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Bank and
the Company. The Commonwealth of Virginia tax consequences of the Conversion and
certain matters related to the Foundation will be passed upon for the Bank and
the Company by Cherry Bekaert & Holland, L.L.P.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC including the Company. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the Registration Statement required to be described. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Bank has filed an application for conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 1475 Peachtree Street, NE, Atlanta, Georgia 30309.
In connection with the Conversion, the Company will register its
Common Stock with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
OTS under Section 12(g) of the Exchange Act and, upon such registration, the
Bank and the holders of its stock will become subject to the same obligations
and restrictions.
A copy of the Articles of Incorporation and the Bylaws of the Company
and the Federal Stock Charter and Bylaws of the Bank and the proposed Articles
of Incorporation and Bylaws of the Foundation are available without charge from
the Bank.
113
<PAGE>
F-0
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
<TABLE>
<CAPTION>
Contents
Page
<S> <C>
Report of Independent Auditors F-l
Balance Sheets F-2
Statements of Income 34
Statements of Comprehensive Income F-3
Statements of Changes in Equity Capital F-4
Statements of Cash Flows F-5-F-6
Notes to Financial Statements F-7-F-27
</TABLE>
Certain schedules required by OTS regulations and by Regulation
S-X are not included because they are not applicable or the
required information has been disclosed elsewhere.
Financial statements related to Virginia Capital Bancshares, Inc.
are not included as it has not begun operations.
<PAGE>
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Members
Fredericksburg Savings and Loan
Association, F.A.
Fredericksburg, Virginia
We have audited the accompanying balance sheets of Fredericksburg Savings and
Loan Association, F.A. as of December 31, 1997 and 1996, and the related
statements of income, comprehensive income, changes in equity capital, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Association'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 financial statements referred to above present fairly, in
all material respects, the financial position of Fredericksburg Savings and Loan
Association, F.A. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
January 29, 1998, except to Note 16,
for which the date is August 14, 1998
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-2
ASSOCIATION, F.A.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------
1998 1997 1996
----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents (includes interest-bearing deposits of
$8,248 at June 30, 1998; $10,634 in 1997; $15,177 in 1996) $ 9,031 $ 11,287 $ 15,937
Investment securities
Held-to-maturity (fair value $1,226 at June 30, 1998; $1,335 in
1997; $1,545 in 1996) 1,190 1,291 1,502
Available-for-sale (cost $30,470 at June 30, 1998; $30,865 in
1997; $32,261 in 1996) 30,928 31,151 31,979
Federal Home Loan Bank stock, restricted, at cost 3,539 3,448 3,232
Loans receivable, net 415,986 413,032 405,145
Accrued interest receivable
Loans 2,206 2,054 1,858
Investment securities 508 543 588
Foreclosed real estate for sale, net 1,883 1,959 1,611
Property and equipment
Land 1,115 1,115 1,120
Office properties and equipment, at cost, less accumulated
depreciation ($4,119 at June 30, 1998; $3,999 in 1997;
$4,593 in 1996) 2,398 2,393 2,504
Other assets 183 269 813
Deferred tax asset 3,313 3,378 3,628
----------- ---------- ----------
TOTAL ASSETS $ 472,280 $ 471,920 $ 469,917
=========== ========== ==========
LIABILITIES AND RETAINED EARNINGS
LIABILITIES
Deposits $ 373,719 $ 377,114 $ 375,652
Advances from Federal Home Loan Bank 8,000 8,000 15,000
Retirement obligations 5,593 5,480 4,934
Advances from borrowers for taxes and insurance 1,234 936 844
Accrued expenses and other liabilities 234 317 191
----------- ---------- ----------
TOTAL LIABILITIES 388,780 391,847 396,621
----------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
RETAINED EARNINGS, SUBSTANTIALLY RESTRICTED 83,216 79,896 73,471
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE-FOR-SALE,
NET OF TAX 284 177 (175)
----------- ---------- ----------
TOTAL EQUITY CAPITAL 83,500 80,073 73,296
----------- ---------- ----------
TOTAL LIABILITIES AND EQUITY CAPITAL $ 472,280 $ 471,920 $ 469,917
=========== ========== ==========
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-3
ASSOCIATION, F.A.
STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- --------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 3,320 $ 3,259 $ 6,425 $ 4,581 $ 6,658
------- ------- ------- ------- -------
Other comprehensive income-net of tax:
Unrealized gains (losses) on securities
available for sale 55 (199) 285 150 (192)
Less: reclassification adjustment for
gains (losses) included in net income (52) (19) (67) 138 (19)
------- ------- ------- ------- -------
Total other comprehensive income 107 (180) 352 12 (173)
------- ------- ------- ------- -------
Comprehensive income $ 3,427 $ 3,079 $ 6,777 $ 4,593 $ 6,485
======= ======= ======= ======= =======
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-4
ASSOCIATION, F.A.
STATEMENTS OF CHANGES IN EQUITY CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Holding Gains
(Losses) or
Retained Available for
Earnings Sale Securities Total
-------- ---------------- ---------
<S> <C> <C> <C>
Balances at December 31, 1994 $ 62,232 $ (14) $ 62,218
Net income 6,658 - 6,658
Changes in net unrealized gains/(losses) on securities held
available for sale, net of reclassification adjustment - (173) (173)
-------- ---------------- ---------
Balances at December 31, 1995 68,890 (187) 68,703
Net income 4,581 - 4,581
Changes in net unrealized gains/(losses) on securities held
available for sale, net of reclassification adjustment - 12 12
-------- ---------------- ---------
Balances at December 31, 1996 73,471 (175) 73,296
Net income 6,425 - 6,425
Changes in net unrealized gains/(losses) on securities held
available for sale, net of reclassification adjustment - 352 352
-------- ---------------- ---------
Balances at December 31, 1997 79,896 177 80,073
Net income (unaudited) 3,320 - 3,320
Changes in net unrealized gains/(losses) on securities
held available for sale, net of reclassification
adjustment (unaudited) - 107 107
-------- ---------------- ---------
Balances at June 30, 1998 (unaudited) $ 83,216 $ 284 $ 83,500
======== ================ =========
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-5
ASSOCIATION, F.A.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------- -------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,320 $ 3,259 $ 6,425 $ 4,581 $ 6,658
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation 172 181 371 377 385
Provision for loan losses (269) (241) (375) (325) (412)
Increase (decrease) in provision for
loss on real estate owned 54 (10) 87 (21) 18
Discount on mortgage-backed securities (32) (29) (70) (79) (99)
Premium/discount on investment securities 9 (10) 4 (29) 40
Loan fees deferred, net 110 226 266 192 90
(Increase) decrease in deferred income taxes 8 (14) 34 (537) (332)
Loss on sale of property and equipment 29 5 16 7 5
(Gain) loss on sale of real estate owned 2 (66) (5) 34 87
(Increase) decrease in accrued interest
receivable (117) (244) (150) 358 (276)
(Increase) decrease in other assets 84 549 543 (590) (67)
Increase (decrease) in advances by borrowers
for taxes and insurance 298 143 92 (35) 136
Increase in retirement obligations 113 80 547 657 541
Increase (decrease) in other liabilities (85) 163 125 (333) 269
------ ------ ------ ------ -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,696 3,992 7,910 4,257 7,043
------ ------ ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
held-to-maturity - - - - 15,450
Proceeds from sale of securities available-for-sale - - - 25,673 -
Proceeds from redemption of securities
available for sale 4,000 2,829 6,812 - -
Purchases FHLB stock (91) (215) (215) (158) -
Proceeds from redemption of FHLB stock - - - - 1,015
Purchase of securities held-to-maturity - - - - (12,593)
Purchase of securities
available-for-sale (3,595) (2,621) (5,420) (8,347) (73)
Principal payments on mortgage-backed
securities held to maturity 130 131 281 456 329
Loan originations and principal payments, net (4,214) (7,640) (11,422) (17,487) (21,421)
Capital expenditures (181) (127) (271) (241) (464)
Proceeds from sale of real estate owned 1,392 1,781 3,214 3,528 1,313
------ ------ ------ ------ -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (2,559) (5,862) (7,021) 3,424 (16,444)
------ ------ ------ ------ -------
</TABLE>
(continued)
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-6
ASSOCIATION, F.A.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
------------------- -------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in savings accounts $ (4,370) $ (1,001) $ (4,894) $ (7,706) $ (11,253)
Net increase (decrease) in advance from
Federal Home Loan Bank - (5,000) (7,000) 7,000 -
Net increase (decrease) in certificates of deposit 977 2,998 6,355 (3,018) 21,546
-------- -------- -------- -------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,393) (3,003) (5,539) (3,724) 10,293
-------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,256) (4,873) (4,650) 3,957 892
-------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 11,287 15,937 15,937 11,980 11,088
-------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 9,031 $ 11,064 $ 11,287 $ 15,937 $ 11,980
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 9,620 $ 9,569 $ 19,419 $ 19,534 $ 18,978
======== ======== ======== ======== ========
Cash paid during the period for income taxes $ 2,165 $ 1,674 $ 3,591 $ 3,623 $ 4,166
======== ======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES
Loans transferred to real estate owned $ 1,326 $ 1,779 $ 3,209 $ 3,512 $ 1,400
======== ======== ======== ======== ========
Investment securities transferred to
available-for-sale, at fair value $ - $ - $ - $ - $ 49,257
======== ======== ======== ======== ========
Change in unrealized gain (loss) in value
of securities available-for-sale,
net of tax effect $ 107 $ (180) $ 352 $ 12 $ (173)
======== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
<PAGE>
FREDERICKSBURG SAVINGS AND LOAN F-7
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fredericksburg Savings & Loan
Association, F.A., "the Bank", are in accordance with generally accepted
accounting principles and conform to the general practices within the savings
institutions industry. The more significant of the principles used in preparing
the financial statements are briefly described below. Financial statements and
disclosures as of June 30, 1998 and for the six months ended June 30, 1998 and
1997 are unaudited and, in the opinion of management of the Bank, include all
adjustments, consisting of normal recurring adjustments, for a fair presentation
of interim financial position and operating results.
NATURE OF OPERATIONS
The Bank is a mutual savings and loan association with the primary business of
granting residential, commercial real estate and installment loans. As a
federally chartered savings institution, the Bank is subject to the regulation
of the Office of Thrift Supervision as well as the Federal Deposit Insurance
Corporation. The area served by the Bank is Fredericksburg, Virginia and the
surrounding counties. Services are provided at four business locations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain of the prior year amounts have been reclassified or restated to conform
to the current presentation. Such reclassifications and restatements are
immaterial to the financial statements.
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Bank considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Bank classifies its investment securities and its mortgage-backed securities
in one of three categories: held-to-maturity, available-for-sale, and trading.
Securities held-to-maturity are purchased with the intent and ability to hold to
their maturity or call date. They are carried and reported at amortized cost.
The amortization of premium and accretion of discount are recognized as
adjustments to interest income. Securities available-for-sale are those needed
to meet liquidity needs, assist in portfolio restructuring, or minimize interest
rate market risk. They are carried at their fair value, with unrealized gains
and losses reported as a separate component of capital. Securities that are
bought and held principally for the purpose of selling them in the near term are
classified as trading securities. The Bank as a matter of policy does not trade
securities and, therefore, does not have trading securities. Gains or losses on
disposition of securities are computed on the specific identification of the
cost of each security.
(continued)
<PAGE>
F-8
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE AND ALLOWANCE FOR LOSSES
Loans receivable are stated at the amount of unpaid principal, net of
participation or whole-loan interests owned by others, less the allowance for
loan losses, undisbursed loans in process, and net deferred loan origination
fees and discounts. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries). Management's periodic
determination of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Impaired loans are measured based on the present value of expected cash flows
discounted at the loan's effective interest rate, or as a practical expedient at
the loan's observable market price or fair value of the collateral if the loan
is collateral dependent. Any change in fair value is reported as bad debt
expense in the same manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be reported.
Uncollectible interest on loans is charged off, or an allowance is established
based on management's periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is restored, in which case the loan is returned
to accrual status.
LOAN SALES
The Bank periodically generates additional funds for lending by selling whole
and/or participating interests in real estate loans. Gains or losses on such
sales are recognized at the time of sale and are determined by the difference
between the net sales proceeds and the unpaid principal balance of the loans
sold adjusted for any yield differential, servicing fees and servicing cost
applicable to future years. At each of the balance sheet dates presented in the
financial statements, the Bank was not holding any loans for sale.
LOAN ORIGINATION FEES AND RELATED COSTS
Fees charged on the origination of real estate loans and certain direct loan
origination costs are deferred and the net amount amortized as an adjustment of
the related loan's yield over the contractual life of the loan. Unamortized
fees on loans sold are recognized as adjustments to the basis of those loans in
the year of sale.
FORECLOSED REAL ESTATE
Real estate acquired in settlement of loans is classified as held for sale and
initially recorded at the lower of cost or fair value less estimated selling
costs at the date of foreclosure. Costs relating to development and improvement
of property are capitalized, whereas costs relating to the holding of property
are expensed. The portion of interest costs relating to the development of real
estate is capitalized.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs to sell.
(continued)
<PAGE>
F-9
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND DEPRECIATION
The various classes of property and equipment are stated at cost less
accumulated depreciation computed principally by the straight-line method. The
costs of major improvements are capitalized, while the costs of maintenance and
repairs, which do not improve or extend the life of the respective properties,
are expensed currently. The cost and accumulated depreciation on property are
eliminated from the accounts upon disposal, and any resulting gain or loss is
included in the determination of net income.
<TABLE>
<CAPTION>
Estimated
Useful Lives
------------
(Years)
<S> <C>
Land -
Buildings 5 - 39
Furniture, fixtures and equipment 5 - 7
</TABLE>
INCOME TAXES
The Bank accounts for certain income and expense items differently for financial
reporting purposes than for purposes of computing income taxes currently
payable. Provisions for deferred taxes are made in recognition of such timing
differences.
The Bank has qualified under the provisions of the Internal Revenue Code which
permit it to deduct from taxable income an annual addition to the reserve for
bad debts based on the experience method. The tax bad debt reserve is
includible in taxable income of later years only if the bad debt reserves are
used subsequently for purposes other than to absorb bad debt losses. The
cumulative bad debt reserve, upon which no taxes have been paid, amounted to
$9,700 at June 30, 1998 and December 31, 1997.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date.
NEW ACCOUNTING PRONOUNCEMENTS
The Statement of Financial Accounting Standards No. 131 - Disclosure about
Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting by public companies about operating segments of their business. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement is effective for
periods beginning after December 15, 1997. At this time, management does
anticipate that the adoption of this Statement will significantly impact the
Bank's financial reporting.
(continued)
<PAGE>
F-10
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
The Statement of Financial Accounting Standards No. 132 -Employers' Disclosures
about Pensions and Other Postretirement Benefits -an amendment of FASB
Statements N. 87, 88, and 106
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements
No. 87, 88, and 106". SFAS No. 132 standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair value plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful as when Statements No. 87, 88, and 106
were originally issued. SFAS 132 does not change the measurement recognition of
the plans. This statement is effective for the periods beginning after December
15, 1997. At this time, management does anticipate that the adoption of this
Statement will significantly impact the Bank's financial reporting.
The Statement of Financial Accounting Standards No. 133 - Accounting for
Derivative Instruments and Hedging Activities
This Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The bank is evaluating the
potential impact of adopting SFAS No. 133. Management does not expect the
adoption of SFAS No. 133 to have a material adverse impact on financial
condition or results of operation. The statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Management does not
expect to early adopt this Statement as permitted by the Statement. At the
initial application of this Statement, the Bank may elect to transfer any
security classified by the Bank as held-to-maturity to the available-for-sale or
trading classification. In addition, the Bank may elect to transfer any
security classified as available-for-sale to the trading classification.
Presently, management does not expect to elect these options.
<PAGE>
F-11
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of mortgage-backed securities and
investment securities are as follows as of June 30, 1998, and December 31, 1997
and 1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
June 30, 1998 (unaudited)
Mortgage Backed Securities
FNMA pass-through securities $ 768 $ - $ - $ 768
GNMA certificates 422 36 458
---------- ---------- --------- --------
$ 1,190 $ 36 $ - $ 1,226
========== ========== ========== ========
December 31, 1997
Mortgage Backed Securities
FNMA pass-through securities $ 838 $ - $ - $ 838
GNMA certificates 453 44 497
---------- ---------- --------- --------
$ 1,291 $ 44 $ - $ 1,335
========== ========== ========== ========
December 31, 1996
Mortgage Backed Securities
FNMA pass-through securities $ 1,008 $ - $ - $ 1,008
GNMA certificates 494 43 537
--------- ---------- ---------- --------
$ 1,502 $ 43 $ - $ 1,545
========= ========== ========== ========
</TABLE>
FNMA pass-through securities are valued at net carrying value for fair value
purposes. Mortgage backed securities are not deemed to have a single maturity
date and no maturity grouping information has been presented.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
June 30, 1998 (unaudited)
U.S. Treasury and agency obligations $ 16,814 $ 73 $ 12 $ 16,875
Corporate securities 4,856 62 12 4,906
State and local municipal bonds 1,290 34 23 1,301
Equity securities 3,717 948 - 4,665
Mutual fund 1,293 - 25 1,268
Dual Index Consolidated Bonds 2,500 - 587 1,913
---------- ---------- ---------- ----------
$ 30,470 $ 1,117 $ 659 $ 30,928
========== ========== ========== ==========
</TABLE>
(continued)
<PAGE>
F-12
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE (CONCLUDED)
December 31, 1997
U.S. Treasury and agency obligations $ 19,812 $ 82 $ 58 $ 19,836
Corporate securities 3,345 70 2 3,413
State and local municipal bonds 350 21 - 371
Equity securities 3,596 770 23 4,343
Mutual fund 1,262 - 20 1,242
Dual Index Consolidated Bonds 2,500 - 554 1,946
---------- ---------- ---------- ----------
$ 30,865 $ 943 $ 657 $ 31,151
========== ========== ========== ==========
December 31, 1996
U.S. Treasury and agency obligations $ 20,823 $ 84 $ 104 $ 20,803
Corporate securities 3,995 99 - 4,094
State and local municipal bonds 350 23 - 373
Equity securities 3,394 260 44 3,610
Mutual fund 1,199 - 24 1,175
Dual Index Consolidated Bonds 2,500 - 576 1,924
---------- ---------- ---------- ----------
$ 32,261 $ 466 $ 748 $ 31,979
========== ========== ========== ==========
</TABLE>
The mutual fund investments are in funds that invest primarily in obligations of
the U.S. Government or its agencies.
