<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File No.: 0-25031
VIRGINIA CAPITAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1913168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 George Street, Fredericksburg, Virginia 22404
(Address of principal executive offices)
Registrant's telephone number, including area code: (540) 899-5500
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $144,251,500, based upon the last sales price of $12.875
as quoted on the Nasdaq National Market for March 1, 1999. Solely for purposes
of this calculation, the shares held by the directors and officers of the
registrant are deemed to be held by affiliates.
The number of shares outstanding of the registrant's Common Stock as of
March 1, 1999 was 11,404,800.
<PAGE>
INDEX
Part I
Page
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 29
Item 3. Legal Proceedings.............................................. 30
Item 4. Submission of Matters to a Vote of Securities Holders.......... 30
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 30
Item 6. Selected Financial Data........................................ 31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 33
Item 7A. Quantitative and Qualitative Disclosure about Market Risk...... 46
Item 8. Financial Statements and Supplementary Data.................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................... 47
Part III
Item 10. Directors and Executive Officers of the Registrant............. 47
Item 11. Executive Compensation......................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management. 53
Item 13. Certain Relationships and Related Transactions................. 54
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 55
Signatures............................................................... 56
<PAGE>
PART I
Item 1. BUSINESS OF THE COMPANY
General
Virginia Capital Bancshares, Inc. (the "Company"), was formed on September
4, 1998 as the holding company for Fredericksburg Savings Bank (the "Bank") in
connection with the conversion of the Bank from mutual to stock form of
ownership on December 23, 1998. The Company is headquartered in Fredericksburg,
Virginia and its principal business currently consists of the operations of the
Bank. The Company, as a savings and loan holding company, and the Bank are
subject to the regulation of the Office of Thrift Supervision ("OTS"), the
Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). The Company is listed on the Nasdaq Stock Market under the
symbol "VCAP". The Company does not transact any material business other than
through its subsidiary, the Bank.
The Bank is a community oriented savings bank 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 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.
3
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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 purchasers of new homes 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 December 31,
1998, gross loans totalled $431.3 million, of which $365.3 million, or 84.71%
were one- to four-family, residential mortgage loans and home equity loans. At
such date, the remainder of the loan portfolio consisted of: $33.1 million of
non-residential loans, including church loans totalling $12.1 million, or 7.68%
of total loans; $19.3 million of construction and development loans, including
unadvanced loan amounts, or 4.47% of total loans; $1.2 million of land and land
development loans or .27% of total loans; $3.3 million of multi-family loans, or
.77% of total loans; and $9.1 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.
4
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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,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------- -------- ------ -------- ------ -------- ------ -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family (1).. $365,296 84.71% $358,561 83.19% $345,799 80.94% $329,589 79.69% $312,933 79.09%
Multi-family............. 3,335 0.77 3,455 0.80 3,453 0.81 2,340 0.57 4,407 1.11
Non-residential real
estate(2).................. 33,117 7.68 40,951 9.50 44,528 10.42 44,520 10.77 39,950 10.10
Land and land development.. 1,175 0.27 3,091 0.72 4,136 0.97 6,398 1.55 4,375 1.12
Construction and
development............... 19,295 4.47 16,046 3.72 21,285 4.98 23,545 5.69 27,259 6.89
-------- ------- -------- ------- -------- ------- -------- -------- -------- ------
Total mortgage loans... 422,218 97.90 422,104 97.93 419,201 98.12 406,392 98.27 388,924 98.31
-------- ------- -------- ------- -------- ------- -------- -------- -------- ------
Consumer and other loans... 9,065 2.10 8,913 2.07 8,046 1.88 7,159 1.73 6,601 1.69
-------- ------- -------- ------- -------- ------- -------- -------- -------- ------
Total loans.................. 431,283 100.00% 431,017 100.00% 427,247 100.00% 413,551 100.00% 395,525 100.00%
======= ======= ======= ======== ======
Less:
Participating interests.... 2,958 4,217 5,450 6,543 8,126
Undisbursed loan funds..... 7,206 4,978 8,064 8,132 7,829
Unearned discounts and
deferred loan fees........ 3,644 3,312 3,045 2,855 2,764
Allowance for loan losses.. 5,684 5,478 5,543 5,480 5,537
-------- -------- -------- -------- --------
Loans receivable, net...... $411,791 $413,032 $405,145 $390,541 $371,269
======== ======== ======== ======== ========
</TABLE>
- ----------------------
(1) Includes home equity lines of credit.
(2) Includes 35 loans to local churches totalling $12.1 million at December 31,
1998.
5
<PAGE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loans at December 31, 1998. The table does not include
the effect of future principal prepayments.
<TABLE>
<CAPTION>
At December 31, 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......... $ 2,802 $ -- $ -- $ 19,295(1) $ 6 $2,106 $ 24,209
After one year:
More than one year to
three years............ 2,528 -- 87 -- 16 2,916 5,547
More than three years
to five years.......... 6,592 -- 173 -- 128 3,239 10,132
More than five years to
ten years.............. 54,353 771 7,044 -- 329 660 63,157
More than ten years to
twenty years........... 147,911 962 20,109 -- 628 144 169,754
More than twenty years.. 151,110 1,602 5,704 -- 68 -- 158,484
-------- -------- -------- ----------- ------- ------ --------
Total amount due..... $365,296 $3,335 $33,117 $ 19,295 $1,175 $9,065 $431,283
======== ======== ======= =========== ====== ====== ========
</TABLE>
<TABLE>
<S> <C>
Less:
Participating interests................................................................................................. 2,958
Undisbursed loan funds.................................................................................................. 7,206
Unearned discounts and
deferred loan fees..................................................................................................... 3,644
Allowance for loan losses................................................................................................ 5,684
-------
Loans, net................................................................................................................ 411,791
========
</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 December 31, 1998, the dollar amount of
loans contractually due after December 31, 1999 and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1999
------------------------------------
Fixed Adjustable Total
------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family.................................... 274,013 88,482 362,495
Multi-family........................................... 1,882 1,453 3,335
Non-residential........................................ 20,189 12,928 33,117
Construction and development........................... -- -- --
Land and land development.............................. 698 471 1,169
------- -------- -------
Total real estate loans................................ 296,782 103,334 400,116
Consumer and other loans................................. 5,600 1,358 6,958
------- ------- -------
Total loans.............................................. 302,382 104,692 407,074
======= ======= =======
</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 Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("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.
6
<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, 1998, 1997 and 1996, the Bank
originated $117.9 million, $85.1 million and $55.7 million of one- to four-
family mortgage loans, respectively, all of which were retained by the Bank. On
January 1, 1996, the Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 122, as amended by SFAS No. 125, which provides for the recognition
of servicing rights as assets by the Bank. For the years ended December 31,
1998 and 1997, the presentation of the servicing assets was not material to the
Bank's financial position and were not recognized in the financial statements.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Mortgage loans (gross):
Beginning balance....................................................... $ 422,104 $ 419,201 $406,392
Mortgage loans originated:
One- to four-family................................................... 117,959 85,099 55,724
Multi-family.......................................................... -- -- 1,440
Non-residential real estate........................................... 491 1,763 2,384
Construction and development.......................................... 18,424 19,333 21,772
Land and land development............................................. -- -- 503
---------- ---------- ---------
Total mortgage loans originated..................................... 136,874 106,195 81,823
Transfer of mortgage loans to foreclosed real estate.................. (727) (937) (4,815)
Principal repayments.................................................. (136,033) (102,355) (64,199)
---------- ---------- ---------
Ending balance........................................................ $ 422,218 $ 422,104 $419,201
========== ========== =========
Consumer and other loans (gross):
Beginning balance....................................................... $ 8,913 $ 8,046 $ 7,159
Consumer and other loans originated................................... 6,809 6,323 6,130
Principal repayments.................................................. (6,657) (5,456) (5,243)
---------- --------- --------
Ending balance........................................................ $ 9,065 $ 8,913 $ 8,04
========== ========= ========
</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 December 31, 1998, the Bank's one-
to four-family mortgage loans totalled $365.3 million, or 84.71%, of total
loans. Of the one- to four-family mortgage loans outstanding at that date,
75.76% were fixed-rate mortgage loans and 24.24% 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 did not
purchase any mortgage loans during 1998.
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
7
<PAGE>
the potential for default. However, as of December 31, 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 December 31, 1998, the Bank had $2.7
million, or .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 35 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 December 31, 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.
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.
8
<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.
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 December 31, 1998 amounted to
$9.1 million, or 2.10%, 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 December 31,
1998, the Bank had 19 consumer loans 90 days or more delinquent, whose balances
totalled $91,000.
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 of $500,000 and
above. 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
9
<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 Classification of Assets 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 December 31, 1998, the Bank
had $7.1 million, or 1.23% of total assets, designated as Substandard. At such
date, no assets were classified as Doubtful or Loss (in accordance with OTS
regulations). As of December 31, 1998, the Bank had a total of $1.2 million, or
0.21% of total assets, classified loans designated as Special Mention. At
December 31, 1998, all of the Bank's classified and Special Mention assets
totalled $8.3 million, representing 1.92% of loans.
10
<PAGE>
The following table sets forth the delinquencies in the Bank's loan portfolio
as of the dates indicated.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
--------------------------------------------------------------------------------------------------
60-89 Days 90 Days or More 60-89 Days or More 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...... 16 $1,206 21 $1,342 13 $ 841 31 $1,596
Multi-family............. -- -- -- -- -- -- -- --
Non-residential real 1 200 -- -- -- -- 1 488
estate..................
Construction and -- -- 1 44 -- -- 3 604
development.............
Land and land development -- -- -- -- -- -- 1 1
---- ------ ---- ------ -------- ----- ---- ------
Total mortgage loans... 17 1,406 22 1,386 13 841 36 2,689
Consumer and other loans... 9 66 19 91 15 87 33 111
---- ------ ---- ------ -------- ----- ---- ------
Total loans................ 26 $1,472 41 $1,477 28 $ 928 69 $2,800
==== ====== ===== ====== ======== ===== ==== ======
Delinquent loans to total
loans..................... 0.39% 0.34% 0.61% 0.34% 0.41% 0.22% 1.01% 0.65%
==== ====== ==== ====== ======== ===== ==== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------
60-89 Days 90 Days or More
-------------------------- -----------------------
Principal Principal
Number Balance Number Balance
of Loans of Loan of Loans of Loan
-------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family....................................... 17 $1,578 74 $3,827
Multi-family.............................................. -- -- 2 389
Non-residential real 2 516 3 710
estate...................................................
Construction and -- -- 4 839
development..............................................
Land and land development................................. 1 301 1 37
---- ------ ---- ------
Total mortgage loans.................................... 20 2,395 84 5,802
Consumer and other loans................................... 13 111 32 343
---- ------ ---- ------
Total loans................................................. 33 $2,506 116 $6,145
==== ====== ==== ======
Delinquent loans to total
loans...................................................... 0.49% 0.59% 1.71% 1.44%
==== ====== ==== ======
</TABLE>
11
<PAGE>
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and REO. At December 31, 1998, the Bank
had $1.2 million of REO net of a valuation allowance. It is the policy of the
Bank to cease accruing interest on loans 90 days or more past due and to charge-
off all accrued interest. The Bank does, however, continue accruing interest on
loans 90 days or more past due that are in the process of being renewed or
extended. 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
December 31, 1998 is in process of collection. For the years ended December 31,
1998, 1997 and 1996, no interest income was recorded on non-accrual loans. For
the years ended December 31, 1998, 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
$111,000, $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 $8.0 million that met the definition of
impaired loans, per SFAS 114 at December 31, 1998. This compares to $9.8
million and $11.9 million for December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------- ------ --------
<S> <C> <C> <C> <C> <C>
Non-accrual loans(1):
Mortgage loans:
One- to four-family..................... $3,227 $3,282 $ 5,366 $3,959 $ 5,211
Non-residential real estate............. 1,026 1,163 1,920 1,389 3,634
Construction and development............ -- -- 774 529 84
Land and development.................... 349 493 558 653 1,332
Consumer and other loans.................. 118 136 135 269 284
------ ------ ------- ------ ---------
Total non-accrual loans................. 4,720 5,074 8,753 6,799 10,545
Loans 90 days or more past due and accruing:
Construction and development........... 202 -- 65 -- --
------ ------ ------- ------ ---------
Land and land development.............. -- 482 138 -- --
Total accruing loans 90 days
or more past due.................. 202 482 203 -- --
------ ------ ------- ------ ---------
Total non-performing loans............. 4,922 5,556 8,956 6,799 10,545
Total foreclosed real estate................ 1,177 1,959 1,611 2,135 1,082
------ ------ ------- ------ ---------
Total non-performing assets................. $6,099 $7,515 $10,567 $8,934 $11,627
====== ====== ======= ====== =========
Restructured loans.......................... $2,756 $3,660 $ 2,546 $3,768 $ 2,239
====== ====== ======= ====== =========
Non-performing loans to
total loans............................... 1.14% 1.29% 2.10% 1.64% 2.67%
====== ====== ======= ====== =======
Non-performing assets
to total assets........................... 1.06% 1.59% 2.25% 1.91% 2.58%
====== ====== ======= ====== =======
</TABLE>
- ----------------------------
(1) Loans are presented before allowance for loan losses.
12
<PAGE>
Restructured loans totalled $2.8 million at December 31, 1998. Restructured
loans include loans that were modified while delinquent. Although the original
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. Three restructured
loans are currently not performing in accordance with their terms. There can be
no assurance that the remaining 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
December 31, 1998, the Bank's allowance for loan losses was 1.38% of net loans
as compared to 1.33% as of December 31, 1997. The Bank had non-performing loans
of $4.9 million and $5.6 million at December 31, 1998 and 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.
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 Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $ 5,478 $5,543 $5,480 $5,537 $5,355
Provision for loan losses.................. 461 375 325 412 1,010
Charge-offs:
Mortgage loans:
One- to four-family.................... (185) (260) (244) (17) (197)
Non-residential real estate............ -- -- -- -- (619)
Construction and development........... (5) (148) -- (469) --
Consumer loans........................... (70) (32) (19) (3) (12)
------- ------ ------ ------ ------
Total charge-offs.................... (260) (440) (263) (489) (828)
Recoveries................................. 5 -- 1 20 --
------- ------ ------ ------ ------
Balance at end of period................... $ 5,684 $5,478 $5,543 $5,480 $5,537
======= ====== ====== ====== ======
Ratio of net charge-offs during the
period to average net loans outstanding
during the period........................ 0.06% 0.11% 0.07% 0.13% 0.22%
======= ====== ====== ====== ======
Ratio of allowance for loan losses to
net loans receivable at the end of
the period............................... 1.38% 1.33% 1.37% 1.40% 1.49%
======= ====== ====== ====== ======
Ratio of allowance for loan losses to
non-performing loans at the end of
the period............................... 115.48% 98.60% 61.89% 80.60% 52.50%
======= ====== ====== ====== ======
</TABLE>
13
<PAGE>
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 December 31,
----------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ----------------------------
Percent Percent Percent
Percent of Loans Percent of Loans Percent of Loans
of in Each of in Each 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......... $2,130 37.47% 84.71% $1,862 33.99% 83.19% $1,860 33.58% 80.94%
Multi-family............... 33 0.58 0.77 35 0.63 0.80 289 5.17 0.81
Non-residential real estate 710 12.49 7.68 762 13.90 9.50 982 17.71 10.42
Construction and
development............... 174 3.06 4.47 80 1.46 3.72 116 2.09 4.98
Land and land development.. 204 3.59 0.27 225 4.11 0.72 251 4.54 0.97
Consumer and other loans... 243 4.28 2.10 252 4.61 2.07 229 4.12 1.88
Unallocated general
allowance................. 2,190 38.53 -- 2,262 41.30 -- 1,816 32.79 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance........ $5,684 100.00% 100.00% $5,478 100.00% 100.00% $5,543 100.00% 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1995 1994
--------------------------- ---------------------------
Percent Percent
Percent of Loans Percent of Loans
of in Each 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)...... $2,047 37.35% 79.69% $1,738 31.40% 79.09%
Multi-family............... 276 5.04 0.57 895 16.17 1.11
Non-residential real estate 639 11.65 10.77 1,061 19.15 10.10
Construction and
development............... 194 3.55 5.69 148 2.68 6.89
Land and land development.. 141 2.57 1.55 166 3.00 1.12
Consumer and other loans... 208 3.79 1.73 203 3.66 1.69
Unallocated general
reserves.................. 1,975 36.05 -- 1,326 23.94 --
------ ------ ------ ------ ------ ------
Total allowance.......... $5,480 100.00% 100.00% $5,537 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
- ----------------------
(1) Includes home equity lines of credit.
14
<PAGE>
Real Estate Owned. At December 31, 1998 and 1997, the Bank had $1.2
million and $2.0 million of REO, respectively. At December 31, 1998, REO
consisted of 17 one- to four-family properties, and two parcels of land. 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 5% 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 December 31, 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 December 31, 1998, the Bank owned approximately $3.2 million of
equity securities at fair value. These securities are held by the Bank for the
non-qualified deferred compensation plan established by the Bank. At December
31, 1998, the equity securities consisted primarily of investment 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 December 31, 1998, the weighted average term to
maturity for investment securities available-for-sale and mortgage-backed and
related securities held-to-maturity was 1.87 years and 9.64 years, respectively.
At December 31, 1998 the Bank had dual indexed consolidated bonds with a
fair value of $2.0 million, which was $500,000 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.
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.
15
<PAGE>
The following table sets forth certain information regarding the carrying
value and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
--------- -------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities,
available-for-sale
U.S. Treasury and agency
obligations.................... $14,897 $15,058 $19,812 $19,836 $20,823 $20,803
Corporate obligations............ 6,858 6,934 3,345 3,413 3,995 4,094
Equity securities................ 2,263 3,201 3,596 4,343 3,394 3,610
State and local municipal bonds.. 1,868 1,896 350 371 350 373
Mutual funds..................... 1,323 1,305 1,262 1,242 1,199 1,175
Duel indexed consolidated bonds.. 2,500 1,987 2,500 1,946 2,500 1,924
------- ------- ------- ------- ------- -------
Total investment securities...... $29,709 $30,381 $30,865 $31,151 $32,261 $31,979
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the carrying
value 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,
------------------------------------------------------------------
1998 1997 1996
------------------ ------------------- -------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
--------- -------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related
securities held-to-maturity:
Fixed rate:
FNMA pass through securities.. $ 731 $ 724 $ 838 $ 838 $1,008 $1,008
GNMA certificates............. 259 279 453 497 494 537
------- ------ ------ ------ ----- -------
Total mortgage-backed
and related securities.......... $ 990 $1,003 $1,291 $1,335 $1,502 $1,545
======= ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the Bank's mortgage-backed and mortgage-related
securities activities for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Mortgage-backed securities:
At beginning of period...................................... $1,291 $1,502 $1,879
Mortgage-backed securities purchased...................... -- -- --
Mortgage-backed securities sold........................... -- -- --
Amortization and repayments............................... (301) (211) (377)
------ ------ ------
Balance of mortgage-backed and related
securities at end of period................................ $ 990 $1,291 $1,502
====== ====== ======
</TABLE>
16
<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 December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------------------------------
One Three to More than
One Year or Less to Three Years Five Years Five Years
------------------- ------------------- ------------------ ------------------
Carrying Weighted Carrying Weighted Carrying Weighted Carrying Weighted
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities,
available-for-sale:
U.S. Treasury and agency obligations.......... $5,299 5.96% $ 7,604 5.55% $1,490 5.55% $ 504 6.19%
Corporate obligations......................... 999 10.13% 4,672 5.80% 847 6.49% 340 6.25%
Equity securities............................... 2,263 -- -- -- -- -- -- --
State and local municipal
bonds.......................................... -- -- 572 3.90% 940 6.02% 356 4.87%
Mutual funds.................................... 1,323 -- -- -- -- -- -- --
Duel indexed consolidated bonds................. -- -- -- -- -- -- 2,500 2.59%
------ ----- ------- ----- ------ ---- ------- ----
Total investment securities................... $9,884 4.22% $12,848 5.57% $3,277 5.93% $ 3,700 3.64%
====== ===== ======= ===== ====== ==== ======= ====
Mortgage-backed and related
securities held-to-maturity:
FNMA pass through securities.................... -- -- -- -- -- -- $ 731 8.91%
GNMA certificates............................... -- -- -- -- -- -- 259 9.87%
------ ----- ------- ----- ------ ----- ------ ----
Total mortgage-backed and related securities.. $ -- $ -- $ -- $ -- $ -- $ -- $ 990 9.16%
====== ===== ======= ===== ====== ===== ====== ====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------
Total
---------------------------------
Average Weighted
Remaining Carrying Market Average
Years to Amount Value Yield
--------- -------- ------ --------
<S> <C> <C> <C> <C>
Investment securities,
available-for-sale:
U.S. Treasury and agency obligations.......... 1.69 $14,897 $15,058 5.72%
Corporate obligations......................... 2.36 6,858 6,934 6.54%
Equity securities............................... -- 2,263 3,201 --
State and local municipal
bonds.......................................... 4.72 1,896 1,896 1.19%
Mutual funds.................................... 0.25 1,323 1,305 --
Duel indexed consolidated bonds................. 6.70 2,500 1,987 2.59%
----- ------- ------- ----
Total investment securities................... 1.87 $29,709 $30,381 4.59%
===== ======= ======= ====
Mortgage-backed and related
securities held-to-maturity:
FNMA pass through securities.................... 7.00 731 $ 724 8.91%
GNMA certificates............................... 17.08 259 279 9.87%
----- ------- ------- ----
Total mortgage-backed and related securities.. 9.64 $ 990 $1,003 9.16%
===== ======= ======= ====
</TABLE>
17
<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 December 31, 1998, the
balance of core deposits (savings and money market accounts) represented 21.62%
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 $192 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 Year Ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net increase (decrease) before interest credited................. $(38,043) $(19,638) $(28,729)
Interest credited................................................ 18,717 18,816 19,076
-------- -------- --------
Net increase (decrease) in deposits.............................. (19,326) $ (822) $ (9,653)
======== ======== ========
</TABLE>
At December 31, 1998, the Bank had $37.9 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........................................................... $ 1,479
Over 3 through 6 months.................................................... 374
Over 6 through 12 months................................................... 18,952
Over 12 months............................................................. 17,070
-------
Total................................................................. $37,875
=======
</TABLE>
18
<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,
-----------------------------------------------------------------------------------------------------
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
------- -------- -------- ------- -------- -------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts(1).... $ 779 0.22% 2.65% -- ---% --% $ -- ---% --%
Non-interest-bearing
transaction accounts.... 583 0.16 -- 266 0.07 -- 1,735 0.46 --
Savings.................... 75,360 21.24 2.96 84,547 22.60 3.25 90,255 24.07 3.25
-------- ------ -------- ------ -------- ------
Total.................. 76,722 21.62 2.93 84,813 22.67 3.13 91,990 24.53 3.16
-------- ------ -------- ------ -------- ------
Certificate accounts(2)(3):
Within 12 months......... 191,999 54.12 5.23 192,592 51.48 5.74 206,995 55.21 5.57
Over 12 through 36
months................ 64,762 18.25 5.59 82,054 21.93 5.81 73,143 19.51 6.03
Over 36 months........... 21,305 6.01 6.05 14,655 3.92 6.32 2,808 0.75 6.21
-------- ------ -------- ------ -------- ------
Total certificate
accounts............ 278,066 78.38 5.38 289,301 77.33 5.79 282,946 75.47 5.70
-------- ------ -------- ------ -------- ------
Total deposits......... $354,788 100.00% 4.85% $374,114 100.00% 5.19% $374,936 100.00% 5.07%
======== ====== ======== ====== ======== ======
</TABLE>
- ---------------------
(1) Does not include official bank checks, see Financial Statement.