The amortized cost and estimated fair value of investment securities at June 30,
1998 and December 31, 1997 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------------- --------------------
(Unaudited)
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
Due after five years through ten years $ 768 $ 768 $ 838 $ 838
Due after ten years 422 458 453 497
--------- --------- --------- ---------
$ 1,190 $ 1,226 $ 1,291 $ 1,335
========= ========= ========= =========
SECURITIES AVAILABLE-FOR-SALE
Mutual Fund $ 1,293 $ 1,268 $ 1,262 $ 1,242
Due in one year or less 14,231 12,717 14,593 15,351
Due after one year through five years 11,596 14,172 11,651 11,778
Due after five years through ten years 2,991 2,401 2,997 2,409
Due after ten years 359 370 362 371
--------- --------- --------- ---------
$ 30,470 $ 30,928 $30,865 $ 31,151
========= ========= ========= =========
</TABLE>
(continued)
<PAGE>
F-13
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 2 - INVESTMENT SECURITIES (CONCLUDED)
During 1993, the Bank acquired Dual Indexed Consolidated Bonds ("DICBs") issued
by the Federal Home Loan Bank ("FHLB"). DICBs' coupon rates are determined by
the difference between the designated Constant Maturity Treasury ("CMT") and the
designated London Interbank Borrowing Rate ("LIBOR"). Interest rates on DICBs
are subject to reset annually at specified dates. This reset may result in an
interest rate less than those payable on conventional fixed rate debt securities
issued at the same time. These investments were acquired as part of the interest
rate risk management of the Bank.
The Secondary market for DICBs is affected by factors other than the credit
worthiness of the issuer. Such factors include other interest rates, volatility
of the two indices utilized, time remaining to maturity and the amount of the
outstanding bonds. Management of the Bank utilizes a third-party investment
advisory company to estimate the market value of the DICB's by comparison to bid
and asked prices of similar instruments. As these market values are based on
similar instruments, and are estimates, the actual value the Bank would receive
in a sale transaction is dependent upon the market for these instruments at the
time of disposition.
DICBs are classified by the Bank as available for sale and are recorded at fair
value with unrealized gains and losses included in Retained Earnings
Substantially Restricted. The DICBs were acquired at their face amount. The
consensus reached by the Emerging Issues Task Force ("EITF") Issue number 96-12
requires interest income recognition for these instruments based upon the
retrospective interest method. The Bank recognizes interest income based on the
actual interest payments received. The difference between the retrospective
interest method and the method utilized is immaterial.
Disclosed below are the characteristics of each issue of DICBs, the indices
utilized and period-end coupon rates and market value. The Bank's exposure to
credit risk, on these instruments, is limited to the amount paid for each DICB,
if the FHLB fails to perform.
<TABLE>
<CAPTION>
June 30, 1998
-------------------
(Unaudited)
Face Indexing Market
Issuer Maturity Amount Formula Coupon Value
- -------- ---------- -------- ---------------------------- --------- --------
<S> <C> <C> <C> <C> <C>
FHLB 08/17/05 $ 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 2.93% $ 766
FHLB 08/26/05 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 3.03 772
FHLB 11/18/05 500 (10 yr CMT+2.75%)-6 mo LIBOR 2.68 375
-------- --------
$ 2,500 $ 1,913
======== ========
<CAPTION>
December 31,
----------------------------------------
1997 1996
------------------- -------------------
Face Indexing Market Market
Issuer Maturity Amount Formula Coupon Value Coupon Value
- -------- ---------- -------- ---------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLB 08/17/05 $ 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 3.408% $ 786 3.853% $ 765
FHLB 08/26/05 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 3.472 788 3.940 771
FHLB 11/18/05 500 (10 yr CMT+2.75%)-6 mo LIBOR 2.764 372 3.499 369
-------- ----- -------
$ 2,500 $ 1,946 $ 1,905
======== ======= =======
</TABLE>
<PAGE>
F-14
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------
1998 1997 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Real estate mortgage loans
One to four family $ 367,041 $ 358,561 $ 345,799
Multi-family 3,396 3,455 3,453
Non-residential real estate 35,316 40,951 44,528
Land and land development 2,321 3,091 4,136
----------- ----------- -----------
Total real estate mortgage loans 408,074 406,058 397,916
Less: Amounts owned by holders
of participating interests, net (3,319) (4,217) (5,450)
----------- ----------- -----------
Net real estate mortgage loans 404,755 401,841 392,466
----------- ----------- -----------
Real estate construction and development loans 19,960 16,046 21,285
Less: Undisbursed loan funds (8,743) (4,978) (8,064)
----------- ----------- -----------
Net real estate construction loans 11,217 11,068 13,221
----------- ----------- -----------
Other loans
Consumer and other installment loans 9,192 8,913 8,046
----------- ----------- -----------
Total other loans 9,192 8,913 8,046
----------- ----------- -----------
425,164 421,822 413,733
Less: Deferred loan fees (3,539) (3,312) (3,045)
Allowance for loan losses (5,639) (5,478) (5,543)
----------- ----------- -----------
Net loans receivable $ 415,986 $ 413,032 $ 405,145
=========== =========== ===========
</TABLE>
Amounts owned by holders of participating interests are not included in the
balance sheets. The unpaid principal balances of these loans are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------
1998 1997 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
FNMA, net of discount $ 1,512 $ 2,222 $ 2,638
FHLMC 750 872 1,130
Other 1,057 1,123 1,682
----------- ----------- -----------
$ 3,319 $ 4,217 $ 5,450
=========== =========== ===========
</TABLE>
(continued)
<PAGE>
F-15
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 3 - LOANS RECEIVABLE (CONCLUDED)
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $294 and $364 at June 30, 1998 and 1997, and $215, $130 and $284
at December 31, 1997, 1996 and 1995, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
--------------- -------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $5,478 $5,543 $ 5,543 $ 5,480 $5,537
Provision charged to operations 269 241 375 325 412
Loans charged off (108) (187) (440) (263) (489)
Recoveries - - - 1 20
------ ------ ------ ------ ------
Balance, end of period $5,639 $5,597 $5,478 $5,543 $5,480
====== ====== ====== ====== ======
</TABLE>
Impairment of loans having recorded investments of $8,476 at June 30, 1998,
$9,801 at December 31, 1997, $11,880 at December 31, 1996, and $10,756 at
December 31, 1995 have been recognized in conformity with FASB No. 114, as
amended by FASB No. 118. The average recorded investment in impaired loans
during 1998, 1997, 1996, and 1995 was $8,860, $10,466, $13,257, and $12,205,
respectively. The total allowance for loan losses related to these loans was
$659 on June 30, 1998, $669 and $729 on December 31, 1997 and 1996, and $807 on
December 31, 1995, respectively. Interest income foregone associated with these
loans was $114 and $323 for the six months ended June 30, 1998 and
1997, $193 for December 31, 1997 and $438 for December 31, 1996, and $198 for
December 31, 1995.
Loans having carrying values of $1,326, $3,209 , $3,512, and $2,471 were
transferred to foreclosed real estate in 1998, 1997, 1996, and 1995,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Unspecified residential loans of approximately $208,000 at June 30, 1998 and
December 31, 1997, and approximately $199,000 at December 31, 1996 have been
pledged to the Federal Home Loan Bank under a floating blanket lien as
collateral for advances from that bank. See Note 6.
NOTE 4 - FORECLOSED REAL ESTATE FOR SALE
Foreclosed real estate consisted of the following:
<TABLE>
<CAPTION>
December 31,
June 30, --------------
1998 1997 1996
---------- ------ ------
(Unaudited)
<S> <C> <C> <C>
Foreclosed real estate $2,063 $2,085 $1,650
Less allowance for losses (180) (126) (39)
------ ------ ------
$1,883 $1,959 $1,611
====== ====== ======
</TABLE>
(continued)
<PAGE>
F-16
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 4 - FORECLOSED REAL ESTATE FOR SALE (CONCLUDED)
A summary of the foreclosed real estate operations is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------ ------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Foreclosed real estate
Foreclosed real estate
sales $ 1,392 $ 1,781 $ 3,214 $ 3,528 $ 1,313
Cost of sales 1,326 1,779 3,209 3,512 1,400
Increase (decrease) in
reserve 54 (11) 87 (21) 18
Selling and other expenses 37 34 81 167 79
------- ------- ------- ------- -------
Net loss $ (25) $ (21) $ (163) $ (130) $ (184)
======= ======= ======= ======= =======
</TABLE>
Activity in the allowance for losses for real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------ ------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period $ 126 $ 39 $ 39 $ 60 $ 42
Provision for losses 95 3 167 112 112
Charge-offs (41) (13) (80) (143) (94)
------- ------- ------- ------- -------
Balance, end of period $ 180 $ 29 $ 126 $ 39 $ 60
======= ======= ======= ======= =======
</TABLE>
NOTE 5 - DEPOSITS
Deposits summarized by interest rates were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------- ----------------------------------------
1998 1997 1996
------------------- ------------------ -------------------
(Unaudited)
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts
(weighted average rate
of 3.25% and 3.24%) $ 37,818 10.10% $ 38,708 10.26% $ 39,659 10.56%
Non-interest bearing
deposits 2,481 0.70 3,266 0.87 2,451 0.65
Money market accounts
(weighted average rate
of 3.25% and 3.26%) 43,141 11.50 45,839 12.16 50,596 13.47
--------- ------ --------- ------ -------- ------
83,440 22.30 87,813 23.29 92,706 24.68
--------- ------ --------- ------ -------- ------
Certificates:
Up to 4.00% - - - - 18 0.01
4.01% to 5.00% 19,299 5.16 17,303 4.58 42,404 11.28
5.01% to 6.00% 243,579 65.18 233,582 61.94 183,490 48.85
6.01% to 7.00% 24,239 6.49 32,589 8.64 51,217 13.63
7.01% to 8.00% 3,162 0.87 5,827 1.55 5,817 1.55
--------- ------ --------- ------ -------- ------
290,279 77.70 289,301 76.71 282,946 75.32
--------- ------ --------- ------ -------- ------
Total deposits $ 373,719 100.00% $ 377,114 100.00% $375,652 100.00%
========= ====== ========= ====== ======== ======
</TABLE>
(continued)
<PAGE>
F-17
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 5 - DEPOSITS (CONCLUDED)
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100 was approximately $45,346 at June 30, 1998, and $21,270 and
$39,805 at December 31, 1997 and 1996, respectively. Deposits in excess of $100
are not federally insured.
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31,1997
------------- ----------------
(Unaudited)
<S> <C> <C>
One Year or Less $ 196,666 $ 192,592
Over One Through Two Years 48,743 56,227
Over Two Through Three Years 23,760 25,827
Over Three Through Four Years 8,988 3,645
Over Four Through Five Years 12,122 11,011
--------- ---------
$ 290,279 $ 289,302
========= =========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
--------------- --------------------------
1998 1997 1997 1996 1995
------ ------ ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Passbook savings $ 614 $ 614 $ 1,237 $ 1,336 $ 1,408
Money market 726 822 1,619 1,692 1,921
NOW 4 3 6 7 7
Certificates of deposit 8,031 7,823 15,954 16,041 15,096
----- ------ ------- ------- -------
$9,375 $9,262 $18,816 $19,076 $18,432
====== ====== ======= ======= =======
</TABLE>
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
The advances to the Bank consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
Interest ----------- --------------------
Maturity Date Rate 1998 1997 1996
------------- -------- ----------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
January 6, 1997 6.53% $ - $ - $ 5,000
November 24, 1997 5.66% - - 2,000
November 22, 1999 6.09% 3,000 3,000 3,000
November 28, 2001 6.25% 5,000 5,000 5,000
------ ------- -------
$8,000 $8,000 $15,000
====== ====== =======
</TABLE>
The Bank had approved borrowing capacity at the FHLB for $45 million as of June
30, 1998, December 31, 1997 and 1996. The unused portion of this facility
aggregated $37 million at June 30, 1998 and December 31, 1997 and $30 million at
December 31, 1996.
<PAGE>
F-18
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 7 - RETIREMENT OBLIGATIONS
Following is a description of each of the Bank's retirement plans. Total
retirement plan obligations of the Bank for all of the Plans was $5.6 million,
$5.5 million and $4.9 million at June 30, 1998, December 31, 1997 and December
31, 1996, respectively.
PENSION PLAN
The Bank has a qualified, noncontributory defined benefit plan covering
substantially all of its full-time employees. The benefits are based upon the
employee's average compensation during the last five years of employment. To
qualify initially, employees must have worked 1,000 hours in a twelve month
period. An employee becomes fully vested upon completion of 5 years of
qualifying service. The amounts of retirement plan expense recognized in the
Bank's statements of income for this plan totaled $169, and $108 for the six
months ended June 30, 1998 and 1997, respectively, $226 for 1997, $136 for
1996, and $426 for 1995. The Bank contributes to the plan the maximum allowable
amount in accordance with ERISA funding standards.
The Plan's assets are invested in managed stock and bond investment accounts
held by the Plan trustee and in certificates of deposit of $2,447 at June 30,
1998, $2,137 in 1997 and $2,055 in 1996 with the Bank.
The discount rate and rate of future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 7.5% and 5.5%,
respectively, and the expected long-term rates of return on assets used in the
computations was 7.00% at June 30, 1998, and 7.75% for 1997 and 1996.
The following sets forth the plan's funded status and amounts recognized in the
Bank's financial statements as of the actuarial dates of June 30, 1998, December
31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------
1998 1997 1996
----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Accumulated benefit obligation,
fully vested $ 2,709 $ 2,509 $ 2,627
=========== ============= ============
Projected benefit obligation $ 4,361 $ 4,061 $ 4,094
Market value of plan assets 4,902 4,761 4,712
----------- ------------- ------------
Excess of projected benefit obligation
over market value of plan assets 541 700 618
Unrecognized net transition amount 627 668 752
Unrecognized prior service cost (210) (219) (237)
Unrecognized net (gain) loss (1,192) (1,573) (1,781)
----------- ------------- ------------
Accrued pension liability (included in
retirement obligations) $ (234) $ (424) $ (648)
=========== ============= ============
</TABLE>
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------- ------------------------------------------
1998 1997 1997 1996 1995
----------- ------------- ----------- ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Service cost - benefits earned
during the period $ 113 $ 106 $ 212 $ 201 $ 209
Interest cost on projected benefit
obligation 137 138 277 313 268
Expected return on plan assets (181) (170) (341) (306) (516)
Net amortization and deferral - (6) (12) 28 301
----------- ------------- ----------- ------------- ------------
Net pension expense $ 69 $ 68 $ 136 $ 236 $ 261
=========== ============= =========== ============= ============
</TABLE>
(continued)
<PAGE>
F-19
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 7 - RETIREMENT OBLIGATIONS (CONCLUDED)
MANAGEMENT SECURITY PLAN
The Bank established a non-qualified deferred compensation plan in 1986 for
certain management personnel, known as the Fredericksburg Savings and Loan
Association, F.A. Management Security Plan. This plan is structured to provide
benefits upon retirement based on years of service to the Bank. Participants
are to receive benefits for life and are eligible for retirement at age 55. If
the participant passes away before the age of 80, the benefits shall continue to
be paid to the named beneficiary until such time the participant would have
reached such age. Deferred compensation expense amounted to $216 for the six
months ended June 30, 1998 and 1997, respectively, and $432, $297, and $426 for
the years ended December 31, 1997, 1996, and 1995, respectively. At June 30,
1998, December 31, 1997 and 1996, the balance of their management security trust
plan was approximately $5,958, $4,342 and $3,376, respectively, which is
included in investment securities classified as available-for-sale. The use of
these funds is restricted to fulfilling the deferred compensation obligation,
subject to the claims of creditors in a bankruptcy proceeding. The Bank has
recorded the assets and liabilities for the non-qualified deferred compensation
plan as gross amounts in the balance sheet.
SUPPLEMENTAL RETIREMENT AGREEMENT
During 1996, the Bank entered into a non-funded supplemental retirement
agreement with its former chairman of the board. Deferred compensation expense
related to this agreement amounted to $56 for the six months ended June 30, 1998
and 1997, $112 for 1997, and $0 for 1996.
401(K) PLAN
The Bank maintains the Fredericksburg Savings and Loan Association, F.A. Salary
Savings Plan (the "401(k) Plan"), a tax-qualified profit sharing plan with a
qualified cash or deferred arrangement under Section 401(k) of the Code.
Eligible employees may begin participating in the 401(k) Plan upon the
completion of one-half of one "Year of Service" and attainment of age 21.
Participants may make contributions to the plan during the year, with certain
limitations placed on such contributions. The Bank is required to contribute
to the plan an amount equal to one-half the basic contribution made by a
participant to a maximum of 6% per participant. Expenses of the plan totaled
$31 and $25 for the six months ended June 30, 1998 and 1997, $58 for the year
ended December 31, 1997, $67 for the year ended December 31, 1996, and $62 for
the year ended December 31, 1995.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Bank has made loans to various officers and directors, collateralized by the
personal residences of the borrowers or their deposits in the Bank. Loans
outstanding to officers and directors totaled $2,136 at June 30, 1998, $2,302 at
December 31, 1997 and $2,350 at December 31, 1996. New loans to officers and
directors for the first six months in 1998 were approximately $331 and $225 in
1997.