(2) Based on remaining maturity of certificates.
(3) Includes retirement accounts such as IRA and Keogh accounts.
19
<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 December 31, 1998.
<TABLE>
<CAPTION>
Period to Maturity from
December 31, 1998
---------------------------------------- At December 31,
Less than One to Over ---------------------------------
One Year Three Years Three Years 1998 1997 1996
-------- ----------- ----------- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%......... $ -- $ -- $ -- $ -- $ -- $ 18
4.01% to 5.00%..... 56,654 5,564 36 62,254 17,303 42,404
5.01% to 6.00%..... 132,480 57,854 6,081 196,415 233,582 183,490
6.01% to 7.00%..... -- 1,344 15,188 16,532 32,589 51,217
7.01% to 8.00%..... 2,865 -- -- 2,865 5,827 5,817
8.01% to 9.00%..... -- -- -- -- -- --
Over 9.01%......... -- -- -- -- -- --
-------- ------- ------- -------- -------- --------
Total.......... $191,999 $64,762 $21,305 $278,066 $289,301 $282,946
======== ======= ======= ======== ======== ========
</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 December 31, 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 December 31, 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 Year Ended
December 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding (monthly)............. $8,000 $ 9,667 $ 7,417
Maximum amount outstanding at any 8,000 10,000 15,000
month-end during the period....................
Balance outstanding at end of period.............. 8,000 8,000 15,000
Weighted average interest rate during the period.. 6.19% 6.23% 6.19%
Weighted average interest rate at end of period... 6.19% 6.19% 6.23%
</TABLE>
20
<PAGE>
Personnel
As of December 31, 1998 the Bank had 48 full-time employees and 11 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.
REGULATION AND SUPERVISION
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 and its deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("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 and the FDIC to test the Bank's safety and soundness and compliance
with various regulatory requirements. 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 through legislation, could have a material adverse impact on the
Company, the Bank and their operations. The Company, as a savings and loan
holding company, is required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS under the Home Owners' Loan Act, as
amended (the "HOLA"), and of the Securities and Exchange Commission ("SEC")
under the federal securities laws. 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 institutions set forth in this document do not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDI Act") and the regulations issued to implement those statutes. These laws
and regulations delineate the nature and extent of the activities in which
federal associations may engage. In particular, many types of lending
authorities for federal associations, e.g., commercial, nonresidential real
property and consumer loans, are limited to a specified percentage of the
institution's capital assets.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Unless an
exception applies, savings institutions may not make a loan or extend credit to
a single or related group of borrowers in excess of 15.0% of the Bank's
unimpaired capital and surplus. An additional amount may be lent, equal to
10.0% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion, but does not include real estate. At December 31, 1998, limit on
loans to one borrower was $46.3 million. At December 31, 1998, the Bank's
largest aggregate outstanding balance of loans to one borrower was $2.2 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings bank is required to either
qualify as a "domestic building and loan association" as defined in the Internal
Revenue Code of 1986 or maintain at least 65.0% of its "portfolio assets" (total
assets less (i) specified liquid assets up to 20.0% 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) on a monthly basis in 9 out of every 12 months.
21
<PAGE>
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1998, the Bank maintained 91.37% of its portfolio assets in
qualified thrift investments and had more than 65% of its portfolio assets in
qualified thrift investments for each of the 12 months ending December 31, 1998.
Therefore, the Bank met the QTL test. Recent legislation has expanded the extent
to which education loans, credit card loans and small business loans may be
considered "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 capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice to 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) 75.0% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its regulatory 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. At December 31, 1998, the Bank was a
Tier 1 Bank.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10.0% depending upon economic conditions and the savings flows
of member institutions, and is currently 4.0%. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's liquidity
ratio for December 31, 1998 was 15.76% which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a semi-
annual basis, is computed as a percentage upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the bank's latest
quarterly thrift financial report.
Branching. The OTS regulations authorize federally chartered savings
associations to branch nationwide to the extent allowed by federal statute.
This permits federal savings and loan associations with interstate networks to
diversify more easily their loan portfolios and lines of business
geographically. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make
22
<PAGE>
public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA
rating in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in
certain 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) is limited by Sections 23A
and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of "covered transactions" (including extension of credit to, purchases of
assets from or the issuance of a guarantee, acceptance or letter of credit on
behalf of affiliate) with any individual affiliate to 10.0% of the capital and
surplus of the savings institution and also limits the aggregate amount of
transactions with all affiliates to 20.0% 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 provides that certain transactions with affiliates, (including loan,
asset sales or purchases, and any servicing, leases or other agreements) 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 nonaffiliated companies.
Notwithstanding Sections 23A and 23B, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies under Section 4 (c) of the Bank Holding Company Act
("BHC Act"). Further, no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
principal shareholders (generally considered to be those owners controlling or
having the power to vote ten percent or more of any class of the Company's
stock) as well as entities controlled by such persons, are currently governed by
Sections 22(g) and 22(h) of the FRA, and the Federal Reserve Board's ("FRB")
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and may not involve more than the normal risk of
repayment. Recent legislation created an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to insiders based, in part, on the Bank's capital position and
requires certain board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and 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 and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $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 enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has the
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. 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
standards set forth in 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. Most recently, the agencies have issued safety
and soundness standards for Year 2000 computer compliance. 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 final rule establishes deadlines for the submission
and review of such safety and soundness compliance plans when such plans are
required.
23
<PAGE>
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
standard, a 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based
capital standard. In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage (core) capital ratio (3% for institutions receiving the highest rating
on the CAMEL financial institution rating system), and, together with the risk-
based capital standard itself, a 4% Tier I risk-based capital standard. Core
capital is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus, and
minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. 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 Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS (and other federal banking agencies) has revised the risk-based
capital standards to ensure that such standards take account of interest rate
risk. The OTS regulations set forth the methodology for calculating an interest
rate risk component that would be incorporated into the OTS risk-based capital
regulations. A savings institutions with "above normal" interest rate risk
exposure must deduct from total capital a portion of its capital to cover such
interest rate risk for purposes of calculating their risk-based capital
requirements. A savings institution'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 (except when the 3-month Treasury
bond equivalent yield falls below 4.0%, then the decrease will be equal to one-
half of that Treasury rate) divided by the estimated economic value of the
institution's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings institution whose measured interest rate risk exposure
exceeds 2.0% 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 2.0%, multiplied by the estimated economic value of the
bank's assets. That dollar amount is deducted from an institution's total
capital in calculating compliance with its risk-based capital requirement. For
the present time, the OTS has deferred implementation of a capital deduction
based on the interest-rate risk component. If the Bank had been subject to an
interest-rate risk component as of December 31, 1998, the Bank would not have
been subject to any deduction from capital as a result of its interest rate risk
position.
At December 31, 1998, the Bank met each of its capital requirements. The
following table sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, and the Bank's historical amounts
and percentages at December 31, 1998.
24
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------
Capital Required Actual Actual Excess Excess
Requirement Percent Capital Percent Capital Percent
----------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible............... $ 7,956 1.5% $138,489 26.11% $130,533 24.61%
Leverage............... 21,217 4.0 138,489 26.11 117,272 22.11
Risk-based............. 23,604 8.0 142,191 48.19 118,587 40.19
</TABLE>
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 undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has
a ratio of total capital to risk-weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow 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 a
savings institution 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 become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
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 on Deposit Accounts. The FDIC has established a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under the risk-based assessment system, the average assessment rate
paid by institutions insured under the SAIF was increased. Under the risk-based
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, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. The FDIC also
assigns an institution to 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 conditions and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. Under
the risk-based assessment system, there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied. As a result of the recapitalization of
the SAIF in 1996 after the enactment of the Deposit Funds Insurance Act of 1996,
the FDIC reduced the assessment rates for deposit insurance for SAIF-assessable
deposits for fiscal 1998 to a range of 0 to 27 basis points. The assessment rate
for the Company's SAIF-assessable deposits for fiscal 1998 was 0 basis points.
In addition, SAIF-assessable deposits are also subject to assessments for
payments on the bonds issued in the late 1980s by the Financing Corporation (the
"FICO" bonds) to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation. The Company's total expense in fiscal 1998 for the assessment for
deposit insurance and the FICO payments was $228,000.
25
<PAGE>
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and SAIF were to have merged on January 1, 1999 if there were no more
savings associations as of that date. Various proposals to eliminate the
federal savings association charter, create a uniform financial institutions
charter, abolish the OTS and restrict savings and loan holding company
activities have been introduced in Congress. The Bank is unable to predict
whether such legislation will be enacted or the extent to which the legislation
would restrict or disrupt its operations.
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 that FHLB in an amount at least equal to 1.0% 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 December 31, 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.
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, 1998, 1997 and
1996, dividends from the FHLB to the Bank amounted to $262,000, $247,000 and
$232,000, respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Bank's net interest income would likely also be reduced.
Further, there can be no assurance that the impact of FDICIA and the FIRREA on
the FHLBs will not also cause a decrease in the value of the FHLB stock held by
the Bank.
Federal Reserve System
The FRB regulations require savings institutions to maintain non-interest-
earning reserves against their transaction accounts (primarily NOW and regular
checking accounts). The FRB 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 FRB) the reserve
requirement is 3.0%; and for accounts greater than $47.8 million, the reserve
requirement is $1.48 million plus 10.0% (subject to adjustment by the FRB
between 8.0% and 14.0%) against that portion of total transaction accounts in
excess of $47.8 million. The first $4.7 million of otherwise reservable
balances (subject to adjustments by the FRB) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the FRB may be
used to satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA, as amended. As such, the Company has registered
with the OTS and is 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. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the holding company's subsidiary savings institution.
The Bank must notify the OTS 30 days before declaring any dividend to the
Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5.0%
of the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or 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
26
<PAGE>
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.
As a unitary savings and loan holding company (i.e., one that controls only
one thrift subsidiary), the Company generally will not be restricted under
existing banking laws as to the types of business activities in which it may
engage, provided that the Bank continues to be a QTL. Upon any non-supervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test and is deemed to be a savings institution by OTS, 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 permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
subject to the prior approval of the OTS, and certain other activities
authorized by OTS regulation, and no multiple savings and loan holding company
may acquire more than 5.0% of the stock of a company engaged in impermissible
activities.
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, subject to two exceptions: (i) the approval of 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.