Loans to executive officers and directors are generally made on the same terms
and conditions as for other loans. The Bank does not expect to incur any losses
with respect to these loans.
<TABLE>
<CAPTION>
December 31,
June 30, ----------------
1998 1997 1996 1995
-------- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Beginning balance $493 $543 $690 $612
Additions 214 - - 157
Repayments (134) (50) (147) (79)
---- ---- ---- ----
Ending balance $573 $493 $543 $690
==== ==== ==== ====
</TABLE>
<PAGE>
F-20
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 9 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly discretionary--actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weighting, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of June 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total core capital, tangible capital, and risk-based
capital 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.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Core Capital
(To total assets) $79,903 17.05 $18,748 4.00 $23,610 5.00
Tangible Capital
(To total assets) 79,903 17.05 7,084 1.50 14,166 3.00
Risk-Based Capital
(To risk weighted assets) 83,446 28.52 22,414 8.00 28,186 10.00
As of December 31, 1997
Core Capital
(To total assets) 26,518 16.34 14,109 3.00 23,515 5.00
Tangible Capital
(To total assets) 76,518 16.34 7,054 1.50 14,109 3.00
Risk-Based Capital
(To risk weighted assets) 80,056 26.92 22,878 8.00 28,597 10.00
As of December 31, 1996
Core Capital
(To total assets) 71,843 14.97 14,049 3.00 23,414 5.00
Tangible Capital
(To total assets) 71,843 14.97 7,024 1.50 14,049 3.00
Risk-Based Capital
(To risk weighted assets) 75,280 25.70 21,905 8.00 27,381 10.00
</TABLE>
(continued)
<PAGE>
F-21
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 9 - REGULATORY MATTERS (CONCLUDED)
The following is equity capital determined in accordance with GAAP reconciled to
core capital, tangible capital and risk-based capital at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
June 30, 1998 (Unaudited) December 31, 1997
-------------------------------- -------------------------------
Core Tangible Risk-Based Core Tangible Risk-Based
Capital Capital Capital Capital Capital Capital
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
GAAP equity capital $83,500 $83,500 $83,500 $80,073 $80,073 $80,073
Deferred tax asset (3,313) (3,313) (3,313) (3,378) (3,378) (3,378)
Unrealized losses (gains)
on available-for-sale securities (284) (284) (284) (177) (177) (177)
Allowances for loan and
lease losses - - 3,543 - - 3,538
------- ------- ------- ------- ------- -------
$79,903 $79,903 $83,446 $76,518 $76,518 $80,056
======= ======= ======= ======= ======= =======
</TABLE>
NOTE 10 - OFF BALANCE SHEET RISKS
Financial instruments with off-balance sheet risk include commitments to extend
credit made in the normal course of business. These commitments to extend
credit are not shown in the accompanying financial statements. The Bank uses
the same credit policies in making commitments, evaluates each customers' credit
worthiness on a case-by-case basis and requires collateral to support financial
instruments with credit risk. Collateral held varies, but generally includes
real estate, primarily single-family homes, and in some cases, income-producing
commercial properties. At June 30, 1998, the Bank had commitments to originate
loans of approximately $23,896 and approximately $10,563 at December 31, 1997.
Of these commitments, $23,341 and $10,307 were fixed rate loan commitments at
June 30, 1998 and December 31, 1997 respectively. The fixed rate loan
commitments were at interest rates ranging from 6.25% to 9.75% for both periods.
Standby letters of credit are conditional commitments issued by the Bank. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. At June 30, 1998, the Bank was
conditionally committed under standby letters of credit aggregating
approximately $836 and at December 31, 1997 approximately $1,077. The Bank does
not expect to fund any of the letters of credit.
The amount of unfunded lines of credit for home equity loans was approximately
$3,020 at June 30, 1998 and $3,005 at December 31, 1997.
In the ordinary course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying financial
statements. In addition, the Bank is a defendant in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
financial condition of the Bank.
NOTE 11 - MARKET CONCENTRATION
The Bank has a diversified loan portfolio consisting of commercial and
residential real estate and installment loans. Substantially all of the Bank's
customers are residents or operate business ventures in its market area
consisting of the Fredericksburg Standard Metropolitan Statistical Area (SMSA).
Therefore, a substantial portion of its debtors' ability to honor their
contracts is influenced by the economic conditions in this market area.
<PAGE>
F-22
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
financial instruments.
CASH AND CASH EQUIVALENTS
Fair value of cash and cash equivalents is assumed to be book value.
INVESTMENT SECURITIES
For U.S. Treasury and Agency securities, fair values are based on market prices
or dealer quotes. For other investment securities, fair value equals quoted
market price if available.
MORTGAGE-BACKED SECURITIES
Fair value of mortgage securities is assumed to be net book value for FNMA pass-
through securities and quoted market prices for GNMA certificates.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, residential
mortgage and consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms and by performing and non-performing categories.
The fair value of performing loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan.
DEPOSITS
Fair value of passbook and money market accounts is defined as the amounts
payable on demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated based on the rates currently offered for
deposits of similar maturities
ADVANCES
Fair value of advances outstanding is estimated based on the rates currently
available for advances of similar maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
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 credit-worthiness of the counter parties. All
commitments to extend credit and standby letters of credit are issued on a
short-term or floating rate basis. The fair value of these instruments is not
material.
(continued)
<PAGE>
F-23
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
(Unaudited)
Carrying Est. Fair Carrying Est. Fair Carrying Est. Fair
Value Value Value Value Value Value
--------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Financial assets
Cash $ 9,031 $ 9,031 $ 11,287 $ 11,287 $ 15,937 $15,937
Investment securities 30,470 30,928 30,865 31,151 32,261 31,979
Mortgage-backed securities 1,190 1,226 1,291 1,335 1,502 1,545
Loans 415,986 421,646 413,032 416,508 405,145 405,540
Financial liabilities
Deposits 373,719 372,237 377,114 376,181 375,652 374,753
Advances 8,000 7,965 8,000 7,995 15,000 15,060
</TABLE>
NOTE 13 - INCOME TAXES
Deferred income taxes result from timing differences in the recognition of
income and expense for income tax and financial reporting purposes. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at June 30, 1998 and December
31, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
June 30, December 31,
------------ ------------------------------------
1998 1997 1996
------------ -------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses $ 2,270 $ 2,116 $ 2,108
Deferred compensation 2,125 2,082 1,875
Other 31 31 361
---------- ------------- ---------------
Total gross deferred tax assets 4,426 4,229 4,344
---------- ------------- ---------------
Deferred tax liabilities
FHLB stock dividends 480 480 480
Depreciation 250 250 236
Other 383 121 -
---------- ------------ ---------------
Total gross deferred tax liabilities 1,113 851 716
---------- ------------ ---------------
Net deferred tax asset $ 3,313 $ 3,378 $ 3,628
========== ============ ===============
</TABLE>
(continued)
<PAGE>
F-24
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 13 - INCOME TAXES (CONCLUDED)
The following is a reconciliation of the differences between the statutory
Federal income tax rate and the effective income tax rate for the six months
ended June 30, 1998 and the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
June 30, December 31,
-------- ----------------------------
1998 1997 1996 1995
-------- ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Tax at expected rates 34.0% 34.0 % 34.0 % 34.0 %
Increases (decreases) in taxes resulting from
Tax exempt interest income (2.2) (2.0) (2.8) (2.0)
State income tax, net of federal tax benefit 3.7 3.5 3.5 3.9
Other 4.5 2.6 4.8 2.0
------ ------ ------ ------
40.0% 38.1 % 39.5 % 37.9 %
====== ====== ====== ======
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------- --------------------------------------------------------
1998 1997 1997 1996 1995
------------ -------------- --------------- ---------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current tax expense
U.S. Federal $ 2,143 $ 2,375 $ 3,437 $ 2,568 $ 4,093
State 137 152 553 375 415
------------ ------------- -------------- -------------- -----------------
Total current 2,280 2,527 3,990 2,943 4,508
------------ ------------- -------------- -------------- -----------------
Deferred tax expense
U.S. Federal (61) (354) (36) (509) (412)
State (4) (23) (2) (33) (26)
------------ ------------- -------------- -------------- -----------------
Total deferred (65) (377) (38) (542) (438)
------------ ------------- -------------- -------------- -----------------
Total expense $ 2,215 $ 2,150 $ 3,952 $ 2,401 $ 4,070
============ ============ ============== ============== =================
</TABLE>
NOTE 14 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Bank adopted SFAS No. 130, "Reporting
Comprehensive Income". Statement No. 130 required the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
The Bank holds securities as "Available for Sale" and will sell securities, or
have securities redeemed, which give rise to comprehensive income.
(continued)
<PAGE>
F-25
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 14 - COMPREHENSIVE INCOME (CONCLUDED)
The components of comprehensive income are detailed below, indicating the tax
effect to each item.
<TABLE>
<CAPTION>
Tax Net of
Before Expense Tax
Tax (Benefit) Amount
------------- ------------- -------------
<S> <C> <C> <C>
For the period ended:
1995
Unrealized holding gains (losses) arising during the period $ (310) $ (118) $ (192)
Less: reclassification adjustment for gains (losses) realized
in net income (31) (12) (19)
----------- ----------- -----------
Net unrealized gains (losses) (279) (106) (173)
----------- ----------- -----------
Other comprehensive income $ (279) $ (106) $ (173)
=========== =========== ===========
1996
Unrealized holding gains (losses) arising during the period $ 242 $ 92 $ 150
Less: reclassification adjustment for gains (losses) realized
in net income 223 85 138
----------- ----------- -----------
Net unrealized gains (losses) 19 7 12
----------- ----------- -----------
Other comprehensive income $ 19 $ 7 $ 12
=========== =========== ===========
1997
Unrealized holding gains (losses) arising during period $ 460 $ 175 $ 285
Less: reclassification adjustment for gains (losses) realized
in net income 108 41 67
----------- ----------- -----------
Net unrealized gains (losses) 568 216 352
----------- ----------- -----------
Other comprehensive income $ 568 $ 216 $ 352
=========== =========== ===========
June 30, 1997 (unaudited)
Unrealized holding gains (losses) arising during period (unaudited) $ (321) $ (122) $ (199)
Less: reclassification adjustment for gains (losses) realized
in net income (unaudited) (31) (12) (19)
----------- ----------- -----------
Net unrealized gains (losses) (unaudited) (290) (110) (180)
----------- ----------- -----------
Other comprehensive income (unaudited) $ (290) $ (110) $ (180)
=========== =========== ===========
June 30, 1998 (unaudited)
Unrealized holding gains (losses) arising during period (unaudited) $ 89 $ 34 $ 55
Less: reclassification adjustment for gains (losses) realized
in net income (unaudited) (84) (32) (52)
----------- ----------- -----------
Net unrealized gains (losses) (unaudited) 173 66 107
----------- ----------- -----------
Other comprehensive income (unaudited) $ 173 $ 66 $ 107
=========== =========== ===========
</TABLE>
<PAGE>
F-26
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 15 - SUBSEQUENT EVENTS
On January 12, 1998, agreement was reached with an individual borrower to accept
deeds in lieu of foreclosure on sixteen properties collateralizing mortgage
loans. The outstanding principal balance of these loans aggregated
approximately $627 as of December 31, 1997. During the month of January 1998,
management obtained appraisals on the above referenced properties. These
appraisals indicated that sufficient loan to value of the underlying properties
existed to not require an addition to the allowance for losses.
On January 13, 1998, the Board of Directors granted approval to borrow an
additional $10,000 from the Federal Home Loan Bank at a 10 year term. Such
advances would be collateralized by certain qualifying real estate mortgage
loans under a blanket floating lien.
NOTE 16 - PLAN OF CONVERSION
On July 14, 1998, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Plan") pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank. All
of the outstanding common stock of the Bank will be acquired in exchange for a
portion of the net conversion proceeds (the "Conversion") by a holding company
formed expressly for such purpose (the "Company"). All of the stock to be
issued in the Conversion is being offered to eligible account holders as of
June 30, 1997.
The Bank plans to establish an ESOP for the benefit of eligible employees, to
become effective upon the Conversion. The ESOP intends to purchase up to 8% of
the Common Stock issued in the Conversion utilizing proceeds of a loan from the
Company or a third party lender. The loan will be repaid over a period of 20
years and the collateral for the loan will be the common stock purchased by the
ESOP.
Pursuant to the Plan, the Company intends to establish a Charitable Foundation
("Foundation") in connection with the Conversion. The Plan provides that the
Bank and the Company will create the Foundation and donate an amount of the
Company's common stock equal to 8% of the common stock to be sold in the
Conversion. The Foundation will be dedicated to charitable purposes within the
communities in which the Bank operates and to complement the Bank's existing
community activities. Establishment of the Foundation is subject to the
approval of the Bank's members at the special meeting being held to vote upon
the Conversion.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, under Federal regulations, subject to a
limitation based on 10 percent of the Company's taxable income. The Company,
however, would be able to carry forward any unused portion of the deduction for
five years following the contribution. Upon funding the Foundation, the Company
will recognize an expense in the full amount of the contribution, offset in part
by the corresponding benefit for the tax deduction, during the quarter in which
the contribution is made.
The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space and accounting support. The Bank
expects to provide these services without compensation, however, expenses
incurred on behalf of the Foundation are not expected to be significant to the
operations of the Bank.
At the time of Conversion, the Bank will establish a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
final conversion prospectus. The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible account holders
who continue to maintain their accounts at the Bank after the Conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders and supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's or supplemental account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
(continued)
<PAGE>
F-27
FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 16 - PLAN OF CONVERSION (CONCLUDED)
The costs associated with Conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock. In the event the Conversion
is not consummated, costs incurred will be charged to expense. At June 30,
1998, there were no deferred conversion costs.
After the conversion, the Bank may not declare or pay dividends on its stock if
such declaration and payment would violate statutory or regulatory requirements.
NOTE 17 - OTHER NONINTEREST EXPENSE
<TABLE>
<CAPTION>
June 30, December 31,
------------- ----------------------
1998 1997 1997 1996 1995
------ ----- ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Professional fees $ 327 $ 118 $ 603 $ 115 $ 216
Data processing 177 169 303 259 124
Printing and supplies 80 63 153 90 110
Directors fees 92 85 174 189 185
Charitable contributions 73 57 95 92 96
Advertising 47 63 115 167 160
Other non-interest expense 271 322 611 654 558
------ ----- ------ ------ ------
$1,067 $ 877 $2,054 $1,566 $1,449
====== ===== ====== ====== ======
</TABLE>
<PAGE>
______________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VIRGINIA CAPITAL BANCSHARES, INC., THE BANK OR TRIDENT SECURITIES,
INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
VIRGINIA CAPITAL CHANGE IN THE AFFAIRS OF VIRGINIA CAPITAL BANCSHARES, INC. OR
THE BANCSHARES, INC. BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF.
______________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................................................................
Selected Financial and
Other Data of the Bank.........................................................
Recent Developments................................................................
Risk Factors.......................................................................
Virginia Capital Bancshares, Inc...................................................
Fredericksburg Savings.............................................................
Regulatory Capital Compliance......................................................
Use of Proceeds....................................................................
Dividend Policy....................................................................
Market for the Common Stock........................................................
Capitalization.....................................................................
Pro Forma Data.....................................................................
Comparison of Valuation and Pro Forma Information With
No Foundation...................................................................
Fredericksburg Savings
Statements of Income...........................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................
Business of the Bank...............................................................
Federal and State Taxation.........................................................
Regulation.........................................................................
Management of the Company..........................................................
Management of the Bank.............................................................
The Conversion.....................................................................
Restrictions on Acquisition of the Company
and the Bank...................................................................
Description of Capital Stock of the Company........................................
Description of Capital Stock of the Bank...........................................
Transfer Agent and Registrar.......................................................
Experts............................................................................
Legal and Tax Opinions.............................................................
Additional Information.............................................................
Index of Financial Statements......................................................
</TABLE>
______________________________
UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
______________________________
______________________________
Up to 13,965,600 Shares
VIRGINIA CAPITAL
BANCSHARES, INC.
(Proposed Holding Company for
Fredericksburg Savings Bank)
COMMON STOCK
______________
PROSPECTUS
______________
_____________, 199_
TRIDENT SECURITIES, INC.
______________________________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC filing fee..................................................... $ 44,495
OTS filing fee..................................................... 14,400
NASD filing fee.................................................... 15,583
Nasdaq listing fee................................................. 90,500
Printing, postage and mailing...................................... 500,000
Legal fees and expenses (including underwriter's counsel fees)..... 400,000
Accounting fees and expenses....................................... 150,000
Appraisers' fees and expenses (including business plan)............ 31,000
Marketing fees and selling commissions and Underwriter's expenses.. 580,000
Conversion agent fees.............................................. 50,000
Transfer agent fees and expenses................................... 15,000
Certificate printing............................................... 5,000
Telephone, temporary help and other equipment...................... 50,000
Blue Sky fees and expenses......................................... 10,000
Miscellaneous...................................................... 44,022
----------
TOTAL.............................................................. $2,000,000
==========
</TABLE>
______________________
(1) Unless otherwise noted, based upon the registration and issuance of
15,082,848 shares at $10.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Virginia Stock Corporation Act (being Chapter 9 of Title
13.1 of the Virginia Code), Articles 10 and 11 of the registrant's Articles of
Incorporation provide as follows:
TENTH:
-----
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Virginia Stock Corporation Act, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith; provided, however, that, except as provided in Section C
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
<PAGE>
(hereinafter an "advancement of expenses"); provided, however, that, if the
Virginia Stock Corporation Act requires, an advancement of expenses incurred by
an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Virginia Stock Corporation Act. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Virginia Stock Corporation Act, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Articles of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Virginia Stock Corporation Act.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable to
--------
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 13.1-692 of the Virginia Stock
<PAGE>
Corporation Act; or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Virginia Stock Corporation Act is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Virginia
Stock Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between Fredericksburg Savings and Loan Association,
F.A. and Trident Securities, Inc.*
1.2 Draft Form of Agency Agreement between Fredericksburg Savings and Loan
Association, F.A. and Trident Securities, Inc.
2.1 Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
of Fredericksburg Savings Bank*
3.1 Articles of Incorporation of Virginia Capital Bancshares, Inc.*
3.2 Bylaws of Virginia Capital Bancshares, Inc.*
3.3 Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
(See Exhibit 2.1 hereto)*
4.1 Draft Stock Certificate of Virginia Capital Bancshares, Inc.*
5.1 Opinion of Muldoon, Murphy & Faucette re: legality
8.1 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.2 Opinion of Cherry Bekaert & Holland re: State Tax Matters
10.1 Form of Fredericksburg Savings Bank Employee Stock Ownership
Trust Agreement*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Proposed Employment Agreement between Fredericksburg Savings Bank
and certain executive officers*
10.4 Form of Proposed Employment Agreement between Virginia Capital Bancshares,
Inc. and certain executive officers*
10.5 Form of Proposed Fredericksburg Savings Bank Employee Severance
Compensation Plan*
10.6 Form of Fredericksburg Savings Bank Supplemental Executive Retirement
Plan*
23.1 Consent of Cherry Bekaert & Holland
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of Fredericksburg Savings Charitable Foundation Gift
Instrument*
______________________
*Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fredericksburg,
Commonwealth of Virginia, on October 27, 1998.
VIRGINIA CAPITAL BANCSHARES, INC.
By: /s/ Samuel C. Harding, Jr.
--------------------------------
Samuel C. Harding, Jr.
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Samuel C. Harding, Jr. President and Director October 27, 1998
- ------------------------------- (principal executive officer)
Samuel C. Harding, Jr.
/s/ Peggy J. Newman Executive Vice President, Treasurer, October 27, 1998
- ------------------------------- Secretary and Director
Peggy J. Newman (principal accounting and financial officer)
* Chairman of the Board
- -------------------------------
H. Smith McKann
* Vice Chairman of the Board
- -------------------------------
Ronald G. Beck
* Director
- -------------------------------
William M. Anderson, Jr.
* Director
- -------------------------------
O'Conor Ashby
* Director
- -------------------------------
Ernest N. Donahoe, Jr.
* Director
- -------------------------------
DuVal Q. Hicks, Jr.
* Director
- -------------------------------
Charles S. Rowe
</TABLE>
_____________________
*Pursuant to a Power of Attorney dated September 11, 1998 and filed as Exhibit
24.1 to the Registration Statement on Form S-1 of Virginia Capital Bancshares,
Inc. on September 11, 1998.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Samuel C. Harding, Jr. President and Director October 27, 1998
- -------------------------------
Samuel C. Harding, Jr.
</TABLE>
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
1.1 Engagement Letter between Fredericksburg Savings and Loan Association,
F.A. and Trident Securities, Inc.*
1.2 Draft Form of Agency Agreement between Fredericksburg Savings and Loan
Association, F.A. and Trident Securities, Inc.
2.1 Plan of Conversion (including the Federal Stock Charter and Stock Bylaws
of Fredericksburg Savings Bank*
3.1 Articles of Incorporation of Virginia Capital Bancshares, Inc.*
3.2 Bylaws of Virginia Capital Bancshares, Inc.*
3.3 Federal Stock Charter and Stock Bylaws of Fredericksburg Savings Bank
(See Exhibit 2.1 hereto)*
4.1 Draft Stock Certificate of Virginia Capital Bancshares, Inc.*
5.1 Opinion of Muldoon, Murphy & Faucette re: legality
8.1 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.2 Opinion of Cherry Bekaert & Holland re: State Tax Matters
10.1 Form of Fredericksburg Savings Bank Employee Stock Ownership
Trust Agreement*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Proposed Employment Agreement between Fredericksburg Savings Bank
and certain executive officers*
10.4 Form of Proposed Employment Agreement between Virginia Capital Bancshares,
Inc. and certain executive officers*
10.5 Form of Proposed Fredericksburg Savings Bank Employee Severance
Compensation Plan*
10.6 Form of Fredericksburg Savings Bank Supplemental Executive Retirement
Plan*
23.1 Consent of Cherry Bekaert & Holland
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc. (P)
99.2 Draft of Fredericksburg Savings Charitable Foundation Gift
Instrument*
______________________
*Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
Exhibit 1.2
VIRGINIA CAPITAL BANCSHARES, INC.
UP TO 13,965,600 SHARES OF COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
$10.00 PER SHARE
AGENCY AGREEMENT
----------------
November __, 1998
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Virginia Capital Bancshares, Inc., a Virginia corporation ("Company"), and
Fredericksburg Savings and Loan Association, F.A., a federally chartered and
insured mutual savings and loan association ("Association"), hereby confirm as
of the date above their respective agreements with Trident Securities, Inc.
("Trident"), a broker-dealer registered with the Securities and Exchange
Commission ("Commission") and a member of the National Association of Securities
Dealers, Inc. ("NASD"), as follows:
1. Introduction. The Association intends to convert from a federally
------------
chartered mutual savings and loan association to a federally chartered stock
savings and loan association as a wholly-owned subsidiary of the Company
(together with the Offerings (as defined below), the issuance of shares of
common stock of the Association to the Company, the incorporation of the
Company, and the establishment and operation of the Foundation (as defined
below), collectively the "Conversion") pursuant to a plan of conversion adopted
by the Association's Board of Directors on _______, 1998 ("Plan"). In
accordance with the Plan, the Company is offering up to 13,965,600 shares
("Shares") of its common stock, par value $0.01 per share ("Common Stock"),
pursuant to nontransferable subscription rights in a subscription offering
("Subscription Offering"), in order of priority, to (i) the Association's
Eligible Account Holders (as defined in the Plan), (ii) the Company's Employee
Stock Ownership Plan ("ESOP"), (iii) the Association's Supplemental Eligible
Account Holders (as defined in the Plan), and (iv) the Association's Other
Members (as defined in the Plan). Shares of the Common Stock not sold in the
Subscription Offering are being offered to the general public in a community
offering, with preference being given to natural persons residing in
___________________, Virginia ("Association's Local Community") ("Community
Offering"), and, if necessary, through a syndicate of NASD-registered broker-
dealers managed by Trident in a syndicated community offering ("Syndicated
Community Offering"). The Community Offering and the Syndicated Community
Offering may commence any time during the Subscription Offering or after the
expiration of the Subscription Offering. The Subscription Offering, the
Community
<PAGE>
Trident Securities, Inc.
Page 2
Offering and the Syndicated Community Offering are collectively referred to as
the "Offerings." Purchases of Shares in the Offerings are subject to certain
limitations and restrictions as described in the Plan.
In addition, in connection with the Conversion and pursuant to the terms of
the Plan as described in the Prospectus, the Company has established a
charitable foundation ("Foundation"). Immediately following the consummation of
the Conversion, subject to the approval of the establishment of the Foundation
by the members of the Association and compliance with all conditions as may be
imposed by the OTS and any other regulatory authorities, the Company will
contribute Common Stock equal to 8% of the Common Stock sold in the Conversion
("Foundation Shares") to the Foundation.
The Company and the Association have been advised by Trident that it
intends to utilize its best efforts to assist the Company and the Association
with the sale of the Shares in the Subscription Offering and, if deemed
necessary, in the Community Offering and the Syndicated Community Offering.
2. Representations and Warranties.
------------------------------
(a) The Company and the Association jointly and severally represent and
warrant to Trident that:
(i) The Company has filed with the Commission a registration statement,
including exhibits and an amendment or amendments thereto, on Form S-1
(No. 333-_______), including a Prospectus relating to the Offerings, for the
registration of the Shares and the Foundation Shares under the Securities Act of
1933, as amended ("Securities Act"); and such registration statement has been
declared effective under the Securities Act and no stop order has been issued
with respect thereto and no proceedings therefor have been initiated or, to the
Company's best knowledge, threatened by the Commission. Except as the context
may otherwise require, such registration statement, as amended or supplemented,
on file with the Commission at the time the registration statement became
effective, including the Prospectus, financial statements, schedules, exhibits
and all other documents filed as part thereof, as amended and supplemented, is
herein called the "Registration Statement," and the prospectus, as amended or
supplemented, on file with the Commission at the time the Registration Statement
became effective is herein called the "Prospectus," except that if any
prospectus filed by the Company with the Commission pursuant to Rule 424(b) of
the general rules and regulations of the Commission under the Securities Act
(together with the published policies and actions of the Commission thereunder,
the "Securities Act Regulations") differs from the form of prospectus on file at
the time the Registration Statement became effective, the term "Prospectus"
shall refer to the Rule 424(b) prospectus from and after the time it is filed
with the Commission and shall include any amendments or supplements thereto from
and after their dates of effectiveness or use, respectively.
<PAGE>
Trident Securities, Inc.
Page 3
(ii) The Association has filed an Application for Approval of Conversion on
Form AC, including exhibits (as amended or supplemented, the "Form AC" or the
"Conversion Application") with the Office of Thrift Supervision ("OTS") under
the Home Owners' Loan Act, as amended ("HOLA"), and the rules and regulations,
including published policies and actions, of the OTS thereunder (collectively,
the "OTS Regulations"), which has been approved by the OTS; and the Prospectus
and the proxy statement for the solicitation of proxies from members for the
special meeting to approve the Plan ("Proxy Statement") included as part of the
Form AC have been approved for use by the OTS. No order has been issued by the
OTS preventing or suspending the use of the Prospectus or the Proxy Statement
and no action by or before the OTS revoking such approvals is pending or, to the
Association's best knowledge, threatened.
(iii) The Company has filed with the OTS an application on
Form H-e(1)-S ("Holding Company Application") promulgated under the savings and
loan holding company provisions of the HOLA and the regulations promulgated
thereunder and has received approval of its acquisition of the Association from
the OTS.
(iv) As of the date hereof (i) the Registration Statement and the
Prospectus comply with the Securities Act and the Securities Act Regulations,
(ii) the Registration Statement does not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (iii) the Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Representations or warranties in this subsection shall not apply to statements
or omissions made in reliance upon and in conformity with written information
furnished to the Company or the Association by or on behalf of Trident relating
to Trident expressly for use in the Registration Statement or Prospectus.
(v) The Company has been duly incorporated as a Virginia corporation and
the Association has been duly organized as a mutual savings and loan association
under the laws of the United States, and each of them is validly existing and in
good standing under the laws of their jurisdiction of organization with full
power and authority to own its property and conduct its business as described in
the Registration Statement and Prospectus; the Association is a member in good
standing of the Federal Home Loan Bank of Atlanta; and the deposit accounts of
the Association are insured by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") up to the
applicable legal limits. Each of the Company and the Association is not
required to be qualified to do business as a foreign corporation in any
jurisdiction where non-qualification would have a material adverse effect on the
financial condition, operations, business, properties or assets of the Company
and the Association, taken as a whole.
<PAGE>
Trident Securities, Inc.
Page 4
(vi) The Association has good, marketable and insurable title to all assets
material to its business and to those assets described in the Prospectus as
owned by it, free and clear of all liens, charges, encumbrances or restrictions,
except for liens for taxes not yet due, except as described in the Prospectus
and except as do not in the aggregate have a material adverse effect upon the
financial condition, results of operations or business of the Association; and
all of the leases and subleases material to the financial condition, results of
operations or business of the Association under which it holds properties,
including those described in the Prospectus, are in full force and effect as
described therein.
(vii) The only subsidiary of the Association is ________________ (the
"Subsidiary"). The Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation; the Subsidiary is currently inactive; all of the issued and
outstanding capital stock of the Subsidiary has been duly authorized and validly
issued, is fully paid and nonassessable and is owned by the Association, free
and clear of any security interest, mortgage, pledge, lien, encumbrance, claim
or equitable claim.
(viii) Upon consummation of the Conversion, the Foundation will be duly
incorporated and validly existing as a non-stock corporation in good standing
under the laws of the State of Delaware with corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus; the Foundation will not be a savings and loan holding company
within the meaning of 12 C.F.R. Section 574.2(q) as a result of the issuance of
the Foundation Shares in accordance with the terms of the Plan and in the
amounts as described in the Prospectus; no approvals are required to establish
the Foundation and to contribute the shares of Common Stock thereto as described
in the Prospectus other than those set forth in the OTS approval of the
Conversion Application; except as specifically disclosed in the Prospectus and
the Proxy Statement, there are no agreements and/or understandings, written or
oral, between the Company and/or the Association and the Foundation with respect
to the control, directly or indirectly, over the voting or the acquisition or
disposition of the Foundation Shares; at the time of the Conversion, the
Foundation Shares will have been duly authorized for issuance and, when issued
and contributed by the Company pursuant to the Plan, will be duly and validly
issued and fully paid and non-assessable; and the issuance of the Foundation
Shares is not subject to preemptive or similar rights.
(ix) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized by
all necessary actions on the part of each of the Company and the Association,
and this Agreement is a valid and binding obligation of each of the Company and
the Association, enforceable in accordance with its terms (except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or similar laws relating to or
affecting the enforcement of creditors' rights generally or the rights of
creditors of insured financial institutions and their holding companies, the
accounts of whose subsidiaries are insured by the FDIC, by general equity
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at
<PAGE>
Trident Securities, Inc.
Page 5
law, or laws relating to the safety and soundness of insured depository
institutions and their affiliates, and except to the extent that the provisions
of Sections 8 and 9 hereof may be unenforceable as against public policy or
pursuant to Section 23A of the Federal Reserve Act, 12 U.S.C.
Section 371c (("Section 23A")).
(x) Except as referred to in the Prospectus, there is no litigation or
governmental proceeding pending or, to the best knowledge of the Company or the
Association, threatened against or involving the Company or the Association, or
any of their respective assets, which individually or in the aggregate would
reasonably be expected to have a material adverse effect on the financial
condition, results of operations or business of the Company and the Association,
taken as a whole. (For purposes of this representation, any litigation or
governmental proceeding is not considered "threatened" unless the potential
litigation or governmental authority had manifested to the management of the
Company or the Association a present intention to initiate such litigation or
proceeding.)
(xi) The Company and the Association have received the opinions of Muldoon,
Murphy & Faucette with respect to the federal income tax consequences of the
Conversion and the federal income tax consequences of the Foundation, and of
Cherry, Bekaert & Holland, L.L.P., with respect to the Virginia income tax
consequences of the Conversion, to the effect that the Conversion will
constitute a tax-free reorganization under the Internal Revenue Code of 1986, as
amended, and will not be a taxable transaction for the Association or the
Company under the laws of Virginia; the Association has received an opinion of
Cherry, Bekaert & Holland, L.L.P. with respect to the federal income tax
consequences of the Foundation; and the facts and representations made by the
Company and the Association and relied upon in rendering such opinions are
accurate and complete, and neither the Company nor the Association have taken
any action inconsistent therewith.
(xii) Neither the Company nor the Association is in violation of any
rule or regulation of the OTS or the FDIC that could reasonably be expected to
result in any enforcement action against the Company, the Association or their
officers or directors that might have a material adverse effect on the financial
condition, results of operations or business of the Company and the Association,
taken as a whole.
(xiii) FinPro, Inc. ("FinPro"), the firm that prepared the independent
appraisal dated as of ____________, 1998, is independent with respect to the
Company and the Association within the meaning of the OTS Regulations. The
Company and the Association believe FinPro to be experienced and expert in
rendering appraisals of thrift institutions, and nothing has come to the
attention of the Company and the Association which has caused them to believe
that the appraisal by FinPro was not prepared in accordance with the
requirements of the OTS Regulations.
(xiv) Cherry, Bekaert & Holland, L.L.P., the firm that certified the
financial statements of the Association filed as part of the Registration
Statement and the Conversion Application, is independent with respect to the
Company and the Association as required by the Securities Act, the
<PAGE>
Trident Securities, Inc.
Page 6
Securities Act Regulations, the Code of Professional Ethics of the American
Institute of Certified Public Accountants, and Title 12 of the Code of Federal
Regulations Parts 563c and 571, and nothing has come to the attention of the
Company and the Association which has caused them to believe that such firm is
not independent within the meaning of such provisions.
(xv) The financial statements and related notes or schedules which are
included in the Registration Statement and the Prospectus fairly present the
financial condition, earnings, equity and cash flows of the Association at the
respective dates thereof and for the respective periods covered thereby and
comply as to form with the applicable accounting requirements of the Securities
Act Regulations and the OTS Regulations. Such financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved, except as set forth
therein, and such financial statements are consistent with financial statements
and other reports filed by the Association with the OTS, except as GAAP may
otherwise require. The financial tables in the Prospectus accurately present
the information purported to be shown thereby at the respective dates thereof
and for the respective periods covered thereby.
(xvi) There has been no material change in the financial condition,
results of operations or business of the Company and the Association, taken as a
whole, since the latest date as of which such condition is set forth in the
Prospectus, except as set forth therein; and the capitalization, assets,
properties and business of each of the Company and the Association conform in
all material aspects to the descriptions thereof contained in the Prospectus.
Neither the Company nor the Association has any material liabilities of any
kind, contingent or otherwise, except as set forth in the Prospectus.