Federal law generally provides that no "person," (defined to include a
company) acting directly or indirectly or through or in concert with one or more
other persons, may acquire "control," as that term is defined in OTS
regulations, of a federally-insured savings institution without giving at least
60 days written notice to the OTS and providing the OTS an opportunity to
disapprove of the proposed acquisition. Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
This requirement would apply to acquisitions of the Company's stock.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under the Exchange
Act of 1934, as amended (the "Exchange Act"). The Company and its officers and
directors are subject to periodic reporting, proxy solicitation regulations,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock issued in the Conversion or pursuant to the Company's
employee stock benefit plans does not cover the resale of such shares. 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) 1.0% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Shares acquired from the Company that are deemed to be restricted under
the definition of that term in Rule 144, must be held for a period of at least
one year before they may be publicly resold. 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.
27
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are 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.
28
<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.
ITEM 2. 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 of
Year Property at Total Deposits at
Location Acquired December 31, 1998 December 31, 1998
------------------------- ------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Executive/Branch Office:
400 George Street
Fredericksburg, VA 22404 .............. 1962 $1,487 $230,506
Branch Offices:
Route Three Branch
3600 Plank Road
Fredericksburg, VA 22407............... 1983 $1,025 40,294
Four Mile Fork Branch
4535 Lafayette Boulevard
Fredericksburg, VA 22408............... 1972 $ 439 58,353
Aquia Branch
117 Garrisonville Road
P.O. Box 382
Stafford, VA 22555..................... 1978 $ 303 25,635
</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
December 31, 1998 was $333,000.
29
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition and results of the
operation of the Company and the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Virginia Capital Bancshares, Inc. common stock is traded on the Nasdaq
National Market under the symbol "VCAP." The stock began trading on December
23, 1998. The high and low sales price for the quarter ended December 31, 1998
were 13.5 and 12.625, respectively.
As of December 31, 1998, the Company had approximately 3,597 stockholders
of record.
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated summary historical
financial information concerning the financial position of Virginia Capital
Bancshares, Inc. (the "Company"), including its subsidiary, Fredericksburg
Savings Bank (the "Bank"), for the period and at the dates indicated. The
financial data is derived in part from, and should be read in conjunction with,
the consolidated financial statements and related notes of the Company contained
elsewhere herein.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1998 1997 1996(1) 1995 1994
------- ------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total Assets................ $576,676 $471,920 $469,917 $468,759 $451,035
Loans receivable, net(2).... 411,791 413,032 405,145 390,541 371,269
Mortgage-backed securities.. 990 1,291 1,502 1,879 2,109
Investment securities(3).... 30,381 31,151 31,979 49,257 52,361
Cash and cash equivalents... 115,734 11,287 15,937 11,980 11,088
Deposits.................... 354,788 374,114 374,936 384,589 373,951
Official bank checks........ 21,064 3,002 716 1,787 2,132
FHLB advances............... 8,000 8,000 15,000 8,000 8,000
Equity capital.............. 185,206 80,073 73,296 68,703 62,218
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
1998 1997 1996(1) 1995 1994
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income.............. $ 36,477 $ 36,504 $ 35,998 $ 36,305 $ 33,234
Interest expense.............. 19,212 19,418 19,535 18,997 16,620
-------- -------- -------- -------- --------
Net interest income......... 17,265 17,086 16,463 17,308 16,614
Provision for loan losses..... 461 375 325 412 1,010
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses.. 16,804 16,711 16,138 16,896 15,604
Total noninterest income...... 481 460 409 283 256
Total noninterest expense..... 14,886 6,794 9,565 6,451 6,850
-------- -------- -------- -------- --------
Income before income taxes.... 2,399 10,377 6,982 10,728 9,010
Income tax expense............ 1,003 3,952 2,401 4,070 1,687
-------- -------- -------- -------- --------
Net income................. $ 1,396 $ 6,425 $ 4,581 $ 6,658 $ 7,323
======== ======= ======== ======== ========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------
1998(10) 1997 1996(1) 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data(4)
Performance Ratios:
Return on average assets....................... 0.29% 1.36% 0.98% 1.45% 1.62%
Return on average equity....................... 1.53 8.39 6.42 10.17 12.61
Interest rate spread(5)........................ 2.71 2.93 2.89 3.19 3.25
Net interest margin(6)......................... 3.67 3.73 3.61 3.86 3.76
Yield on average-interest earning assets........ 7.75 7.97 7.90 8.11 7.81
Net interest income after provisions for loan
losses, to total noninterest expenses......... 112.88 245.97 168.72 261.91 227.80
Total noninterest expense to average assets..... 3.08 1.44 2.04 1.41 1.52
Efficiency ratio(7)............................ 83.89 38.72 56.69 36.67 40.60
Regulatory Capital Ratios:(11)
Tangible capital............................... 26.11% 16.34% 14.97% 14.53% 13.33%
Core capital................................... 26.11 16.34 14.97 14.53 13.33
Risk-based capital............................. 48.19 26.92 25.70 25.51 23.53
Asset Quality Ratios:
Non-performing loans to total assets(8)(9)...... .85% 1.18% 1.91% 1.45% 2.34%
Non-performing loans to total loans(8)(9)....... 1.14 1.29 2.10 1.64 2.67
Non-performing assets to total assets(9)........ 1.06 1.59 2.25 1.91 2.58
Allowance for loan losses to non-performing
loans(9)..................................... 115.48% 98.60% 61.89% 80.60% 52.50%
Number of full-service banking facilities......... 4 4 4 4 4
</TABLE>
_________________________
(1) 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.
(2) 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 December 31, 1998, 1997, 1996, 1995 and 1994 was $5.7
million, $5.5 million, $5.5 million, $5.5 million and $5.5 million,
respectively.
(3) 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, $3.4 million, $3.2 million, $3.1 million and $4.1 million at
December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
(4) 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.
(5) 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.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(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 90 days or more
past due. The Bank does, however, continue accruing interest on loans 90
days or more past due that are in the process of being renewed or extended.
(10) Includes effect of one-time contribution of $8.4 million, on a pre-tax
basis, to the Fredericksburg Savings Charitable Foundation.
(11) Regulatory capital ratios are computed based on the capital of the Bank
only.
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Virginia Capital Bancshares, Inc. ("the Company"), is the holding company
for Fredericksburg Savings Bank ("the Bank"). The Company is headquartered in
Fredericksburg, Virginia and its principal business currently consists of the
operations of the Bank. 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.
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements
which are based on certain assumptions and describe future plans, strategies and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. The Company does not undertake -- and
specifically disclaims any obligation -- to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
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 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.
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
33
<PAGE>
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 December 31, 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 3.39%. 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 December 31, 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
December 31, 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 accounts are reflected at actual dates of maturity.
These assumptions are generally based on the FDIC's deposit decay guidelines and
the Company's historical experience. Prepayment and deposit decay rates can have
a significant impact on the Company's estimated gap. While the Company 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.
34
<PAGE>
<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)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1)...................... $110,043 $ 1,175 $ 3,980 $ 3,596 $ 4,150 $294,672 $417,616
Consumer and other loans............... 2,086 859 2,017 2,043 1,155 787 8,947
Mortgage-backed and related
securities........................... 297 297 297 99 -- -- 990
Overnight and short term
investments......................... 114,963 -- -- -- -- -- 114,963
Investments and interest-
earning deposits..................... 14,392 7,878 5,059 2,343 975 3,273 33,920
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets....... $241,781 $ 10,209 $ 11,353 $ 8,081 $ 6,280 $298,732 $576,436
======== ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Money market deposit accounts
and other transaction accounts...... $ 19,976 $ 9,988 $ 9,987 $ -- $ -- $ -- $ 39,951
Savings accounts....................... 7,238 7,238 7,238 7,237 7,237 -- 36,188
Certificate accounts................... 191,999 43,060 21,702 11,203 10,102 -- 278,066
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing deposits........... 219,213 60,286 38,927 18,440 17,339 -- 354,205
FHLB advances.......................... 3,000 -- 5,000 -- -- -- 8,000
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities..... $222,213 $ 60,286 $ 43,927 $ 18,440 $ 17,339 $ -- $362,205
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap.................. $ 19,568 $(50,077) $(32,574) $(10,359) $(11,059) $298,732 $214,231
======== ======== ======== ======== ======== ======== ========
Cumulative interest-rate
sensitivity gap......................... $ 19,568 $(30,509) $(63,083) $(73,442) $(84,501) $214,231
======== ======== ======== ======== ======== ========
Cumulative interest-rate sensitivity gap
as a percentage of total assets......... 3.39% (5.29)% (10.94)% (12.74)% (14.65)% 37.15%
Cumulative interest-rate gap as a
percentage of total interest-earning
assets................................. 3.39% (5.29)% (10.94)% (12.74)% (14.66)% 37.16%
Cumulative interest-earning assets as a
percentage of cumulative interest-
bearing liabilities..................... 108.81% 89.20% 80.67% 78.70% 76.67% 159.15%
</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.
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
35
<PAGE>
loan prepayment rates, reinvestment rates and deposit decay rates. The
following table sets forth the Bank's NPV as of December 31, 1998 (the latest
NPV analysis prepared by the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
Change in Interest Rates NPV as % of Portfolio
in 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............................... 110,674 (37,639) (25.00) 22.36% (494)
+300............................... 120,796 (27,518) (19.00) 23.80 (351)
+200............................... 130,933 (17,381) (12.00) 25.17 (214)
+100............................... 140,518 (7,796) (5.00) 26.39 (92)
Static............................. 148,314 -- -- 27.31 --
- -100.............................. 152,801 4,487 3.00 27.75 45
- -200.............................. 155,676 7,362 5.00 27.97 66
- -300.............................. 159,440 11,126 8.00 28.29 98
- -400.............................. 163,022 14,709 10.00 28.58 127
</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 December 31, 1998, and for the years ended December 31,
1998, 1997 and 1996. 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.
36
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1998
------------------------
Yield/
Balance Cost
------- ------
(Dollars in thousands)
<S> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net........................ $403,005 8.09%
Consumer and other loans, net.............. 8,786 9.22%
Mortgage-backed and related
securities............................... 990 18.69
Overnight and short-term deposits.......... 114,963 0.84
Investment securities(1)................... 33,920 5.60
-------- -----
Total interest-earning assets.......... 561,664 6.49%
-----
Noninterest-earning assets................... 15,012
--------
Total assets........................... $576,676
========
Liabilities and Equity:
Interest-bearing liabilities:
Transaction accounts....................... $ 779 1.41%
Savings accounts........................... 75,360 3.55
Certificates of deposit.................... 278,066 5.77
-------- -----
Total deposits........................ 354,205 5.28
FHLB advances.............................. 8,000 6.19
-------- -----
Total interest-bearing liabilities.... 362,205 5.30%
-----
Other liabilities............................ 29,265
--------
Total liabilities..................... 391,470
--------
Equity capital............................... 185,206
--------
Total liabilities and equity capital.. $576,676
========
Net interest income/Net interest 1.19%
rate spread(2).............................. =====
Net earning assets/Net interest $199,459 3.67%
margin(3).................................. ======== =====
Ratio of interest-earning assets to 155.07%
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.