(xvii) There has been no breach or default (or the occurrence of any
event which, with notice or lapse of time or both, would constitute a default)
under, or creation or imposition of any lien, charge or other encumbrance upon
any of the properties or assets of the Company or the Association pursuant to
any of the terms, provisions or conditions of, any agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which the Company
or the Association is a party or by which any of them or any of their respective
assets or properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law, administrative
regulation or order or court order, writ, injunction or decree, which breach,
default, encumbrance or violation would have a material adverse effect on the
financial condition, results of operations or business of the Company and the
Association, taken as a whole; all agreements which are material to the
financial condition, results of operations or business of the Company and the
Association, taken as a whole, are in full force and effect, and no party to any
such agreement has instituted or threatened any action or proceeding wherein the
Company or the Association would be alleged to be in default thereunder.
(xviii) Neither the Company nor the Association is in violation of its
respective charter, certificate of incorporation or bylaws. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby (including the establishment and operation
<PAGE>
Trident Securities, Inc.
Page 7
of the Foundation) do not conflict with or result in a breach of the charter,
certificate of incorporation or bylaws of the Company or the Association (in
either mutual or stock form) or constitute a material breach of or default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of any lien,
charge or other encumbrance upon any of the properties or assets of the Company
or the Association pursuant to any of the terms, provisions or conditions of,
any material agreement, contract, indenture, bond, debenture, note, instrument
or obligation to which the Company or the Association is a party (other than the
establishment of a liquidation account pursuant to the Plan) or violate any
governmental license or permit or any law, administrative regulation or order or
court order, writ, injunction or decree (subject to the satisfaction of certain
conditions imposed by the OTS in connection with its approval of the Conversion
Application), which breach, default, encumbrance or violation would have a
material adverse effect on the financial condition, results of operations or
business of the Company and the Association, taken as a whole.
(xix) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, except as otherwise may be
indicated or contemplated therein, neither the Company nor the Association has
issued any securities which will remain issued at the Closing Date or incurred
any liability or obligation, direct or contingent, or borrowed money, except
borrowings or liabilities in the ordinary course of business consistent with
past practice, or entered into any other transaction not in the ordinary course
of business and not consistent with prior practices, which is material in light
of the business of the Company and the Association, taken as a whole.
(xx) The issuance and the sale of the Shares have been duly authorized by
all necessary action of the Company and approved by the OTS and, when issued in
accordance with the terms of the Plan and paid for, shall be validly issued,
fully paid and nonassessable and shall conform to the description thereof
contained in the Prospectus; the issuance of the Shares is not subject to
preemptive rights and good title to the Shares will be transferred by the
Company upon issuance thereof against payment therefor, free and clear of all
claims, encumbrances, security interests and liens against the Company
whatsoever. The issuance and sale of the capital stock of the Association to
the Company has been duly authorized by all necessary action of the Association
and the Company and the OTS (subject to the satisfaction of various conditions
imposed by the OTS in connection with its approvals of the Conversion
Application and the Holding Company Application), and such capital stock, when
issued in accordance with the terms of the Plan, will be fully paid and
nonassessable and will conform in all material respects to the description
thereof contained in the Prospectus.
(xxi) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares and the Foundation Shares, except such
approvals as have been obtained and except for the declaration of
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Trident Securities, Inc.
Page 8
effectiveness of any required post-effective amendment by the Commission and
approval thereof by the OTS, the issuance of the Association's Federal Stock
Charter by the OTS and as may be required under the "blue sky" or securities
laws of various jurisdictions.
(xxii) All contracts and other documents required to be filed as
exhibits to the Registration Statement, the Conversion Application or the
Holding Company Application have been filed with the Commission or the OTS or
both, as the case may be.
(xxiii) The Company and the Association have timely filed all required
federal, state and local tax returns, and no deficiency has been asserted with
respect to such returns by any taxing authorities, and the Company and the
Association have paid all taxes that have become due and, to the best of their
knowledge, have made adequate reserves for accrued tax liabilities, except where
any failure to make such filings, payments and reserves, or the assertion of
such a deficiency, would not have a material adverse effect on the financial
condition or results of operations of the Company and the Association, taken as
a whole.
(xxiv) All of the loans represented as assets of the Association as of
the most recent date for which financial condition data is included in the
Prospectus meet or are exempt from all requirements of federal, state or local
law pertaining to lending, including without limitation truth in lending
(including the requirements of Regulation Z and 12 C.F.R. Part 226 and Section
563.99), real estate settlement procedures, consumer credit protection, equal
credit opportunity and all disclosure laws applicable to such loans, except for
violations which, if asserted, would not have a material adverse effect on the
financial condition, results of operations or business of the Company and the
Association, taken as a whole.
(xxv) The records of Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members (as those terms are defined in the Plan)
delivered to Trident by the Association or its agent for use during the
Conversion have been reviewed by the Association and are believed to be
accurate, reliable and complete and Trident shall have no liability to any
person relating to the reliability, accuracy or completeness of such records or
for any denial or allocation of a subscription to purchase shares to any person
based upon such records.
(xxvi) Neither the Company nor the Association has made any payment of
funds of the Company or the Association as a loan for the purchase of shares or
has made any other payment of funds prohibited by law, and no funds of the
Company or the Association have been set aside to be used for any payment
prohibited by law.
(xxvii) To the best knowledge of the Company and the Association, the
Company and the Association are in compliance with all laws, rules and
regulations relating to environmental protection and neither the Company nor the
Association is subject to liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or
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Trident Securities, Inc.
Page 9
any similar law, except for violations which, if asserted, would not have a
material adverse effect on the Company and the Association, taken as a whole.
There are no actions, suits, regulatory investigations or other proceedings
pending or threatened against the Company or the Association relating to
environmental protection. To the best knowledge of the Company and the
Association, no disposal, release or discharge of hazardous or toxic substances,
pollutants or contaminants, including petroleum and gas products, as any of such
terms may be defined under federal, state or local law, has been caused by the
Company or the Association or, to the best knowledge of the Company and the
Association, and except as already disclosed in the Prospectus, has occurred on,
in or at any of the facilities or properties owned or leased by the Company or
the Association or in which the Company or the Association has a security
interest, except such disposal, release or discharge which would not have a
material adverse effect on the financial condition, operations, business, assets
or properties of the Company, the Association or the subsidiary, taken as a
whole.
(xxviii) All documents delivered by the Association or the Company or their
representatives in connection with the issuance and sale of the Common Stock,
except for those documents that were prepared by parties other than the
Association, the Company or their representatives, were, on the dates on which
they were delivered, true, complete and correct.
(b) Trident represents and warrants to the Company and the Association
that:
(i) Trident is registered as a broker-dealer and is in good standing
with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation, with full corporate power and
authority to provide the services to be furnished to the Company and the
Association hereunder.
(iii) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly authorized by
all necessary action on the part of Trident, and this Agreement is a legal,
valid and binding obligation of Trident, enforceable in accordance with its
terms (except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of creditors of
registered broker-dealers accounts of whose may be protected by the Securities
Investor Protection Corporation or by general equity principles, regardless of
whether such enforceability is considered in a proceeding in equity or at law,
and except to the extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or pursuant to Section 23A).
(iv) Trident and, to Trident's best knowledge, its employees, agents and
representatives who shall perform any of the services required hereunder to be
performed by Trident, shall be duly authorized and shall have all licenses,
approvals and permits necessary to perform such services, and Trident is a
registered selling agent in the jurisdictions in which the Company is relying on
such
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Trident Securities, Inc.
Page 10
registration for the sale of the Shares, and will remain so registered
until the Conversion is consummated or terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with the charter
or bylaws of Trident or violate, conflict with or constitute a breach of, or
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, any material agreement, indenture or other
instrument by which Trident is bound or under any governmental license or permit
or any law, administrative regulation, authorization, approval or order or court
decree, injunction or order.
(vi) All funds received by Trident to purchase Common Stock will be handled
in accordance with Rule 15c2-4 under the Securities Exchange Act of 1934, as
amended ("Exchange Act").
(vii) No action or proceeding against Trident before the Commission,
the NASD, any state securities commission, or any state or federal court is
pending or, to Trident's best knowledge, threatened concerning Trident's
activities as a broker-dealer.
3. Engagement of Trident; Sale and Delivery of the Shares. On the basis
------------------------------------------------------
of the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Association hereby engage
Trident as their agent to utilize its best efforts to assist the Company with
the Company's sale of the Shares in the Offerings, and Trident hereby accepts
such engagement. The engagement of Trident hereunder shall terminate (a) forty-
five (45) days after the Subscription and Community Offering closes, unless the
Company and the Association, with the approval of the OTS, are permitted to
extend such period of time, or (b) upon consummation of the Conversion,
whichever date shall first occur.
In the event the Company is unable to sell a minimum of 8,976,000 Shares
(or such lesser amount as the OTS may permit) within the period herein provided,
this Agreement shall terminate, and the Company and the Association shall refund
promptly to any persons who have subscribed for any of the Shares, the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the other party hereunder, except as set forth in Sections 6, 8, 9 and 10
hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares in special interest-bearing accounts with the
Association until all Shares are sold and paid for will be made prior to the
commencement of the Subscription and Community Offering, with provision for
prompt refund to the purchasers as set forth above, or for delivery to the
Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued
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Trident Securities, Inc.
Page 11
such Shares and to release for delivery certificates to subscribers thereof for
such Shares on the Closing Date against payment to the Company by any means
authorized pursuant to the Prospectus, at the principal office of the Company,
400 George Street, Fredericksburg, Virginia, or at such other place as shall be
agreed upon between the parties hereto. The date upon which the Company shall
release or deliver the Shares sold in the Offerings, in accordance with the
terms hereof, is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward to the Association for deposit in a segregated account the
offering price of the Common Stock ordered on or before twelve noon on the next
business day following receipt or execution of an order form by Trident or (b)
to solicit indications of interest in which event Trident will (i) subsequently
contact any potential subscriber indicating interest to confirm the interest and
give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) mail
acknowledgements of receipt of orders to each subscriber confirming interest on
the business day following such confirmation, (iii) debit accounts of such
subscribers on the third business day ("debit date") following receipt of the
confirmation referred to in (i), and (iv) forward completed order forms together
with such funds to the Association on or before twelve noon on the next business
day following the debit date for deposit in a segregated account. Trident
acknowledges that if the procedure in (b) is adopted, subscribers' funds are not
required to be in their accounts until the debit date.
Trident agrees to render to the Company and the Association the services
set forth in Exhibit A hereto. Trident shall receive the following compensation
and expense reimbursement for its services hereunder:
(a) (i) a management fee of $525,000, and (ii) a commission to be agreed
upon by Trident and the Company for Shares sold by other member firms of
the NASD through a selected dealers arrangement in the Syndicated Community
Offering, which aggregate commission shall be determined at the discretion
of the Company and the Association with the advice of Trident. All such
fees shall be paid to Trident in next-day funds on the Closing Date.
(b) Reimbursement for reasonable out-of-pocket allocable expenses,
including but not limited to travel, food, lodging and legal fees, incurred
by it whether or not the Offerings are successfully completed; provided,
however, that reimbursable legal fees will not exceed $30,000 (excluding
legal fees and expenses to comply with "blue sky" requirements) and that
other reimbursable expenses will not exceed $25,000, and, provided further,
that neither the Company nor the Association shall reimburse Trident for
any of the foregoing expenses accrued after Trident shall have notified the
Company or the Association of its election to terminate this Agreement
pursuant to Section 11 hereof or after such time as the Company or the
Association shall have given notice in accordance with Section 12
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Trident Securities, Inc.
Page 12
hereof that Trident is in breach of this Agreement. Full reimbursement of
Trident shall be made in next-day funds on the Closing Date or, if the
Conversion is not completed and is terminated for any reason, within ten
(10) business days of receipt by the Company of a written request detailing
allocable expenses from Trident for reimbursement of such expenses. Trident
acknowledges receipt of a $10,000 advance payment from the Association,
which shall be credited against the total reimbursement due Trident
hereunder. In the event this Agreement is terminated pursuant to Section 11
hereof, Trident shall be reimbursed only for its actual allocable expenses.
(c) Reimbursement for any expenses of the Company and the Association
set forth in Section 6 hereof to the extent paid by Trident on behalf of
the Company and the Association. Full reimbursement shall be made in next-
day funds on the Closing Date or, if the Conversion is not completed and is
terminated for any reason, within ten (10) business days of receipt by the
Company and the Association of a written request for such reimbursement
detailing such reimbursements.
Notwithstanding the limitations on reimbursement of Trident for its
allocable expenses provided in subsection (b) above and notwithstanding any
reimbursement of Trident pursuant to subsection (c) above, in the event that a
resolicitation or other event causes the Offerings to be extended beyond their
original expiration date the parties agree to renegotiate the expense cap on
legal fees and out-of-pocket expenses applicable to Trident.
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
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assisting the Company on a best efforts basis in offering a minimum of 8,976,000
and a maximum of 12,144,000 Shares, subject to adjustment up to 13,965,600
Shares (except as the OTS may permit to be decreased or increased) in the
Offerings. The Shares are to be offered to the public at the price set forth on
the cover page of the Prospectus and the first page of this Agreement.
5. Further Agreements. The Company and the Association jointly and
------------------
severally covenant and agree that:
(a) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus and through and including the Closing
Date, except as otherwise may be indicated or contemplated therein, neither the
Company nor the Association will issue any securities which will remain issued
at the Closing Date or incur any liability or obligation, direct or contingent,
or borrow money, except borrowings or liabilities in the ordinary course of
business consistent with past practice, or enter into any other transaction not
in the ordinary course of business and consistent with past practice, which is
material in light of the financial condition, results of operations or business
of the Company and the Association, taken as a whole.
(b) If any Shares remain unsubscribed following completion of the
Subscription Offering
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Trident Securities, Inc.
Page 13
and the Community Offering, the Company (i) will, if deemed necessary, promptly
file with the Commission a post-effective amendment to such Registration
Statement relating to the results of the Subscription and the Community
Offerings, any additional information with respect to the proposed plan of
distribution and any revised pricing information or (ii) if no such post-
effective amendment is required, will file with, or mail for filing to, the
Commission a prospectus or prospectus supplement containing information relating
to the results of the Subscription and Community Offerings and pricing
information pursuant to Rule 424(c) of the Securities Act Regulations, in either
case in a form reasonably acceptable to the Company and Trident.
(c) Upon consummation of the Conversion (including the establishment and
operation of the Foundation), the authorized, issued and outstanding equity
capital of the Company shall be within the range as set forth in the Prospectus
under the caption "Capitalization," and no Common Stock of the Company shall be
outstanding immediately prior to the Closing Date (other than shares of Common
Stock issued in connection with the initial capitalization of the Company, which
shares will be canceled upon consummation of the Conversion); and the
certificates representing the Common Stock will conform in all material respects
with the requirements of applicable laws and OTS Regulations.
(d) At all times subsequent to the date of the Prospectus through and
including the Closing Date (i) the Registration Statement and the Prospectus
will comply with the Securities Act and the Securities Act Regulations, (ii) the
Registration Statement will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and (iii) the Prospectus will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) Upon amendment of the Association's charter and bylaws as provided in
the OTS Regulations and completion of the sale and issuance of the Shares and
the issuance of the Foundation Shares by the Company as contemplated by the
Prospectus, (i) the Association will be converted pursuant to the Plan to a
federally chartered capital stock savings bank with full power and authority to
own its property and conduct its business as described in the Prospectus,
(ii) all of the authorized and outstanding capital stock of the Association will
be owned of record and beneficially by the Company, (iii) the Company will have
no direct subsidiaries other than the Association, and (iv) the Foundation will
be duly incorporated and validly existing as a non-stock corporation in good
standing under the laws of the State of Delaware.
(f) The Company shall deliver to Trident, from time to time, such number of
copies of the Prospectus as Trident reasonably may request. The Company
authorizes Trident to use the Prospectus in any lawful manner in connection with
the offer and sale of the Shares.
(g) The Company will notify Trident immediately upon discovery, and confirm
the notice
<PAGE>
Trident Securities, Inc.
Page 14
in writing, (i) when any post-effective amendment to the Registration
Statement becomes effective or any supplement to the Prospectus has been filed,
(ii) of the issuance by the Commission of any stop order relating to the
Registration Statement or of the initiation or the threat of any proceedings for
that purpose, (iii) of the receipt of any notice with respect to the suspension
of the qualification of the Shares for offering or sale in any jurisdiction, and
(iv) of the receipt of any comments from the staff of the Commission relating to
the Registration Statement. If the Commission enters a stop order relating to
the Registration Statement at any time, the Company will make every reasonable
effort to obtain the lifting of such order at the earliest possible moment.
(h) During the time when a prospectus is required to be delivered under the
Securities Act, the Company will comply with all requirements imposed upon it by
the Securities Act and by the Securities Act Regulations to permit the
continuance of offers and sales of or dealings in the Shares in accordance with
the provisions hereof and the Prospectus. If during the period when the
Prospectus is required to be delivered in connection with the offer and sale of
the Shares any event relating to or affecting the Company and the Association,
taken as a whole, shall occur as a result of which it is necessary, in the
reasonable opinion of counsel for Trident, to amend or supplement the Prospectus
in order to make the Prospectus not false or misleading in light of the
circumstances existing at the time it is delivered to a purchaser of the Shares,
the Company forthwith shall prepare and furnish to Trident a reasonable number
of copies of an amendment or amendments or of a supplement or supplements to the
Prospectus (in form and substance reasonably satisfactory to counsel for
Trident) which shall amend or supplement the Prospectus so that, as amended or
supplemented, the Prospectus shall not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances existing at the time the Prospectus is
delivered to a purchaser of the Shares, not misleading. The Company will not
file or use any amendment or supplement to the Registration Statement or the
Prospectus unless Trident has been first furnished a copy or if Trident shall
reasonably object after having been furnished such copy. For the purposes of
this subsection the Company and the Association shall furnish such information
with respect to themselves as Trident from time to time may reasonably request.