37
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------- -------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance 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.... $403,766 $32,620 8.08% $399,924 $32,879 8.22% $388,750 $32,170 8.27%
Consumer and other
loans, net............ 8,845 810 9.16 8,495 696 8.19 9,271 543 5.86
Mortgage-backed and
related securities.... 1,165 185 15.88 1,396 237 16.98 1,652 277 16.77
Overnight and
short-term deposits... 23,164 962 4.15 13,076 623 4.76 14,685 661 4.50
Investment
securities(1)......... 33,450 1,900 5.68 34,851 2,069 5.94 40,868 2,347 5.74
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total
interest-earning
assets............. 470,390 $36,477 7.75% 457,742 $36,504 7.97% 455,226 $35,998 7.90%
------ ----- ------ ----- ------- -----
Noninterest-earning 13,408 13,052 13,724
assets.................. -------- -------- --------
Total assets....... $483,798 $470,794 $468,950
-------- ======== ========
Liabilities and Equity:
Interest-bearing
liabilities:
Transaction accounts... $ 2,930 $ 11 0.38% $ 3,329 $ 7 0.21% $ 3,609 $ 6 0.17%
Savings accounts....... 82,138 2,674 3.26 86,907 2,818 3.24 94,856 2,977 3.14
Certificates of deposit 288,258 16,032 5.56 285,410 15,991 5.60 283,944 16,093 5.67
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total deposits...... 373,326 18,717 5.01 375,646 18,816 5.01 382,409 19,076 4.99
FHLB advances and
other borrowings...... 8,000 495 6.19 9,667 602 6.23 7,417 459 6.19
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total
interest-bearing
liabilities......... 381,326 19,212 5.04% 385,313 $19,418 5.04% 389,826 $19,535 5.01%
------- ----- ------- ----- ------- -----
Other liabilities...... 11,432 8,897 7,719
-------- -------- --------
Total liabilities.... 392,758 394,210 397,545
Equity capital......... 91,040 76,584 71,405
-------- -------- --------
Total liabilities
and equity capital.. $483,798 $470,794 $468,950
-------- ======== ========
Net interest income/Net
interest rate
spread(2).............. $17,265 2.71% $17,086 2.93% $16,463 2.89%
======= ===== ======= ===== ======== =====
Net earning assets/Net
interest margin(3)...... $ 89,064 3.67% $ 72,429 3.73% $ 65,400 3.61%
-------- ===== ======== ===== ======== =====
Ratio of
interest-earning assets
to interest-
bearing liabilities.... 123.36% 118.80% 116.78%
======== ======= ========
</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.
38
<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>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Compared to Compared to
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------------- -------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------ ------------------
Volume Rate Net Volume Rate Net
------ ----- --- ------- ----- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, net..................................... $ 317 $(576) $(259) $1,194 $(485) $ 709
Consumer and other loans................................ 29 85 114 (45) 198 153
Mortgage-backed and related securities.................. (39) (13) (52) (43) 3 (40)
Overnight and short term deposits....................... 480 (141) 339 (72) 34 (38)
Investment and interest-earning deposits................ (83) (86) (169) (346) 68 (278)
----- ----- ----- ------ ----- -----
Total interest-earning assets....................... $ 704 $(731) $ (27) $ 688 $(182) $ 506
===== ===== ===== ====== ===== =====
Interest-bearing liabilities:
Transaction accounts.................................... $ (1) $ 5 $ 4 $ -- $ 1 $ 1
Savings accounts........................................ (155) 11 (144) (250) 91 (159)
Certificate of deposits................................. 159 (118) 41 83 (185) (102)
Total interest-bearing deposits.................... 3 (102) (99) (167) (93) (260)
FHLB advances........................................... (104) (3) (107) 139 4 143
----- ----- ----- ------ ----- -----
Total interest-bearing liabilities.................. $(101) $(105) $(206) $ (28) $ (89) $(117)
===== ===== ===== ====== ====== =====
</TABLE>
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
The Company's consolidated assets totalled $576.7 million at December 31,
1998, an increase of $104.8 million, or 22.2% from total assets of $471.9
million at December 31, 1997. The increase in assets was due primarily to the
public offering of stock completed by the Company during 1998 resulting in net
proceeds to the Company of approximately $103.9 million. At 1998 year end, the
net proceeds of the offering were invested by the Company and Bank in short-term
interest-bearing deposits, resulting in an increase of $104.5 million in cash
and cash equivalents from 1997 to 1998.
Loans. The Bank's loan portfolio has remained relatively constant from 1997
to 1998 in both volume and type, with total loans of $431.3 million at December
31, 1998, an increase of $266,000 from $431.0 million in total loans at December
31, 1997. Total mortgage loans were $422.2 million at December 31, 1998, an
increase of $114,000 from $422.1 million at December 31, 1997. Mortgage loans
represented 97.90% of the lending portfolio at December 31, 1998 and 97.93% at
December 31, 1997. One-to four-family residential mortgage loans were $365.3
million at December 31, 1998, an increase of $6.7 million from $358.6 million at
December 31, 1997. Non-residential real estate mortgage loans were $33.1 million
at December 31, 1998, a decrease of $7.8 million from $41.0 million at December
31, 1997. Land and land development loans were $1.2 million at December 31,
1998, a decrease of $1.9 million from $3.1 million at December 31, 1997.
Construction and development loans increased $3.3 million from $16.0 million at
December 31, 1997 to $19.3 million at December 31, 1998.
Allowance for Loan Losses. The allowance for loan losses increased from
$5.5 million at December 31, 1997 to $5.7 million at December 31, 1998, an
increase of $200,000. The relatively stable allowance during this period
reflects improvement in non-performing assets and net charged off loans, as well
as management's belief that
39
<PAGE>
there is economic stability in the Bank's market area. 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, 1998,
the allowance for loan losses provided coverage of 115.48% of total
nonperforming loans of $4,922, an increase from 98.60% of total nonperforming
loans of $5,556 at December 31, 1997. While the Bank's nonperforming loans
decreased, the Bank considers a ratio of 1.25% to 1.40% to net loans receivable
as adequate for its allowance for loan losses and has maintained its allowance
for loan losses accordingly.
Investment Securities. Investment securities classified as held-to-maturity
were $1.0 million at December 31, 1998, a decrease of $300,000 from $1.3 million
at December 31, 1997. These securities consist of FNMA and GNMA mortgage-backed
securities. The decrease in these securities resulted from paydowns received
during 1998. Investment securities classified as available-for-sale were $30.4
million at December 31, 1998, a decrease of $770,000, or 2.5%, from $31.2
million at December 31, 1997. The decrease was primarily due to maturities and
calls of the securities of $11.5 million offset by purchases of securities of
$10.3 million.
Deposits. Total deposits decreased $19.3 million, or 5.2%, from $374.1
million at December 31, 1997 to $354.8 million at December 31, 1998. Savings
accounts decreased $9.2 million, or 10.9%, to $75.4 million at December 31,
1998, from $84.5 million at December 31, 1997. Certificates of deposit
decreased $11.2 million, or 3.9%,from $289.3 million at December 31, 1997, to
$278.1 million at December 31, 1997. The decrease in deposit accounts was due
in part to withdrawals made to purchase the Company's Common Stock in connection
with the Bank's conversion.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. Net income for the year ended December 31, 1998 was $1.4 million,
a decrease of $5.0 million from $6.4 million for the year ended December 31,
1997. Net interest income increased $179,000, or 1.1%, from $17.1 million for
the year ended December 31, 1997 to $17.3 million for the year ended December
31, 1998, resulting primarily from a decrease in interest expense. Noninterest
income increased by $21,000 from 1997, while noninterest expense increased $8.1
million from 1997. The increase in noninterest expense was primarily the result
of a one-time charitable contribution of $8.5 million to establish a charitable
foundation as part of the Bank's conversion to a stock organization. The
Company's return on average assets was .29% for the year ended December 31, 1998
compared to 1.36% for the year ended December 31, 1997. The Company's return on
average equity was 1.53% for the year ended December 31, 1998 compared to 8.39%
for the year ended December 31, 1997. Both of these ratio's being substantially
affected by the current year one-time charge to establish the charitable
foundation.
Interest Income. Interest income was $36.5 million for each of the years
ended December 31, 1998 and 1997. Interest on mortgage loans, the largest
component of interest income decreased $259,000 from $32.9 million for the year
ended December 31, 1997 to $32.6 million for the year ended December 31, 1998.
While the average balance of mortgage loans increased $3.9 million from $399.9
million for the year ended December 31, 1997 to $403.8 million for the year
ended December 31, 1998, the average yield on mortgage loans declined 14 basis
points from 8.22% to 8.08% resulting in the decrease in interest on mortgage
loans. Interest income on investment securities was $3.0 million for the year
ended December 31, 1998, an increase of $118,000 from $2.9 million for the year
ended December 31, 1997. The increase in interest income on investments was due
primarily to a $339,000 increase in interest income from overnight and short-
term deposits investments, partially offset by a $221,000 decrease in interest
income from mortgage-backed and investment securities. The $221,000 decrease in
interest on mortgage-backed and investment securities was due to a $1.6 million
decrease in the average balance of mortgage-backed and investment securities
outstanding from $36.2 million for the year ended December 31, 1997 to $34.6
million for the year ended December 31, 1998. In addition, the average yield on
mortgage-backed and investment securities declined 136 basis points from 1997 to
1998, further decreasing interest income. The $339,000 increase in interest
income from overnight and short-term deposits was primarily due to a $10.1
million increase in the average balance of this investment from $13.1 million
for the year ended December 31, 1997 to $23.2 million for the year ended
December 31, 1998. This $10.1 million increase was primarily due to funds
raised in the Company's public offering of stock. Average interest-earning
assets were $470.4 million for the year ended December 31, 1998, an increase of
$12.7 million, or 2.77%, from $457.7 million for the year ended December 31,
1997. The average yield on earning assets
40
<PAGE>
decreased 22 basis points to 7.75% for the year ended December 31, 1998, from
7.97% for the year ended December 31, 1997.
Interest Expense. Interest expense was $19.2 million for the year ended
December 31, 1998, a decrease of $200,000 from $19.4 million for the year
December 31, 1997. Substantially all of the Bank's interest expense is from
interest-bearing deposits, the largest category of the deposits being
certificates of deposit. Interest expense on certificates of deposit was $16.0
million for the years ended December 31, 1998 and 1997. The average balance of
certificates of deposit increased $2.9 million from $285.4 million for the year
ended December 31, 1997 to $288.3 million for the year ended December 31, 1998,
the effect of which was partially offset by a decrease in the average cost of
certificates of deposit by 4 basis points from 5.60% for the year ended December
31, 1997 to 5.56% for the year ended December 31, 1998, the net result being
constant interest expense on certificates of deposit from 1997 to 1998. Market
conditions continue to effect the ability of the Bank to attract and maintain
time deposits and the rates paid on these deposits. Interest expense on savings
accounts decreased $144,000, from $2.8 million for the year ended December 31,
1997 to $2.7 million for the year ended December 31, 1998. This decrease is
primarily attributable to a $4.8 million decrease in the average balance of
savings accounts, which decreased from $86.9 million for the year ended December
31, 1997 to $82.1 million for the year ended December 31,1998. The average cost
of savings accounts increased 2 basis points from 3.24% for the year ended
December 31, 1997 to 3.26% for the year ended December 31, 1998. Interest
expense on Federal Home Loan Bank advances decreased $107,000 from $602,000 for
the year ended December 31, 1997 to $495,000 for the year ended December 31,
1998. This $107,000 decrease resulted from the maturity of a $2 million advance
from the Federal Home Loan Bank in November 1997. Average interest-bearing
liabilities decreased $4.0 million from $385.3 million for the year ended
December 31, 1997 to $381.3 million for the year ended December 31, 1998. The
average cost of interest-bearing liabilities was 5.04% for the years ended
December 31, 1998 and 1997.
Net Interest Income. Net interest income for the year ended December 31,
1998 was $17.3 million, an increase of $179,000 from $17.1 million for the year
ended December 31, 1997. The increase was the result of a $27,000 decrease in
interest income from 1997 coupled with a decrease in interest expense of
$206,000 from 1997. Average interest-earning assets increased $12.7 million from
the year ended December 31, 1997 to the year ended December 31, 1998. The most
significant area of increase was in overnight and short-term deposits, which
increased $10.1 million. This average increase was primarily due to funds raised
in the Company's public offering of stock. As overnight and short-term deposits
are the Company's lowest yielding earning assets, this increase in average
balance did not significantly affect interest income. The average yield on
interest-earning assets declined 22 basis from 7.97% for the year ended December
31, 1997 to 7.75% for the year ended December 31, 1998. Average interest-bearing
liabilities decreased $4.0 million from the year ended December 31, 1997 to the
year ended December 31, 1998, while the average cost of liabilities was 5.04%
for both 1997 and 1998 year-ends. As a result of these changes the interest rate
spread declined 22 basis points from 2.93% for the year ended December 31, 1997
to 2.71% for the year ended December 31, 1998.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1998 was $461,000, an increase of $86,000 from $375,000 for the
year ended December 31,1997. The provision provides for a constant ratio of
allowance for loan losses to net loans receivable of 1.38% for 1998 compared to
1.33% for 1997 and 1.37% for 1996. The Bank feels the percentage of allowance
for loan losses to net loans receivable for these periods is reasonable due to
its relatively stable historical experience and current economic conditions and
portfolio risks. See "Business of the Bank -- Allowance for Loan Losses" for
additional information.
Noninterest Income. Total noninterest income increased $21,000, or 4.6%, to
$481,000 for the year ended December 31, 1998, compared to $460,000 for the year
ended December 31, 1997. Noninterest income consists of loan fees and service
charges, deposit account fees and service charges, and net gain from the sale of
investments. The increase in noninterest income was due primarily to a $65,000
increase in net gain from the sale of investments, partially offset by a $44,000
decrease in fees, service charges and other income.
Noninterest Expense. Total noninterest expense increased $8.1 million from
$6.8 million for the year ended December 31, 1997 to $14.9 million for the year
ended December 31, 1998. Noninterest expense for the year ended December 31,
1998 includes a one-time expense of $8.4 million to establish the Fredericksburg
Savings Charitable Foundation,
41
<PAGE>
which is a tax-exempt organization established by the Bank to serve the Bank's
local community area. Excluding this one-time expense, the Company's noninterest
expense was $6.5 million, a decrease of $300,000 from 1997. The Company's
efficiency ratio was 83.89% for the year ended December 31, 1998 and was 38.72%
for the year ended December 31, 1997. Excluding the expense to establish the
Fredericksburg Savings Charitable Foundation, the Company's efficiency ratio was
36.28%, a 2.4% decline from 1997.
Compensation and benefits expense increased $41,000 from $3.5 million for
the year ended December 31, 1997 to $3.6 million for the year ended December 31,
1998. The 1998 expense includes $275,000 of compensation expense related to the
employee stock ownership plan established by the Bank during 1998. As this plan
was established during 1998, there is no expense related to this plan in the
1997 compensation and benefits expense. The stable compensation expense from
1997 to 1998 is directly related to ongoing measures of management to increase
operating efficiencies. Although compensation expense remained relatively
stable, there can be no assurance this will continue in future years,
particularly given the cost of stock-based benefit plans the Company has
established and intends to establish in the future. Occupancy and equipment
costs have remained stable with only a 3.2% increase of $23,000 from 1997 to
1998. Federal deposit insurance premium expense remained relatively stable from
1997 to 1998 with a 5.0% decline to $228,000 for the year ended December 31,
1998. Other noninterest expense decreased $456,000, or 20.4%, from $2.2 million
for the year ended December 31, 1997, to $1.8 million for the year ended
December 31, 1998. This decrease was the result of a $202,000 decrease in legal
and professional fees and a decline of $254,000 in general operating expenses.
Income Taxes. Income tax expense decreased $3.0 million from $4.0 million
for the year ended December 31 1997 to $1.0 million for the year ended December
31, 1998. The decrease was primarily the result of an approximately $3.5 million
tax benefit related to the charitable contribution to establish the Foundation.
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.
42
<PAGE>
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
deposit. Interest on certificates of deposit 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
deposit, 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 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 deposit account fees
and 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.
43
<PAGE>
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 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.
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 December 31, 1998, the Bank's liquidity ratio was 15.76%.
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 Company'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 December 31, 1998, the Company's cash and cash equivalents and
securities available-for-sale totalled $146.1 million, or 25.3% of the Company's
total assets.
The Bank has other sources of liquidity if a need for additional funds
arises. At December 31, 1998, the Bank had $8.0 million in advances outstanding
from the FHLB and, at December 31, 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 December 31, 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 $19.7 million. The Bank 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 December 31,
1998, totalled $192.0 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 December 31, 1998, the Bank exceeded all minimum regulatory capital
requirements with a tangible capital level of $138.5 million, or 26.11% of total
adjusted assets, which is above the required level of $8.0 million, or 1.50%;
core capital of $138.5 million, or 26.11% of total adjusted assets, which is
above the required level of $21.2 million, or 4.00%; and risk-based capital of
$142.2 million, or 48.19% of risk-weighted assets, which is above the required
level of $23.6 million, or 8.00%.
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 years ended December 31,
1998, 1997 and 1996, the Bank's loan originations totalled $143.7 million,
$112.5 million and $88.0 million, respectively. Purchases of United States
Treasury and agency securities, mortgage-backed and mortgage related investment
securities and other investment securities totalled $10.3 million, $5.4 million
and $8.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. These activities
44
<PAGE>
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 ($19.3
million), ($800,000) and ($9.7 million) for the years ended December 31, 1998,
1997 and 1996, 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 conducted a comprehensive review of its computer systems in
September 1997 to identify applications that could be affected by the "Year
2000" issue, and 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 identified
BISYS as its primary mission critical service provider. BISYS has informed the
Bank in writing that all reprogramming efforts have been completed as of
September 30, 1998. Bank personnel have attended five BISYS workshops in 1998
and 1999 to plan for User Validation Testing and Verification of Year 2000
Compliance as described in Year 2000 publications from the Federal Financial
Institutions Examination Council. With BISYS' September 1998 completion of The
Remediation Phase and internal certification testing, User Validation Testing
began in November 1998 and is scheduled to continue through April 1999. Based on
this information, the Bank believes BISYS has demonstrated to be Year 2000
compliant as of December 31, 1998. However, the Bank will continue to review and
test BISYS' applications. The User Validation Testing is 50% complete. The
estimated completion date is April 30, 1999. In addition, the Bank has completed
and submitted a draft of its Year 2000 Business Recovery Contingency Plan to the
Board of Directors for review and approval. In response to detailed surveys
obtained from each department within the Bank, the plan addresses those
facilities, applications, systems and other areas that may be impacted by
unforeseen problems related to Year 2000. The Plan will be tested during April
1999 using selected functional areas within the Bank.
Of the other three mission critical systems identified by the Bank
(BANKLINE/Questpoint Item Processing Center, Federal Home Loan Bank of Atlanta,
Federal Reserve-Richmond), all three have completed Year 2000 reprogramming
effective December 31, 1998, allowing the Bank adequate time for testing. If
such systems are found to have unforseen Year 2000 problems, services will be
handled manually, and information will be obtained by telephone.
Additionally, of the seven primary service vendors identified by the Bank,
six have completed Year 2000 reprogramming as of December 1998. The remaining
one will be completed by March 31, 1999, allowing the Bank adequate time for
testing. If such systems are found to have unforeseen Year 2000 problems,
services will be handled manually, and information will be obtained by
telephone.
Certain other non-critical vendors have not yet responded to the Bank's
Year 2000 inquiries; however, the Bank will pursue other options if it appears
that these vendors will be unable to comply.
The Bank estimates that its costs related to Year 2000 will be
approximately $210,000, and has incurred $184,000 through February 28, 1999. The
Bank expects the majority of these costs to consist of hardware and software
replacements that will upgrade the Bank's computer systems in addition to
addressing Year 2000. 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 individual
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-
critical systems focuses on its highest priority system, BISYS, the financial
service bureau.
45
<PAGE>
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. The Statement is
effective for fiscal years beginning after December 15, 1997, and was adopted by
the Company during 1998. The adoption of this Statement did not have a material
effect on the Company'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 December 15, 1997, and was adopted by the Company 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 Company'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 is
effective for fiscal years beginning after December 15, 1997, and was adopted by
the Company during 1998. The adoption of this Statement did not have a material
effect on the Company'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 provides for the recognition of derivative
instruments and hedging instruments as assets and liabilities in the financial
statements, and for these items to be presented at fair value. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The above-captioned information appears in this report under Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and is incorporated herein by reference.
46
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
For the Quarter Ended
--------------------------------------------------------------------------------
12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............... $ 9,222 $ 9,011 $ 9,151 $ 9,093 $ 9,195 $ 9,237 $ 9,107 $ 8,965
Interest expense.............. 4,764 4,828 4,817 4,803 4,943 4,907 4,804 4,764
--------- -------- -------- -------- --------- -------- -------- --------
Net interest income........... 4,458 4,183 4,334 4,290 4,252 4,330 4,303 4,201
Provision for loan losses..... 46 146 163 106 6 128 172 69
--------- -------- -------- -------- --------- -------- -------- --------
Net interest income after
provision for loan losses.. 4,412 4,037 4,171 4,184 4,246 4,202 4,131 4,132
Total noninterest income:..... 147 85 149 100 144 111 111 94
Total noninterest expense..... 10,477 1,340 1,378 1,691 2,193 1,542 1,525 1,534
--------- -------- -------- -------- --------- -------- -------- --------
Income before income taxes.... (5,918) 2,782 2,942 2,593 2,197 2,771 2,717 2,692
Income tax expense............ (2,297) 1,085 1,164 1,051 697 1,105 1,100 1,050
--------- -------- -------- -------- --------- -------- -------- --------
Net income.................... $ (3,621) $ 1,697 $ 1,778 $ 1,542 $ 1,499 $ 1,666 $ 1,617 $ 1,642
========= ======== ======== ======== ========== ======== ======== ========
</TABLE>
Information regarding the financial statements and the Independent
Auditor's Report appears in the Virginia Capital Bancshares, Inc. and Subsidiary
Financial Statements attached as Exhibit 99.0 and is incorporated herein by this
reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information regarding change in accountants appears in Current Report on
Form 8-K filed on March 30, 1999 and is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth certain information regarding the Board of
Directors of the Company.
<TABLE>
<CAPTION>
Director Term
Name Age(1) Position(s) Held Since(2) 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. 57 Director and President 1987 2000
Peggy J. Newman 58 Director, Executive Vice President, 1988 2001
Secretary 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 December 31, 1998.
(2) Includes years of service as a director of the Company's predecessor, the
Bank. All Directors of the Company were appointed in 1998, the first year
of its incorporation.
47
<PAGE>
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.
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.