(i) The Company and the Association will take all reasonably necessary
action as may be required to qualify or register the Shares for offer and sale
by the Company under the securities or blue sky laws of such jurisdictions as
Trident and the Company or its counsel may agree upon; provided, however, that
the Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any such jurisdiction. In each jurisdiction where
such qualification or registration shall be effected, the Company, unless
Trident agrees that such action is not necessary or advisable in connection with
the distribution of the Shares, shall file and make such statements or reports
as are, or reasonably may be, required by the laws of such jurisdiction.
(j) Appropriate entries will be made in the financial records of the
Association to establish a liquidation account for the benefit of Eligible
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Trident Securities, Inc.
Page 15
Account Holders and Supplemental Eligible Account Holders (as those terms are
defined in the Plan) in accordance with the OTS Regulations.
(k) The Company will file a registration statement for the Common Stock
under Section 12(g) of the Exchange Act prior to completion of the Offerings
pursuant to the Plan and shall request that such registration statement be
effective upon completion of the Conversion. The Company shall maintain the
effectiveness of such registration for a minimum period of three years or for
such shorter period as may be required by applicable law.
(l) The Company will make generally available to its security holders as
soon as practicable, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the Securities Act Regulations) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date (as defined in said Rule 158) of the Registration
Statement.
(m) For a period of three (3) years from the date of this Agreement, the
Company will furnish to Trident, as soon as publicly available after the end of
each fiscal year, a copy of its annual report to shareholders for such year; and
the Company will furnish to Trident (i) as soon as publicly available, a copy of
each report or definitive proxy statement of the Company filed with the
Commission under the Exchange Act or mailed to shareholders, and (ii) from time
to time, such other public information concerning the Company as Trident may
reasonably request.
(n) The Company shall use the net proceeds from the sale of the Shares in
the manner set forth in the Prospectus.
(o) The Company shall not deliver the Shares and issue the Foundation
Shares until each and every condition set forth in Section 7 hereof has been
satisfied, unless such condition is waived in writing by Trident.
(p) The Company, after consultation with Trident, shall make all
determinations, if necessary, as to the allocation of deposits, in the case of
Eligible Account Holders and Supplemental Eligible Account Holders, and votes,
in the case of Other Members, and of the Shares in the event of an
oversubscription, and shall provide final instructions as to the allocation of
the Shares ("Allocation Instructions") in such event, and the Allocation
Instructions shall be accurate, reliable and complete. Trident shall be
entitled to rely on the Allocation Instructions and shall have no liability in
respect of its reliance thereon, including without limitation, no liability for
or related to any denial or grant of a subscription in whole or in part.
(q) The Company and the Association will take such actions and furnish such
information as are reasonably requested by Trident in order for Trident to
comply with the NASD's "Interpretation Relating to Free-Riding and Withholding."
(r) At the Closing Date, the Company and the Association will have
completed the
<PAGE>
Trident Securities, Inc.
Page 16
conditions precedent to, and shall have conducted the Conversion (including the
establishment and operation of the Foundation) in all material respects in
accordance with, the Plan, OTS Regulations and all other applicable laws,
regulations, published decisions and orders, including all terms, conditions,
requirements and provisions precedent imposed by the OTS.
(s) The Company will use its best efforts to obtain approval for and
maintain quotation of its shares of common stock on the Nasdaq stock market
effective on or prior to the Closing Date.
(T) THE COMPANY AND THE ASSOCIATION SHALL USE THEIR BEST EFFORTS TO ENSURE
THAT THE FOUNDATION SUBMITS WITHIN THE TIME FRAMES REQUIRED BY APPLICABLE LAW A
REQUEST TO THE INTERNAL REVENUE SERVICE TO BE RECOGNIZED AS A TAX-EXEMPT
ORGANIZATION UNDER SECTION 501(C)(3) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED; THE COMPANY AND THE ASSOCIATION WILL TAKE NO ACTION WHICH WILL RESULT
IN THE POSSIBLE LOSS OF THE FOUNDATION'S TAX-EXEMPT STATUS; AND THE COMPANY AND
THE ASSOCIATION CURRENTLY DO NOT INTEND TO CONTRIBUTE ANY ADDITIONAL ASSETS TO
THE FOUNDATION UNTIL SUCH TIME THAT SUCH ADDITIONAL CONTRIBUTIONS WILL BE
DEDUCTIBLE FOR FEDERAL AND STATE INCOME TAX PURPOSES.
6. Payment of Expenses. Subject to Section 3(c) hereof, whether or not
-------------------
the Conversion is consummated, the Company and the Association shall pay the
following expenses: (a) all regulatory filing fees, including but not limited to
those payable to the Commission, OTS, "blue sky" authorities and the NASD
(including fees payable to the NASD for Trident's filing pursuant to the NASD
Corporate Finance Rule), (b) all stock issue and transfer taxes which may be
payable with respect to the sale of the Shares, (c) attorneys' fees of the
Company and the Association, (d) attorneys' fees relating to any required "blue
sky" laws research and filings, (e) telephone charges, (f) air freight, (g)
rental equipment, (h) supplies, (i) transfer agent and registrar fees and
expenses, (j) auditing and accounting fees and expenses, (k) costs of printing
and mailing all documents necessary in connection with the Conversion, and (l)
slide production expenses in connection with any community investor meetings to
be held by Trident.
7. Conditions of Trident's Obligations. Except as may be waived in
-----------------------------------
writing by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2 hereof as of the date hereof and as of the Closing Date, to the
performance by the Company and the Association of their obligations hereunder,
and to the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinion of
Muldoon, Murphy & Faucette, special counsel for the Company and the Association,
dated the Closing Date, addressed to Trident, in form and substance reasonably
satisfactory to counsel for Trident and stating that:
(i) the Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of Virginia, and
the
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Trident Securities, Inc.
Page 17
Association is validly existing as a mutual savings and loan association
under the laws of the United States, each with full power and authority to own
its properties and conduct its business as described in the Prospectus;
(ii) the Association is a member of the Federal Home Loan Bank of Atlanta,
and the deposit accounts of the Association are insured by the SAIF up to the
applicable legal limits; and no action or proceeding to suspend or revoke such
membership or insurance coverage is pending or threatened;
(iii) the activities of the Association as described in the Prospectus
are permitted under the HOLA and OTS Regulations;
(iv) the Foundation has been duly incorporated and is validly existing as a
non-stock corporation in good standing under the laws of the State of Delaware
with corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus; the Foundation is not a
savings and loan holding company within the meaning of 12 C.F.R. Section
574.2(q) as a result of the issuance of the Foundation Shares to it in
accordance with the terms of the Plan and in the amounts as described in the
Prospectus; no approvals are required to establish the Foundation and to
contribute the Foundation Shares thereto as described in the Prospectus other
than those set forth in the OTS approval related thereto.
(v) the Company and the Association are duly qualified to do business and
are in good standing as a foreign corporation in each jurisdiction where the
ownership or leasing of its properties or the conduct of its business requires
such qualification, unless the failure to be so qualified would not have a
material adverse effect on the Company and the Association, taken as a whole.
(vi) to such counsel's knowledge, the Association has obtained all
licenses, permits and other governmental authorizations required for the conduct
of its business as described in the Prospectus, except where the failure to
obtain such licenses, permits or governmental authorizations would not have a
material adverse effect on the financial condition, results of operations or
business of the Company and the Association, taken as a whole; to such counsel's
knowledge, all of the leases and subleases material to the business of the
Association under which the Association holds properties are in full force and
effect; the Association is not in violation of its charter or bylaws;
(vii) the Plan has been duly adopted by the Boards of Directors of the
Association and the Company and the members of the Association; the Plan
complies with, and to such counsel's knowledge, the Conversion (including the
establishment and operation of the Foundation) has been effected in all material
respects in accordance with, the Plan the
<PAGE>
Trident Securities, Inc.
Page 18
HOLA, the OTS Regulations and applicable OTS approvals issued thereunder; to
such counsel's knowledge, all of the terms, conditions, requirements and
provisions with respect to the Plan and the Conversion (including the
establishment and operation of the Foundation) imposed by the OTS, except with
respect to the Conversion Application and the filing or submission of certain
required post-Conversion reports by the Company or the Association, have been
complied with by the Company and the Association; and, to such counsel's
knowledge, no person has sought to obtain regulatory or judicial review of the
final action of the OTS in approving the Plan or the creation of the Foundation;
(viii) the Company has authorized Common Stock as set forth in the
Registration Statement and the Prospectus, and the description thereof in the
Registration Statement and the Prospectus is accurate and complete in all
material respects;
(ix) the issuance and sale of the Shares and the issuance of the Foundation
Shares have been duly and validly authorized by all necessary corporate action
on the part of the Company; the Shares and the Foundation Shares, upon receipt
of consideration and issuance in accordance with the terms of the Plan and this
Agreement, will be validly issued, fully paid, nonassessable and free of
preemptive rights, and good title thereto shall be transferred by the Company
free and clear of all claims, encumbrances, security interests and liens created
by the Company;
(x) the certificates for the Common Stock are in due and proper form and
comply in all material respects with applicable Virginia law and OTS
Regulations;
(xi) the issuance and sale of the capital stock of the Association to the
Company have been duly authorized by all necessary corporate action of the
Association and have received the approval of the OTS, and such capital stock,
upon receipt of payment and issuance in accordance with the terms of the Plan,
will be validly issued, fully paid and nonassessable and owned of record and, to
the knowledge of such counsel, beneficially by the Company;
(xii) subject to the satisfaction of the conditions to the OTS approval
of the Conversion Application and the Holding Company Application, no further
approval, authorization, consent or other order of any regulatory agency is
required in connection with the execution and delivery of this Agreement, the
issuance and sale of the Shares and the Foundation Shares and the consummation
of the Conversion (including the establishment and operation of the Foundation),
except with respect to the issuance to the Association's Federal Stock Charter
by the OTS, and except as may be required under the "blue sky" securities laws
of various jurisdictions and the regulations of the NASD (as to which no opinion
need be rendered);
<PAGE>
Trident Securities, Inc.
Page 19
(xiii) the execution and delivery of this Agreement and the consummation
of the Conversion (including the establishment and operation of the Foundation)
have been duly and validly authorized by all necessary corporate action on the
part of each of the Company and the Association; and this Agreement is a legal,
valid and binding obligation of each of the Company and the Association,
enforceable in accordance with its terms (except as the enforceability thereof
may be limited by (i) bankruptcy, insolvency, moratorium, reorganization,
receivership, conservatorship or other similar laws relating to or affecting the
enforcement of creditors' rights generally or the rights of creditors of
depository institutions whose accounts are insured by the FDIC or savings and
loan holding companies the accounts of whose subsidiaries are insured by the
FDIC; (ii) general equity principles, regardless of whether such enforceability
is considered in a proceeding in equity or at law, or (iii) laws relating to the
safety and soundness of insured depository institutions and their affiliates,
and except to the extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or Section 23A of the Federal Reserve
Act, as amended);
(xiv) except as set forth in the Prospectus, there are no legal or
governmental proceedings pending or, to such counsel's knowledge, threatened
against or involving the assets of the Company or the Association which would
have a material adverse effect on the Company and the Association, taken as a
whole (provided that for this purpose such counsel need not regard any
litigation or governmental procedure to be "threatened" unless the potential
litigant or government authority has manifested to the management of the Company
or the Association, or to such counsel, a present intention to initiate such
litigation or proceeding);
(xv) the statements in the Prospectus under the captions "Regulation,"
"Federal and State Taxation," "Dividend Policy," "Restrictions on Acquisition of
the Company and the Bank," "Description of Capital Stock of the Company,"
"Description of Capital Stock of the Bank," and "The Conversion," insofar as
they are, or refer to, statements of law or legal conclusions (excluding
financial or statistical data or stock valuation information included therein,
as to which an opinion need not be expressed), have been prepared or reviewed by
such counsel and are accurate and complete in all material respects;
(xvi) the Form AC has been approved by the OTS, and the Prospectus and
the Proxy Statement have been authorized for use by the OTS; the Registration
Statement has been declared effective by the Commission; and no proceedings are
pending by or before the Commission or the OTS seeking to revoke or rescind the
orders declaring the Registration Statement effective or approving the
Conversion Application or, to such counsel's Actual Knowledge, are contemplated
or threatened;
(xvii) the execution and delivery of this Agreement and the consummation
of the Conversion (including the establishment and operation of the Foundation)
do not conflict
<PAGE>
Trident Securities, Inc.
Page 20
with or result in a breach of the charter, certificate of incorporation or
bylaws of the Company or the Association (in either mutual or stock form), or,
to such counsel's knowledge, constitute a breach of or default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
give rise to any right of termination, cancellation or acceleration contained
in, or result in the creation or imposition of any lien, charge or other
encumbrance upon, any of the properties or assets of the Company or the
Association pursuant to any of the terms, provisions or conditions of, any
material agreement, contract, indenture, bond, debenture, note, instrument or
obligation to which the Company or the Association is a party (other than the
establishment of the liquidation account pursuant to the Plan) or violate any
governmental license or permit or any law, administrative regulation or order or
court order, writ, injunction or decree (subject to the satisfaction of certain
conditions imposed by the OTS in connection with its approval of the Conversion
Application and the Holding Company Application), which breach, default,
encumbrance or violation would have a material adverse effect on the financial
condition, results of operations or business of the Company and the Association,
taken as a whole;
(xviii) there has been no breach of any provision of the Company's or
the Association's charter, certificate of incorporation or bylaws, or to such
counsel's knowledge, any breach or default (or the occurrence of any event
which, with notice or lapse of time or both, would constitute a default) by the
Company or the Association under any agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the
Association is a party or by which any of them or any of their respective assets
or properties may be bound, which breach or default would have a material
adverse effect on the financial condition, results of operations, business of
the Company and the Association, taken as a whole;
(xix) at the time the Conversion Application was approved by the OTS
and the Registration Statement was declared effective by the Commission, the
Conversion Application and the Registration Statement (including the Prospectus
and the Proxy Statement contained therein), complied as to form in all material
respects with the requirements of the Securities Act, the HOLA, the Securities
Act Regulations and the OTS Regulations, as the case may be (except as to
information provided in writing by Trident with respect to Trident included
therein and financial statements, notes to financial statements, financial
tables and other financial and statistical data and stock valuation information
included therein, as to which no opinion need be rendered); to such counsel's
knowledge, all documents and exhibits required to be filed with the Conversion
Application and the Registration Statement have been so filed and the
descriptions in the Conversion Application and the Registration Statement of
such documents and exhibits are accurate and complete in all material respects;
and
(xx) upon the effectiveness of the Association's stock charter and bylaws
in
<PAGE>
Trident Securities, Inc.
Page 21
accordance with applicable regulations and completion of the sale by the
Company of the Shares and the issuance of the Foundation Shares as contemplated
by the Prospectus and the Plan, (i) the Association will be converted to a
permanent capital stock savings association under the laws of the United States
with full power and authority to own its property and conduct its business as
described in the Prospectus, (ii) all of the outstanding capital stock of the
Association will be owned of record and, to such counsel's knowledge,
beneficially by the Company, free and clear of all liens, charges, encumbrances
and restrictions, and (iii) the Foundation will be duly incorporated and validly
existing as a non-stock corporation in good standing under the laws of the State
of Delaware.
In rendering such opinion, such counsel may rely as to certain matters of
fact on certificates of executive officers and directors of the Company and the
Association and certificates of public officials delivered pursuant hereto.
Such counsel may assume that any agreement is the valid and binding obligation
of any parties to such agreement other than the Company and the Association.
Such opinion may be governed by, and interpreted in accordance with, the Legal
Opinion Accord ("Accord") of the ABA Section of Business Law (1991). The
opinion of Muldoon, Murphy & Faucette shall cover matters of federal law,
Delaware General Business Corporation Law, and the laws of the Commonwealth of
Virginia. With respect to matters of Delaware law, such counsel may rely upon
the opinion of qualified local counsel, which opinion shall be in form and
substance satisfactory to Trident and its counsel. Such opinion may be limited
to statutes, regulations and judicial interpretations and to facts as they exist
as of the date of such opinions. In rendering such opinion, such counsel need
assume no obligation to revise or supplement it should such statutes,
regulations and judicial interpretations be changed by legislative or regulatory
action, judicial decision or otherwise. Such counsel need express no view,
opinion or belief with respect to whether any proposed or pending legislation,
if enacted, or any proposed or pending regulations or policy statements issued
by any regulatory agency, whether or not promulgated pursuant to any such
legislation, would affect the validity of the execution and delivery by the
Company and the Association of this Agreement or the issuance of the Shares and
the Foundation Shares.
(b) At the Closing Date, Trident shall receive the letter of Muldoon,
Murphy & Faucette, special counsel for the Company and the Association, dated
the Closing Date, addressed to Trident, in form and substance reasonably
satisfactory to counsel for Trident and to the effect that: (i) based on such
counsel's participation in conferences with representatives of the Company, the
Association, its counsel, the independent appraiser, the independent certified
public accountants, Trident and its counsel, review of documents and applicable
law (including the requirements of Form S-1 and Form AC) and the experience such
counsel has gained in its practice under the Securities Act (relying as to
factual matters on certificates of officers and other written factual
representations by the Company and the Association), nothing has come to such
counsel's attention that would lead it to believe that the
<PAGE>
Trident Securities, Inc.
Page 22
Registration Statement, as amended or supplemented (except as to information in
respect of Trident contained therein and except as to the financial statements,
notes to financial statements, financial tables and other financial and
statistical data and stock valuation information contained therein, as to which
such counsel need express no view), at the time it became effective contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading, and
that the Prospectus, as amended or supplemented (except as to information in
respect of Trident contained therein and except as to financial statements,
notes to financial statements, financial tables and other financial and
statistical data and stock valuation information contained therein as to which
such counsel need express no view), as of its date and at the Closing Date,
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading (in issuing such letter, such counsel
may indicate that it has not confirmed the accuracy or completeness of or
otherwise verified the factual information contained in the Registration
Statement or the Prospectus and that it does not assume any responsibility for
the accuracy or completeness thereof.)