ITEM 11. EXECUTIVE COMPENSATION
Directors' Fees
Directors of the Company do not receive any fees or retainer for serving on
the Company's Board of Directors. All directors of the Bank receive a monthly
fee of $1,700 for the two regularly scheduled monthly meetings attended.
Effective August 1, 1998, such fees were increased to $2,000 for the two
regularly scheduled monthly meetings attended. Messrs. Beck and Donohoe
additionally receive $400 per month for Loan Committee meetings attended.
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, 1998, to
the Chief Executive Officer and the highest paid executive officer of the Bank
who received salary and bonus in excess of $100,000 ("Named Executive
Officers").
48
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation(1)
--------------------------------------------------
Other
Annual All Other
Compen- Compen-
Name and Salary Bonus sation sation
Principal Positions Year ($) ($) ($)(2) ($)(3)
- ------------------------------- ---- -------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Samuel C. Harding, Jr. 1998 $218,775 $25,000 $35,160
President (principal
executive officer)
Peggy J. Newman 1998 $213,525 $25,000 $42,604
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 1998, 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 1998, the Bank had no restricted stock or stock related plans in
existence.
(3) Includes deferred compensation of $30,663 and $38,107 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
The Bank and the Company entered into employment agreements (collectively,
the "Employment Agreements") with Mr. Harding and Ms. Newman (individually, the
"Executive"). 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.
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 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
49
<PAGE>
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 paid to Mr. Harding and Ms. Newman
and excluding any benefits under any employee benefit plan which may be payable,
would equal approximately $1.2 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.
Pension Plan. The Bank 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 December 31, 1998, Mr.
Harding and Ms. Newman had 26 and 33 years of service with the Bank,
respectively, for purposes of the Pension Plan.
50
<PAGE>
<TABLE>
<CAPTION>
Years of Credited Service
--------------------------------------------------
Average
Annual
Earnings(1) 15 20 25 30 35
- ----------- --------------------------------------------------
<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).
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 implemented 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.
51
<PAGE>
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 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 December 31, 1998, Mr. Harding and Ms. Newman had completed 27
and 33 years of service, respectively.
52
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information as to those persons believed by
management to be beneficial owners of more than 5% of the Company's outstanding
shares of Common Stock or as disclosed in certain reports received to date
regarding such ownership filed by such persons with the Company and with the
SEC, in accordance with Sections 13(d) and 13(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Other than those persons listed
below, the Company is not aware of any person, as such term is defined in the
Exchange Act, who owns more than 5% of the Company's Common Stock as of the
Record Date.
<TABLE>
<CAPTION>
Name and Address of Number
Title of Class Beneficial Owner of Shares Percent of Class
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Fredericksburg Savings Bank 912,384(1) 8.0%
Employee Stock Ownership Plan
and Trust (the "ESOP")
400 George Street
Fredericksburg, Virginia 22404
Common Stock Fredericksburg Savings 844,800(2) 7.4%
Charitable
Foundation (the "Foundation")
400 George Street
Fredericksburg, Virginia 22404
</TABLE>
_____________________________
(1) Shares of Common Stock were acquired by the ESOP in the Bank's Conversion.
The ESOP Committee administers the ESOP. First Bankers Trust, N.A. has been
appointed as the corporate trustee for the ESOP ("ESOP Trustee"). The ESOP
Trustee, subject to its fiduciary duty, must vote all allocated shares held
in the ESOP in accordance with the instructions of the participants. As of
December 31, 1998, 11,404 shares had been allocated under the ESOP, but not
reported to participants. Under the ESOP, unallocated shares and allocated
shares as to which voting instructions are not given by participants are to
be voted by the ESOP Trustee in a manner calculated to most accurately
reflect the instructions received from participants regarding the allocated
stock so long as such vote is in accordance with the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
(2) The Foundation was established and funded by the Company in connection with
the Bank's Conversion with an amount of the Company's Common Stock equal to
7.4% of the total amount of Common Stock issued in the Conversion. The
Foundation is a Delaware non-stock corporation and is dedicated to the
promotion of charitable purposes within the communities in which the Bank
operates. The Foundation is governed by a board of directors with five
members, four of whom are directors or officers of the Company or the Bank.
The fifth is an individual from the Bank's local community. Pursuant to the
terms of the contribution of Common Stock, as mandated by the Office of
Thrift Supervision ("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 shareholders of the
Company.
53
<PAGE>
Security Ownership of Management
The following table sets forth, as of March 1, 1999, the number of shares
of Common Stock that the directors and executive officers own and that all
directors and executive officers own as a group.
<TABLE>
<CAPTION>
Number of Percent
Name Title of Class Shares of Class
- -------------------------- -------------- ---------- ---------
<S> <C> <C> <C>
H. Smith McKann Common Stock 30,000 *
Ronald G. Beck Common Stock 30,000 *
Samuel C. Harding, Jr. Common Stock 30,800 *
Peggy J. Newman Common Stock 30,000 *
O'Conor Ashby Common Stock 10,000 *
Ernest N. Donohoe Common Stock 10,000 *
DuVal Q. Hicks, Jr. Common Stock 30,000 *
Charles S. Rowe Common Stock 30,000 *
William M. Anderson, Jr. Common Stock -- --%
All directors and executive 200,800 1.76%
officers as a group (9) ======= =====
</TABLE>
*Does not exceed 1.0% of the Company's voting securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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. 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 December 31, 1998, the Bank had $573,000 of loans to executive officers or
Directors all of which had balances of less than $60,000 as of December 31, 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.
54
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following are filed as a part of this report:
. Independent Auditors' Report
. Balance Sheet as of December 31, 1998 and 1997
. Statements of Income for Each of the Years in the Three-Year
Period Ended December 31, 1998
. Statements of Changes in Equity Capital for Each of the Years in
the Three-Year Period Ended December 31, 1998
. Statements of Cash Flows for Each of the Years in the Three-Year
Period Ended December 31, 1998
. Notes to Consolidated Financial Statements
(2) All financial statement schedules are omitted because they are
not required or applicable, or the required information is shown
in the consolidated financial statements or the notes thereto.
(3) Exhibits
3.1 Articles of Incorporation of Virginia Capital Bancshares, Inc.(1)
3.2 Bylaws of Virginia Capital Bancshares, Inc.(1)
4.1 Draft Stock Certificate of Virginia Capital Bancshares, Inc.(1)
10.1 Fredericksburg Savings Bank Employee Stock Ownership Trust Agreement
10.2 ESOP Loan Commitment Letter and ESOP Loan Documents
10.3 Employment Agreement between Fredericksburg Savings Bank and Samuel C.
Harding, Jr.
10.4 Employment Agreement between Fredericksburg Savings Bank and Peggy J.
Newman
10.5 Employment Agreement between Virginia Capital Bancshares, Inc. and Samuel
C. Harding, Jr.
10.6 Employment Agreement between Virginia Capital Bancshares, Inc. and Peggy
J. Newman
10.7 Fredericksburg Savings Bank Employee Severance Compensation Plan
10.8 Fredericksburg Savings Bank Supplemental Executive Retirement Plan
11.0 Computation of earnings per share
16.0 Letter re: Change in Certifying Accountant(2)
21.0 Subsidiary information is incorporated herein by reference to "Item I.
Business - General."
27.1 Financial Data Schedule
99.0 Financial Statements for Virginia Capital Bancshares, Inc. and Subsidiary
____________________
(1) Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement and amendments thereto, initially filed on
September 11, 1998, Registration No. 33-63309.
(2) Incorporated herein by reference into this document from the Current Report
on Form 8-K filed on March 30, 1999.
(b) Reports on Form 8-K
None.
55
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Fredericksburg,
Commonwealth of Virginia, on March 31, 1999.
VIRGINIA CAPITAL BANCSHARES, INC.
By: /s/ Samuel C. Harding, Jr.
-----------------------------
Samuel C. Harding, Jr.
President and Director
Pursuant to the requirements of the Section 13 of Securities Exchange Act
of 1934, this report 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 March 31, 1999
- ----------------------------- (principal executive officer)
Samuel C. Harding, Jr.
/s/ Peggy J. Newman Executive Vice President, March 31, 1999
- ----------------------------- Treasurer, Secretary and Director
Peggy J. Newman (principal accounting
and financial officer)
/s/ H. Smith McKann Chairman of the Board March 31, 1999
- -----------------------------
H. Smith McKann
/s/ Ronald G. Beck Vice Chairman of the Board March 31, 1999
- -----------------------------
Ronald G. Beck
/s/ William M. Anderson, Jr. Director March 31, 1999
- -----------------------------
William M. Anderson, Jr.
/s/ O'Conor Ashby Director March 31, 1999
- -----------------------------
O'Conor Ashby
/s/ Ernest N. Donahoe, Jr. Director March 31, 1999
- -----------------------------
Ernest N. Donahoe, Jr.
/s/ DuVal Q. Hicks, Jr. Director March 31, 1999
- -----------------------------
DuVal Q. Hicks, Jr.
/s/ Charles S. Rowe Director March 31, 1999
- -----------------------------
Charles S. Rowe
</TABLE>
56
<PAGE>
TRUST AGREEMENT
BETWEEN
FREDERICKSBURG SAVINGS AND LOAN ASSOCIATION, F.A.
AND
FIRST BANKERS TRUST COMPANY, N.A.
FOR THE
FREDERICKSBURG SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
<PAGE>
CONTENTS
Page No.
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1 Creation of Trust............................... 1
Section 2 Investment of Trust Fund and
Administrative Powers of the
Trustee......................................... 2
Section 3 Compensation and Indemnification
of Trustee and Payment of Expenses
and Taxes....................................... 7
Section 4 Records and Valuation........................... 8
Section 5 Instructions from Committee..................... 9
Section 6 Change of Trustees.............................. 10
Section 7 Miscellaneous................................... 11
</TABLE>
<PAGE>
This TRUST AGREEMENT dated November 30, 1998, BETWEEN Fredericksburg
Savings and Loan Association, F.A. a federally-chartered savings and loan
association with its principal office at 400 George Street, Fredericksburg,
Virginia 22404 (hereinafter called the "Company"), AND First Bankers Trust
Company, N.A., with offices at 1201 Broadway, Quincy, Illinois 62301
(hereinafter called the "Trustee"),
W I T N E S S E T H T H A T:
WHEREAS, effective January 1, 1998, the Company approved and adopted an
employee stock ownership plan for the benefit of its employees, the
Fredericksburg Savings Bank Employee Stock Ownership Plan, (hereinafter called
the "Plan"); and
WHEREAS, the Company has authorized the execution of this Trust Agreement
and has appointed First Bankers Trust Company, N.A. as Trustee of the Trust Fund
created pursuant to the Plan; and
WHEREAS, First Bankers Trust Company, N.A. has agreed to act as trustee and
to hold and administer the assets of the Plan in accordance with the terms of
this Trust Agreement;
NOW, THEREFORE, the Company and the Trustee agree as follows:
Section 1. Creation of Trust.
------------------
1.1 Trustee. First Bankers Trust Company, N.A. shall be trustee of the
-------
Trust Fund created in accordance with and in furtherance of the Plan, and shall
serve as Trustee until its removal or resignation in accordance with Section 6.
1.2 Trust Fund. The Trustee hereby agrees to accept contributions from
-----------
the Employer as defined in the Plan and amounts transferred from other qualified
retirement plans from time to time in accordance with the terms of the Plan.
All such property and contributions, together with income thereon and increments
thereto, shall constitute the "Trust Fund" to be held in accordance with the
terms of the Trust Agreement.