(c) Counsel for Trident shall have been furnished such documents as they
reasonably may require for the purpose of enabling them to review or pass upon
the sale of the Shares as herein contemplated and related proceedings, and for
the purpose of evidencing the accuracy, completeness or satisfaction of any of
the representations, warranties or conditions herein contained, including but
not limited to, resolutions of the Board of Directors of the Company and the
Association regarding the authorization of this Agreement and the transactions
contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of Trident,
(i) there shall have been no material adverse change in the financial condition,
business, operations, assets or properties of the Company and the Association,
taken as a whole, since the latest date as of which such condition is set forth
in the Prospectus, except as referred to or contemplated therein; (ii) there
shall have been no transaction entered into by the Company or the Association
after the latest date as of which the financial condition of the Company or the
Association is set forth in the Prospectus other than transactions referred to
or contemplated therein, transactions in the ordinary course of business, and
transactions which are not material to the Company and the Association, taken as
a whole; (iii) none of the Company or the Association shall have received from
the OTS or Commission any directive (oral or written) to make any change in the
method of conducting their respective businesses which is material to the
business of the Company and the Association, taken as a whole, with which they
have not complied; (iv) no action, suit or proceeding, at law or in equity or
before or by any federal or state commission, board or other administrative
agency, shall be pending or threatened against the Company or the Association or
affecting any of their respective
<PAGE>
Trident Securities, Inc.
Page 23
assets, wherein an unfavorable decision, ruling or finding would have a material
adverse effect on the business, operations, financial condition or income of the
Company and the Association, taken as a whole; and (v) the Shares shall have
been qualified or registered for offering and sale by the Company under the
securities or "blue sky" laws of such jurisdictions as Trident and the Company
shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer of each of the
Company and the Association, dated the Closing Date, to the effect that: (i)
they have examined the Prospectus and, at the time the Prospectus became
authorized by the Company for use, the Prospectus did not contain an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading with respect to the Company or the Association; (ii)
no event has occurred since the date of the Prospectus which should have been
set forth in an amendment or supplement to the Prospectus which has not been so
set forth, including specifically, but without limitation, any material adverse
change in the business, financial condition, operations, assets or properties of
the Company or the Association and, the conditions set forth in clauses (ii)
through (iv) inclusive of subsection (d) of this Section 7 have been satisfied;
(iii) no order has been issued by the Commission or the OTS to suspend the
Offerings or the effectiveness of the Prospectus, and, to the best knowledge of
such officers, no action for such purposes has been instituted or threatened by
the Commission or the OTS; (iv) to the best knowledge of such officers, no
person has sought to obtain review of the final actions of the OTS approving the
Plan; and (v) all of the representations and warranties contained in Section 2
of this Agreement are true and correct, with the same force and effect as though
expressly made on the Closing Date.
(f) At the Closing Date, Trident shall receive, among other documents,
(i) copies of the letters from the OTS authorizing the use of the Prospectus and
the Proxy Statement and the establishment of the Foundation, (ii) a copy of the
order of the Commission declaring the Registration Statement effective; (iii) a
copy of the certificate from the OTS evidencing the corporate existence of the
Association; (iv) a copy of the certificate from the FDIC evidencing the insured
status of the Association, (v) a copy of the letter from the appropriate
Virginia authority evidencing the incorporation (and, if generally available
from such authority, good standing) of the Company; (vi) a copy of the Company's
certificate of incorporation certified by the appropriate Virginia governmental
authority; and (vii) a copy of the letter from the OTS approving the
Association's Federal Stock Charter.
(g) As soon as available after the Closing Date, Trident shall receive a
certified copy of the Association's Federal Stock Charter as executed by the
OTS.
(h) Concurrently with the execution of this Agreement, Trident acknowledges
<PAGE>
Trident Securities, Inc.
Page 24
receipt of a letter from Cherry, Bekaert & Holland, L.L.P., independent
certified public accountants, addressed to Trident, in substance and form
reasonably satisfactory to counsel for Trident, with respect to the financial
statements of the Association and certain financial information contained in the
Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance reasonably satisfactory to counsel for Trident from Cherry, Bekaert &
Holland, L.L.P., independent certified public accountants, dated the Closing
Date and addressed to Trident, confirming the statements made by them in the
letter delivered by them pursuant to the preceding subsection as of a specified
date not more than five (5) days prior to the Closing Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel.
Any certificates signed by an officer or director of the Company or the
Association prepared for Trident's reliance and delivered to Trident or to
counsel for Trident shall be deemed a representation and warranty by the Company
and the Association to Trident as to the statements made therein. If any
condition to Trident's obligations hereunder to be fulfilled prior to or at the
Closing Date is not so fulfilled, Trident may terminate this Agreement or, if
Trident so elects, may waive in writing any such conditions which have not been
fulfilled, or may extend the time of their fulfillment.
8. Indemnification.
---------------
(a) The Company and the Association jointly and severally agree to
indemnify and hold harmless Trident, its officers, directors and employees and
each person, if any, who controls Trident within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, against any and all
loss, liability, claim, damage and expense whatsoever and shall further promptly
reimburse such persons for any legal or other expenses reasonably incurred by
each or any of them in investigating, preparing to defend or defending against
any action, proceeding or claim (whether commenced or threatened) arising out of
or based upon (A) any untrue or alleged untrue statement of a material fact or
the omission or alleged omission of a material fact required to be stated or
necessary to make the statements, in light of the circumstances under which they
were made, not misleading in (i) the Registration Statement or the Prospectus or
(ii) any application (including the Form AC) or other document or communication
(in this Section 8 collectively called "Application") prepared or executed by or
on behalf of the Company or the Association or based upon written information
furnished by or on behalf of the Company or the Association, filed in any
jurisdiction to register or qualify the Shares under the securities laws thereof
or filed with the OTS or Commission with respect to the offering of the Shares,
unless such statement or omission was made in reliance upon and in conformity
with information furnished in writing to the Company or the Association with
respect to Trident by or on behalf of Trident expressly for use in the
Prospectus or
<PAGE>
Trident Securities, Inc.
Page 25
any amendment or supplement thereof or in any Application, as the case may be,
or (B) the Conversion (including the establishment and operation of the
Foundation) or other actions taken by Trident where acting as an agent of the
Company or the Association; provided, however, that such indemnification shall
be unavailable if such action, proceeding or claim arises as a result of
Trident's gross negligence, bad faith or willful misconduct.
(b) The Company shall indemnify and hold Trident harmless for any liability
whatsoever arising out of (i) the Allocation Instructions or (ii) any records of
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members (as those terms are defined in the Plan) delivered to Trident by the
Association or its agents for use during the Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Association, their officers, directors and employees and each person, if any,
who controls the Company and the Association within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, to the same extent as
the foregoing indemnity from the Company and the Association to Trident, but
only with respect to statements or omissions, if any, made in the Prospectus or
any amendment or supplement thereof, in any Application or to a purchaser of the
Shares in reliance upon, and in conformity with, information furnished in
writing to the Company or the Association with respect to Trident by or on
behalf of Trident expressly for use in the Prospectus or any amendment or
supplement thereof or in any Application.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of any action, proceeding or claim (whether commenced or threatened) such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party of such
action, proceeding or claim; but the omission so as to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 8. In case any such action
is brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with the other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so as to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than the
reasonable cost of investigation except as otherwise provided herein. In the
event the indemnifying party elects to assume the defense of any such action and
retain counsel acceptable to the indemnified party, the indemnified party may
retain additional counsel, but shall bear the fees and expenses of such counsel
unless (i) the indemnifying party shall have specifically authorized the
indemnified party to retain such counsel or (ii) the parties to such suit
include such indemnifying party and the indemnified party, and such indemnified
party shall have been advised by counsel that one or more material legal
defenses may be available to the indemnified party which may not be available to
the indemnifying
<PAGE>
Trident Securities, Inc.
Page 26
party, in which case the indemnifying party shall not be entitled to assume the
defense of such suit notwithstanding the indemnifying party's obligation to bear
the fees and expenses of such counsel. In no event shall the indemnifying
parties be liable for the fees and expenses of more than one separate firm of
attorneys (and any special counsel that said firm may retain) for all
indemnified parties in connection with any one action, proceeding, claim or suit
or separate but similar or related actions, proceedings or claims in the same
jurisdiction arising out of the same general allegations or circumstances. An
indemnifying party against whom indemnity may be sought shall not be liable to
indemnify an indemnified party under this Section 8 if any settlement of any
such action is effected without such indemnifying party's consent. To the extent
applicable, this Section 8 is subject to and limited by Section 23A.
9. Contribution. In order to provide for just and equitable contribution
------------
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to Trident, the Company and/or
the Association other than in accordance with its terms, the Company and the
Association or Trident shall contribute to the aggregate losses, liabilities,
claims, damages, and expenses of the nature contemplated by said indemnity
agreement incurred by the Company and the Association or Trident (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Association, on the one hand, and Trident, on the other, from
the offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above, but
also the relative fault of the Company or the Association, on the one hand, and
Trident, on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or judgments, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Association, on the one hand, and Trident, on the other,
shall be deemed to be in the same proportion as the total net proceeds from the
Conversion received by the Company and the Association bear to the total fees
received by Trident under this Agreement. The relative fault of the Company or
the Association, on the one hand, and Trident, on the other, shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Association
or by Trident and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Association and Trident agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 9, Trident
shall not be
<PAGE>
Trident Securities, Inc.
Page 27
required to contribute any amount in excess of the amount by which fees owed
Trident pursuant to this Agreement exceeds the amount of any damages which
Trident has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. To the extent applicable, this Section 9 is
subject to and limited by Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
--------------------------------------------------------
respective indemnities of the Company and the Association and Trident and the
representation and warranties of the Company and the Association and of Trident
set forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company or the Association
or any controlling person or indemnified party referred to in Section 8 hereof,
and shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Association and any such controlling persons shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
11. Termination. Trident may terminate this Agreement by giving the
-----------
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make it, in
Trident's reasonable opinion, impracticable to proceed with the offering of the
Shares; or if trading on the New York Stock Exchange shall have suspended
(except that this shall not apply to the imposition of trading collars on
program trading); or if the United States shall have become involved in a war or
major hostilities; or if a general banking moratorium has been declared by a
state or federal authority which has material effect on the Association or the
Conversion; or if a moratorium in foreign exchange trading by major
international banks or persons has been declared; or if there shall have been a
material change in the capitalization, condition or business of the Company, or
if the Association shall have sustained a material or substantial loss by fire,
flood, accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act, whether or not said loss shall have been insured; or if there
shall have been a material change in the condition or prospects of the Company
or the Association.
(b) Any party hereto may terminate this Agreement by giving notice pursuant
to Section 12 hereof of a material breach of this Agreement by the other party
at any time after this Agreement becomes effective.
(c) If this Agreement is terminated as provided in this Section 11, the
party terminating this Agreement shall notify the non-terminating party promptly
by telephone or telegram, confirmed by letter.
<PAGE>
Trident Securities, Inc.
Page 28
(d) If this Agreement is terminated by Trident for any of the reasons set
forth in subsection (a) above, and to fulfill its obligations, if any, pursuant
to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand, the Company and
the Association shall pay Trident the full amount so owing thereunder.
(e) The Association may terminate the Conversion in accordance with the
terms of the Plan. Such termination shall be without liability to any party,
except that the Company and the Association shall be required to fulfill their
obligations pursuant to Sections 3(b), 3(c), 6, 8(a), 9 and 10 of this
Agreement.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Breyer & Aguggia LLP, 1300 I Street, N.W., Suite
470 East, Washington, D.C. 20005, Attention: Paul M. Aguggia, Esquire) and if
sent to the Company or the Association, shall be mailed, delivered or
telegraphed and confirmed to Fredericksburg Savings and Loan Association, F.A.,
400 George Street, Fredericksburg, Virginia 22404, Attention: Samuel J. Harding,
Jr., President (with a copy to Muldoon, Murphy & Faucette, 5101 Wisconsin
Avenue, NW, Washington, DC 20016, Attention: Joseph A. Muldoon, Jr., Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Trident, the Company, the Association and the controlling
and other persons referred to in Section 8 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
14. Construction. Unless preempted by federal law, this Agreement shall
------------
be governed by and construed in accordance with the substantive laws of North
Carolina.
15. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
* * *
<PAGE>
Trident Securities, Inc.
Page 29
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
VIRGINIA CAPITAL BANCSHARES, INC.
By:
-----------------------------------------
Samuel J. Harding, Jr.
President and Chief Executive Officer
FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
By:
-----------------------------------------
Samuel J. Harding, Jr.
President and Chief Executive Officer
Agreed to and accepted as of
the date first written above:
TRIDENT SECURITIES, INC.
By:
-------------------------------------
Name: R. Lee Burrows, Jr.
Title: Managing Director
<PAGE>
EXHIBIT 5.1
October 29, 1998
Board of Directors
Virginia Capital Bancshares, Inc.
400 George Street
Fredericksburg, Virginia 22404
Re: The offering of up to 13,965,600 shares of
Virginia Capital Bancshares, Inc. Common Stock
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Virginia law
in connection with the conversion of Fredericksburg Savings and Loan
Association, F.A. (the "Bank"), a federally-chartered savings and loan
association, from the mutual form of ownership to a federally-chartered capital
stock savings bank to be named Fredericksburg Savings Bank (the "Conversion"),
and the related subscription offering, community offering and syndicated
community offering (the "Offerings") by Virginia Capital Bancshares, Inc., a
Virginia corporation (the "Company"), of up to 12,144,000 shares of its common
stock, par value $.01 per share ("Common Stock"), (13,965,600 shares if the
Estimated Valuation Range is increased up to 15% to reflect changes in market
and financial conditions following commencement of the Offerings) and the
issuance of 971,520 shares to Fredericksburg Savings Charitable Foundation (the
"Foundation"), a privately-owned charitable foundation formed by the Company,
(1,117,248 shares if the estimated value range is increased up to 15% to reflect
changes in market and financial conditions following commencement of the
Offerings).
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's articles of incorporation filed with the
State Corporation Commission of Virginia on September 4, 1998 (the "Articles of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on
September 11, 1998 (the "Registration Statement"); a consent of the sole
incorporator of the Company; the gift instrument whereby shares will be granted
to the Foundation; the ESOP trust agreement and the ESOP loan agreement;
resolutions of the Board of Directors of the Company (the "Board") concerning
the organization of the Company, the Offerings and designation of a Pricing
Committee of the Board, and the form of stock certificate approved by the Board
to represent shares of Common Stock. We have also been furnished a certificate
of the State Corporation Commission of Virginia certifying the Company's good
standing as a Virginia corporation. Capitalized terms used but not defined
herein shall have the meaning given them in the Articles of Incorporation.
<PAGE>
Board of Directors
Virginia Capital Bancshares, Inc.
October 29, 1998
Page 2
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP Trust will use to
purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth in paragraph 2
below, we assume that: (a) the Board of Directors of the Company has duly
authorized the loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid
corporate purpose for the Company; (c) the Loan will be made at an interest rate
and on other terms that are fair to the Company; (d) the terms of the Loan will
be set forth in customary and appropriate documents including, without
limitation, a promissory note representing the indebtedness of the ESOP Trust to
the Company as a result of the Loan; and (e) the closing for the Loan and for
the sale of Common Stock to the ESOP Trust will be held after the closing for
the sale of the other shares of Common Stock sold in the Offerings and the
receipt by the Company of the proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Virginia law, it is our opinion that:
1. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP Trust) and the shares to be granted to a charitable foundation to be
established by the Company in connection with the Conversion will be duly
authorized and, when such shares are sold and paid for or granted (in the case
of the Foundation) in accordance with the terms set forth in the Prospectus and
such resolution of the Pricing Committee, and certificates representing such
shares in the form provided to us are duly and properly issued, will be validly
issued, fully paid and nonassessable.
The following provisions of the Articles of Incorporation may not be given
effect by a court applying Virginia law, but in our opinion the failure to give
effect to such provisions will not affect the duly authorized, validly issued,
fully paid and nonassessable status of the Common Stock:
1. (a) Subsections D.3 and D.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply
the provisions of those Articles, subsection D.4 of Article
FOURTH, to the extent that subsection obligates any person to
provide to the Board the information such subsection authorizes
the Board to demand, subsection D.1 of Article FOURTH, to the
extent that subsection limits the amount of shares of Common
Stock a stockholder may vote, and the provision of Subsection D.7
of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent,
<PAGE>
Board of Directors
Virginia Capital Bancshares, Inc.
October 29, 1998
Page 3
if any, that a court applying Virginia law were to impose
equitable limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-1 and the Form AC and to the use of the name of our firm
where it appears in the Registration Statement, Form AC and Prospectus.
Very truly yours,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 8.1
October 29, 1998
Board of Directors
Virginia Capital Bancshares, Inc.
408 George Street
Fredericksburg, Virginia 22401-5816
Board of Directors
Fredericksburg Savings and Loan Association, F.A.
408 George Street
Fredericksburg, Virginia 22401-5816
Re: Certain Federal Tax Consequences of the Conversion of Fredericksburg
Savings and Loan Association, F.A. from a federally chartered Mutual
Savings and Loan Association to a federally chartered Stock Savings
Bank and the Offer and Sale of Common Stock of Virginia Capital
Bancshares, Inc. (the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax consequences of
the proposed conversion of Fredericksburg Savings and Loan Association, F.A.
(the "Association") from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank to be known as
Fredericksburg Savings Bank (the "Converted Bank") and the acquisition
of the Converted Bank's capital stock by Virginia Capital Bancshares, Inc., a
Virginia corporation (the "Holding Company"), pursuant to the plan of conversion
adopted by the Board of Directors on July 14, 1998 (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE>
Board of Directors
October 29, 1998
Page 2
We have made such inquiries and have examined such documents and records as
we have deemed appropriate for the purpose of this opinion. In rendering this
opinion, we have received certain standard representations of the Holding
Company and the Association concerning the Holding Company and the Association
as well as the transaction ("Representations"). These Representations are
required to be furnished prior to the execution of this letter and again prior
to the closing of the Conversion. We will rely upon the accuracy of the
Representations of the Holding Company and the Association and the statements of
facts contained in the examined documents, particularly the Plan of Conversion.
We have also assumed the authenticity of all signatures, the legal capacity of
all natural persons and the conformity to the originals of all documents
submitted to us as copies. Each capitalized term used herein, unless otherwise
defined, has the meaning set forth in the Plan of Conversion. We have assumed
that the Conversion will be consummated strictly in accordance with the terms of
the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed description of
the Conversion. These documents as well as the Representations to be provided
by the Holding Company and the Association are incorporated in this letter as
part of the statement of the facts.
Fredericksburg Savings and Loan Association, F.A., with an administrative
office in Fredericksburg, Virginia, is a federally chartered mutual savings and
loan association. As a mutual savings and loan association, the Association has
never been authorized to issue stock. Instead, the proprietary interest in the
reserves and undivided profits of the Association belong to the deposit account
holders of the Association, hereinafter sometimes referred to as "depositors." A
depositor of the Association has a right to share, pro rata, with respect to the
withdrawal value of his respective deposit account in any liquidation proceeds
distributed in the event the Association is ever liquidated. In addition, a
depositor of the Association is entitled to interest on his account balance as
fixed and paid by the Association.
In order to provide organizational and economic strength to the
Association, the Board of Directors has adopted the Plan of Conversion whereby
the Association will convert itself into a federally chartered stock savings
bank (the "Converted Bank"), the stock of which will be held entirely by the
Holding Company. Assuming that the Holding Company form of organization is
utilized, the Holding Company will acquire the stock of the Converted Bank by
purchase, in exchange for the Conversion proceeds that are not permitted to be
retained by the Holding Company. The Holding Company will apply to the Office
of Thrift Supervision ("OTS") to retain up to 50% of the proceeds received from
the Conversion. The aggregate sales price of the Common Stock issued in the
Conversion will be based on an independent appraiser's valuation of the
estimated pro forma market value of the Common Stock of the Converted Bank. The
Conversion and sale of the Common Stock will be subject to approval by the OTS
and the approval of the Voting Members.
<PAGE>
Board of Directors
October 29, 1998
Page 3
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Converted Bank shall establish
at the time of Conversion a liquidation account in an amount equal to its net
worth as of the latest practicable date prior to Conversion. The liquidation
account will be maintained by the Converted Bank for the benefit of the Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
maintain their Savings Accounts at the Converted Bank. Each Eligible Account
Holder and Supplemental Eligible Account Holder shall, with respect to his
Savings Account, hold a related inchoate interest in a portion of the
liquidation account balance, in relation to his Savings Account balance on the
Eligibility Record Date and/or Supplemental Eligibility Record Date or to such
balance as it may be subsequently reduced, as provided in the Plan of
Conversion.
In the unlikely event of a complete liquidation of the Converted Bank (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the Converted
Bank's capital stock. No merger, consolidation, purchase of bulk assets with
assumption of Savings Accounts and other liabilities, or similar transaction
with an FDIC institution, in which the Converted Bank is not the surviving
institution, shall be deemed to be a complete liquidation for this purpose. In
such transactions, the liquidation account shall be assumed by the surviving
institution.
ESTABLISHMENT OF FOUNDATION. As part of the Conversion, the Company and
the Converted Bank intend to establish a charitable foundation (the
"Foundation") that will qualify as an exempt organization under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and to
donate to the Foundation up to 8.0% of the number of shares of Common Stock sold
in the Conversion. The establishment and funding of the Foundation as part of
the Conversion is subject to the approval of the Voting Members of the Converted
Bank at the Special Meeting of Members. In the event that the Foundation does
not receive the prerequisite approval, the Association may determine to complete
the Conversion without the Foundation.
The Plan of Conversion provides that the Foundation is being formed to
further the Converted Bank's long term commitment to its community. The Plan of
Conversion states that the Foundation is intended to complement the Converted
Bank's existing community reinvestment activities so as to allow the local
community to share in the growth and profitability of the Holding Company and
the Converted Bank over the long term.
The Foundation will be dedicated to the promotion of charitable and
educational purposes within the Converted Bank's Local Community, including, but
not limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-
<PAGE>
Board of Directors
October 29, 1998
Page 4
for-profit community groups and other types of organizations or civic minded
projects. The Foundation will annually distribute total grants and donations to
assist charitable organizations or to fund projects within its local community
of not less than 5% of the average fair value of the Foundation assets each
year.
* * *
You have provided the following representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account of the Converted Bank to be
constructively received under the Plan of Conversion will, in each
instance, be equal to the fair market value of the withdrawable
deposit accounts (plus the related interest in the residual equity of
the Converted Bank) deemed to be surrendered in exchange therefor.
(b) If an individual's total deposits in the Association equal or exceed
$50 as of the Eligibility Record Date or the Supplemental Eligibility
Record Date, then no amount of that individual's total deposits will
be excluded from participating in the liquidation account. The fair
market value of the deposit accounts of the Association which have a
balance of less than $50 on the Eligibility Record Date or the
Supplemental Eligibility Record Date will be less than 1% of the total
fair market value of all deposit accounts of the Association.
(c) Immediately following the Conversion, the Eligible Account Holders and
the Supplemental Eligible Account Holders of the Converted Bank will
own all of the outstanding interests in the liquidation account and
will own such interest solely by reason of their ownership of deposits
in the Association immediately before the Conversion.
(d) After the Conversion, the Converted Bank will continue the business of
the Association in the same manner as prior to the Conversion. The
Converted Bank has no plan or intention and the Holding Company has no
plan or intention to cause the Converted Bank to sell its assets other
than in the ordinary course of business.
(e) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the Converted Bank other than in the
ordinary course of business.
<PAGE>
Board of Directors
October 29, 1998
Page 5
(f) The Holding Company and the Converted Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Stock
issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities of the
Converted Bank will be identical to the assets and liabilities of the
Association immediately prior to the Conversion, plus the net proceeds
from the sale of the Converted Bank's common stock to the Holding
Company and any liability associated with indebtedness incurred by the
Employee Plans in the acquisition of Common Stock by the Employee
Plans.
(h) The Association, Converted Bank and the Holding Company are
corporations within the meaning of section 7701(a)(3) of the Internal
Revenue Code.
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Association in the Conversion will be
issued or acquired at a discount. However, shares may be given to
certain Directors and employees as compensation by means of the
Employee Plans. Compensation to be paid to such Directors and
depositor-employees will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
(j) The fair market value of the assets of the Association, which will be
transferred to the Converted Bank in the Conversion, will equal or
exceed the sum of the liabilities of the Association which will be
assumed by the Converted Bank and any liabilities to which the
transferred assets are subject.
(k) The Association is not under the jurisdiction of a bankruptcy or
similar court in any Title 11 or similar case within the meaning of
section 368(a)(3)(A) of the Internal Revenue Code.
(l) Upon the completion of the Conversion, the Holding Company will own
and hold 100% of the issued and outstanding capital stock of the
Converted Bank and no other shares of capital stock of the Converted
Bank will be issued and/or outstanding. At the time of the
Conversion, the Association does not have any plan or intention to
issue additional shares of its stock following the transaction.
Further, no shares of preferred stock of the Converted Bank will be
issued and/or outstanding.
(m) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital
<PAGE>
Board of Directors
October 29, 1998
Page 6
stock of the Converted Bank, nor will there be any securities
outstanding which are convertible into the capital stock of the
Converted Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
(o) The Association has utilized a reserve for bad debts in accordance
with section 593 and, following the Conversion, to the extent allowed
under the Code, the Converted Bank shall maintain a reserve for bad
debts in accordance with the applicable provisions of the Internal
Revenue Code.
(p) The Association currently satisfies the 60% "qualified assets" test of
section 7701(a)(19) of the Internal Revenue Code. Management expects
the Converted Bank to be able to continue to satisfy the test in the
future. The Converted Bank will also satisfy the "qualified thrift
lender" tests set out in sections 301 and 303 of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989.
(q) Depositors will pay the expenses of the Conversion solely applicable
to them, if any. The Holding Company and the Association will each
pay expenses of the transaction attributable to them and will not pay
any expenses solely attributable to the depositors or to the Holding
Company shareholders.
(r) The exercise price of the subscription rights received by the
Association's Eligible Account Holders, Supplemental Eligible Account
Holders, and other holders of subscription rights to purchase Holding
Company Common Stock will be equal to the fair market value of the
stock of the Holding Company at the time of the completion of the
Conversion as determined by an independent appraisal.
(s) The proprietary interests of the Eligible Account Holders and the
Supplemental Eligible Account Holders in the Association arise solely
by virtue of the fact that they are account holders in the
Association.
(t) There is no plan or intention for the Converted Bank to be liquidated
or merged with another corporation following this proposed
transaction.
(u) The liabilities of the Association assumed by the Converted Bank plus
the liabilities, if any, to which the transferred assets are subject
were incurred by the Association in the ordinary course of its
business and are associated with the assets transferred.
<PAGE>
Board of Directors
October 29, 1998
Page 7
(v) The Association currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to future tax
years. The Association has neither generated nor carried forward a
net operating loss for federal tax purposes in the past ten tax years.
LIMITATIONS ON OPINION
----------------------
Our opinions expressed herein are based solely upon current provisions of
the Internal Revenue Code of 1986, as amended, including applicable regulations
thereunder and current judicial and administrative authority. Any future
amendments to the Code or applicable regulations, or new judicial decisions or
administrative interpretations, any of which could be retroactive in effect,
could cause us to modify our opinion. No opinion is expressed herein with
regard to the federal, state, or city tax consequences of the Conversion under
any section of the Code except if and to the extent specifically addressed.
FEDERAL TAX OPINION
-------------------
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level other
than changes in the form of organization will be insubstantial. Based
upon that fact and the fact that the equity interest of a depositor in
a mutual savings and loan association is more nominal than real,
unlike that of a shareholder of a corporation, the Conversion of the
Association from a mutual savings and loan association to a stock
savings bank is a tax-free reorganization since it is a mere change in
identity, form or place of organization within the meaning of section
368(a)(1)(F) of the Code (see Rev. Rul. 80-105, 1980-1 C.B. 78).
Neither the Association nor the Converted Bank shall recognize gain or
loss as a result of the Conversion. The Association and the Converted
Bank shall each be "a party to a reorganization" within the meaning of
section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money from the
Holding Company in exchange for shares of the Converted Bank's capital
stock or by the Holding Company upon the receipt of money from the
sale of its Common Stock (Section 1032(a) of the Code).
<PAGE>
Board of Directors
October 29, 1998
Page 8
(3) The basis of the assets of the Association in the hands of the
Converted Bank shall be the same as the basis of such assets in the
hands of the Association immediately prior to the Conversion (Section
362(b) of the Code).
(4) The holding period of the assets of the Association in the hands of
the Converted Bank shall include the period during which the
Association held the assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account Holders
and the Supplemental Eligible Account Holders of the Association on
the issuance to them of withdrawable deposit accounts in the Converted
Bank plus interests in the liquidation account of the Converted Bank
in exchange for their deposit accounts in the Association or to the
other depositors on the issuance to them of withdrawable deposit
accounts (Section 354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no
gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them of
the nontransferable subscription rights to purchase shares of stock in
the Holding Company (Section 356(a)). Gain realized, if any, by the
Eligible Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription rights to
purchase shares of Common Stock will be recognized but only in an
amount not in excess of the fair market value of such subscription
rights (Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription
rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be received
by the Eligible Account Holders, Supplemental Eligible Account Holders
and other depositors of the Association will be the same as the basis
of their deposit accounts in the Association surrendered in exchange
therefor (Section 358(a)(1) of the Code). The basis of the interests
in the liquidation account of the Converted Bank to be received by the
Eligible Account Holders and Supplemental Eligible Account Holders of
the Association shall be zero (Rev. Rul. 71-233, 1971-1 C.B. 113). The
basis of the Holding Company Common Stock to its stockholders will be
the purchase price thereof plus the basis, if any, of nontransferable
subscription rights (Section 1012 of the Code). Accordingly, assuming
the nontransferable subscription rights have no value, the basis of
the Common Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor. The holding
period of the
<PAGE>
Board of Directors
October 29, 1998
Page 9
Common Stock purchased pursuant to the exercise of subscription rights
shall commence on the date on which the right to acquire such stock
was exercised (Section 1223(6) of the Code).
Our opinion under paragraph (6) above is predicated on the representation
that no person shall receive any payment, whether in money or property, in lieu
of the issuance of subscription rights. Our opinion under paragraphs (6) and (7)
above assumes that the subscription rights to purchase shares of Common Stock
received by Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members have a fair market value of zero. We understand that you have
received a letter from FinPro, Inc. that the subscription rights do not have any
value. We express no view regarding the valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause
us to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form AC
and Form S-1 Registration Statement of Virginia Capital Bancshares, Inc. and the
references to and summary of this opinion in such Form AC and Form S-1
Registration Statement.
Sincerely,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
Exhibit 8.2
[LETTERHEAD OF CHERRY, BEKAERT & HOLLAND, L.L.P. APPEARS HERE]
October 29, 1998
Board of Directors
Fredericksburg Savings and Loan Association, F.A.
Fredericksburg, Virginia
RE: HOLDING COMPANY FORMATION AND STOCK ISSUANCE
--------------------------------------------
Ladies and Gentlemen:
We have been requested to express our opinion concerning the Virginia
income tax consequences relating to the proposed conversion of Fredericksburg
Savings and Loan Association, F.A. (the "Bank") from a federally chartered
mutual savings and loan association to a federally chartered stock savings bank
to be known as Fredericksburg Savings Bank, F.S.B. (the "Converted Bank"), and
the formation of a holding company to be known as Virginia Capital Bancshares,
Inc. (the "Holding Company"), which will acquire the outstanding stock of the
Converted Bank.
You have submitted to us a copy of the Federal income tax opinion ("Federal
Opinion") relating to the federal income tax consequences of the proposed
transaction prepared by your counsel, Muldoon, Murphy & Faucette of Washington,
D.C.
Our opinion regarding the Virginia income tax consequences of the proposed
transaction is based on the same facts and conditions contained in the Federal
Opinion dated October 29, 1998. It is also based on existing Virginia tax law
which is subject to change. We have not reviewed the legal documents necessary
to effectuate the steps to be undertaken, and we assume that all steps will be
properly effectuated under state and Federal law and will be consistent with the
legal documentation.
In our opinion, the Virginia income tax consequences of the proposed
transaction are the same as the federal income tax consequences of the proposed
transaction identified in the Federal Opinion.
The State of Virginia has adopted federal taxable income, as currently
amended, as the starting point for computing Virginia taxable income. Income
tax terms are defined in relation to the Internal Revenue Code of 1986, as
amended [Code of Virginia, Sec. 58.1-402(A)]. Taxpayers are required to use the
same taxable year and accounting methods as are used in computing federal
taxable income [Code of Virginia, Sec. 58.1-440(A)].
<PAGE>
Board of Directors
Fredericksburg Savings and Loan Association
October 29, 1998
Page 2
Several specific modifications to Federal taxable income are enumerated in
the Code of Virginia in determining taxable income for Virginia purposes;
however, there are no specific modifications which apply to the proposed
transaction.
Our opinion as expressed above is rendered only with respect to the
Virginia income tax consequences of the specific matters discussed herein, and
we express no opinion with respect to any other Virginia income tax matter or
any other Federal, state, local or foreign tax matter relating to the proposed
transaction. Our opinion is based on the facts and conditions as stated herein,
whether directly or by reference to the Federal Opinion. If any of the
foregoing is not entirely complete or accurate, it is imperative that we be
informed immediately, as the inaccuracy or incompleteness could have a material
effect on our conclusions. In rendering our opinion, we are relying upon the
relevant provisions of the Internal Revenue Code of 1986, as amended, and Code
of Virginia, as amended, the regulations and rules thereunder and judicial and
administrative interpretations thereof, which are subject to change or
modifications by subsequent legislative, regulatory, administrative, or judicial
decisions. Any such changes could also have an effect on the validity of our
opinion. We undertake no responsibility to update or supplement our opinion.
Our opinion is not binding on the Internal Revenue Service or the Virginia
Department of Taxation, nor can any assurance be given that any of the foregoing
parties will not take a contrary position or that our opinion will be upheld if
challenged by such parties.
CHERRY, BEKAERT & HOLLAND, L.L.P.
/s/ Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
<PAGE>
Exhibit 23.1
[LETTERHEAD OF CHERRY, BEKAERT & HOLLAND, L.L.P. APPEARS HERE]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Fredericksburg Savings and Loan Association, F.A.
Fredericksburg, VA
We consent to the use in this pre-effective amendment no. 1 to the Registration
Statement on Form S-1 and to the Application for Conversion on Form AC of our
report dual dated January 29, 1998 and August 14, 1998, relating to the balance
sheets of Fredericksburg Savings and Loan Association, F.A., as of December 31,
1997 and December 31, 1996, and the related statements of income, comprehensive
income, changes in equity capital and cash flows for each of the years in the
three year period ended December 31, 1997, and to the reference to our Firm
under the caption "Experts" in the Prospectus, which is part of the Registration
Statement.
/s/ Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
October 29, 1998