1.3 Incorporation of Plan. An instrument entitled " Fredericksburg
----------------------
Savings Bank Employee Stock Ownership Plan" is incorporated herein by reference,
and this Trust Agreement shall be interpreted consistently with that Plan. All
words and phrases defined in that Plan shall have the same meaning when used in
this Trust Agreement.
1.4 Name. The name of this trust shall be "Fredericksburg Savings Bank
-----
Employee Stock Ownership Plan Trust."
1.5 Nondiversion of Assets. In no event shall any part of the corpus or
-----------------------
income of the Trust Fund be used for, or diverted to, purposes other than for
-1-
<PAGE>
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan, except to the extent that
assets may be returned to the Employer in accordance with the Plan where the
Plan fails to qualify initially under Section 401(a) of the Code, or where they
are attributable to contributions made by mistake of fact or conditioned upon
their deductibility.
Section 2. Investment of Trust Fund and Administrative Powers of the
---------------------------------------------------------
Trustee.
--------
2.1 Stock and Other Investments. The basic investment policy of the Plan
----------------------------
shall be to invest primarily in Stock of the Employer for the exclusive benefit
of the Participants and their Beneficiaries. The Committee shall have full and
complete investment authority and responsibility with respect to the purchase,
retention, sale, exchange, and pledge of Stock and the payment of Acquisition
Loans, and the Trustee shall not deal in any way with Stock except in accordance
with the written instructions of the Committee. The Trustee shall invest, or
keep invested, all or a portion of the Trust Fund in Stock, and shall pay
Acquisition Loans out of assets of the Trust Fund, as instructed from time to
time by the Committee. The Trustee shall invest any balance of the Trust Fund
(the "Investment Fund") in such other property as the Committee, in its sole
discretion, shall deem advisable, subject to any delegation of such investment
responsibility pursuant to Section 2.2. Nothing contained herein shall provide
investment discretion authority or any like kind responsibility in regard to the
assets of the Trust Fund.
In connection with instructions to acquire Stock, the Trustee may purchase
newly issued or outstanding Stock from an Employer or any other holders of
Stock, including Participants, Beneficiaries, and Plan fiduciaries. All
purchases and sales of Stock shall be made by the Trustee at fair market value
as determined by the Committee in good faith and in accordance with any
applicable requirement under ERISA. Such purchases may be made with assets of
the Trust Fund, with funds borrowed for this purpose (with or without guarantees
of repayment to the lender by an Employer), or by any combination of the
foregoing.
Notwithstanding any other provision of this Trust Agreement or the Plan,
neither the Committee nor Trustee shall make any purchase, sale, exchange,
investment, pledge, valuation, or loan, or take any other action involving those
assets for which it is responsible which (i) is inconsistent with the policy of
the Plan and Trust, (ii) is inconsistent with the prudence and diversification
requirements set forth in Sections 404(a)(1)(B) and (C) of ERISA (to the extent
such requirements apply to an employee stock ownership plan and trust), (iii) is
prohibited by Section 406 or 407 of ERISA, or (iv) would impair the
qualification of the Plan or the exemption of the Trust under Sections 401 and
501 of the Code.
2.2 Delegation of Investment Responsibility. The Committee may, by
----------------------------------------
written notice, direct the Trustee to segregate any portion or all of the
Investment Fund into one or more separate accounts for each of which full
investment responsibility will be delegated to an investment manager appointed
in such notice pursuant to Section 402(c)(3) of ERISA (hereinafter a "Manager").
For any separate account where the Trustee is to maintain custody of
-2-
<PAGE>
the assets, the Trustee and the Manager shall agree upon procedures for the
transmittal of investment instructions from the Manager to the Trustee, and the
Trustee may provide the Manager with such documents as may be necessary to
authorize the Manager to effect transactions directly on behalf of the
segregated account.
Further, the Committee may, by written notice, direct the Trustee to
segregate any portion or all of the Investment Fund into one or more separate
accounts for each of which full investment responsibility will be delegated to
an insurance company through one or more group annuity contracts, deposit
administration contracts, or similar contracts, which may provide for
investments in any commingled separate accounts established under such
contracts. An insurance company shall be a Manager with respect to any amounts
held under such a contract except to the extent the insurer's assets are not
deemed assets of the Plan and Trust Fund pursuant to Section 401(b)(2) of ERISA.
The allocation of amounts held under such a contract among the insurer's general
account and one or more individual or commingled separate accounts shall be
determined by the Company except as otherwise agreed by the Company and the
insurer.
Any Manager shall have all of the powers given to the Trustee pursuant to
Section 2.3 with respect to the portion of the Trust Fund committed to its
investment discretion and control. The Trustee shall be responsible for the
safekeeping of any assets which remain in its custody, but in no event shall the
Trustee be under any duty to question or make any inquiry or suggestion
regarding the action or inaction of a Manager or an insurer or the advisability
of acquiring, retaining, or disposing of any asset of a segregated account. The
Employer shall indemnify and hold the Trustee harmless from any and all costs,
damages, expenses, and liabilities which the Trustee may incur by reason of any
action taken or omitted to be taken by the Trustee upon directions from the
Committee, a Manager, or an insurer pursuant to this Section 2.2.
2.3 Trustee Powers. In addition to and not by way of limitation upon the
---------------
fiduciary powers granted to it by law, the Trustee shall have the following
specific powers, subject to the limitations set forth in Section 2.1:
2.3-1 to receive, hold, manage, invest and reinvest the money or other
property which constitutes the Trust Fund, without distinction between principal
and income;
2.3-2 to hold funds uninvested temporarily without liability for interest
thereon, and to deposit funds in one or more savings or similar accounts with
any banks and savings and loan associations which are insured by an
instrumentality of the federal government, including the Trustee if it is such
an institution.
2.3-3 at the direction of the Committee, to invest or reinvest the whole
or any portion of the money or other property which constitutes the Trust Fund
in such common or preferred stocks, investment trust shares, mutual funds,
commingled trust funds, partnership interests, bonds, notes, or other evidences
of indebtedness, and real and personal property as the Trustee in its absolute
judgment and discretion may deem to be for the best interests of the Trust Fund,
-3-
<PAGE>
regardless of nondiversification to the extent that such nondiversification is
clearly prudent, and regardless of whether any such investment or property is
authorized by law regarding the investment of trust funds, of a wasting asset
nature, temporarily nonincome producing, or within or without the United States;
2.3-4 to invest in common and preferred stocks, bonds, notes, or other
obligations of any corporation or business enterprise in which an Employer or
its owners may own an interest;
2.3-5 at the direction of the Committee, to exchange any investment or
property, real or personal, for other investments or properties at such time and
upon such terms as the Trustee shall deem proper;
2.3-6 at the direction of the Committee, to sell, transfer, convey or
otherwise dispose of any investment or property, real or personal, for cash or
on credit, in such manner and upon such terms and conditions as the Trustee
shall deem advisable, and no person dealing with the Trustee shall be under any
duty to inquire as to the validity, expediency, or propriety of any such sale or
as to the application of the purchase money paid to the Trustee;
2.3-7 to hold any investment or property in the name of the Trustee, with
or without the designation of any fiduciary capacity, or in name of a nominee,
or unregistered, or in such other form that title may pass by delivery;
provided, however, that the Trustee's records always show that such investment
or property belongs to the Trust Fund and the Trustee shall not be relieved
hereby of its responsibility to maintain safe custody of the Trust Fund;
2.3-8 to organize one or more corporations to hold, manage, or liquidate
any property, including real estate, owned or acquired by the Trust Fund if in
the sole discretion of the Trustee the organization of such corporation or
corporations is for the best interest of the Trust;
2.3-9 to extend the time for payment of, to modify, to renew, or to
release security from any mortgage, note or other evidence of indebtedness, or
to take advantage of or waive any default; to foreclose mortgages and bid in
property under foreclosure or to take title to property by conveyance in lieu of
foreclosure, either with or without the payment of additional consideration;
2.3-10 to vote in person or by proxy all stocks and other securities
having voting privileges; to exercise or refrain from exercising any option or
privilege with respect to stocks and other securities, including any right or
privilege to subscribe for or otherwise to acquire stocks and other securities;
or to sell any such right or privilege; to assent to and join in any plan of
refinance, merger, consolidation, reorganization or liquidation of any
corporation or other enterprise in which this Trust may have an interest, to
deposit stocks and other securities with any committee formed to effectuate the
same, to pay any expense incidental thereto, to exchange stocks and other
securities for those which may be issued pursuant to any such plan, and to
retain as an investment the stocks and other securities received by the Trustee;
and to deposit any
-4-
<PAGE>
investment in a voting trust; notwithstanding the preceding, participants and
beneficiaries shall be entitled to direct the manner in which stock allocated to
their respective accounts are to be voted on all matters. All stock which has
been allocated to participant's accounts for which the Trustee has received no
written direction and all unallocated Employer securities will be voted by the
Trustee in direct proportion to any participant directions received and solely
in the interest of the participants and beneficiaries. Whenever such voting
rights are to be exercised, the Employer, the Committee and the Trustee shall
see that all participants and beneficiaries are provided with adequate
opportunity to deliver their instructions to the Trustee regarding voting of
stock allocated to their accounts. The instructions of the participants with
respect to the voting of allocated shares hereunder shall be confidential;
2.3-11 to abandon any property, real or personal, which the Trustee shall
consider to be worthless or not of sufficient value to warrant its keeping or
protecting; to abstain from the payment of taxes, water rents, assessments,
repairs, maintenance, and upkeep of any such property; to permit any such
property to be lost by tax sale or other proceedings, and to convey any such
property for a nominal consideration or without consideration;
2.3-12 to borrow money from an Employer or from others (including the
Trustee), and to enter into installment contracts, for the purchase of Stock
upon such terms and conditions and at such reasonable rates of interest as the
Committee may deem to be advisable, to issue its promissory notes as Trustee to
evidence such debt, to secure the payment of such notes by pledging any property
of the Trust Fund, and to authorize the holders of any such notes to pledge them
to secure obligations of the holders and in connection therewith to repledge any
assets of the Trust as security therefor; provided that, with respect to any
extension of credit to the Trust involving, as a lender or guarantor, an
Employer or another "disqualified person" within the meaning of Section
4975(e)(2) of the Code --
(a) each loan or installment contract is primarily for the benefit of
Participants and Beneficiaries of the Plan;
(b) any interest on a loan or installment contract does not exceed a
reasonable rate;
(c) the proceeds of any loan shall be used only to acquire Stock, to repay
the loan, or to repay a previous loan meeting these conditions, and the
subject of any installment contract shall be only the Trust's
purchase of Stock;
(d) any collateral pledged to a creditor by the Trustee shall consist only
of the assets purchased with borrowed funds or received in accordance
with an installment contract and the creditor shall have no recourse
against the Trust Fund except with respect to the collateral (although
the creditor may have recourse against an Employer as guarantor);
(e) payments with respect to a loan or installment contract shall be made
only from those amounts contributed by the Employer to the Trust Fund,
from amounts earned on such contributions, and from cash dividends
received on unallocated Stock held by the Trust as collateral for such
an obligation; and
-5-
<PAGE>
(f) upon the payment of any portion of balance due on a loan or upon any
installment payment, a proportionate part of any assets originally
pledged as collateral for such indebtedness shall be released from
encumbrance in accordance with the applicable provisions of the Plan
and the Committee shall at least annually advise the Trustee of the
number of shares of Stock so released and the proper allocation of such
shares under the terms of the Plan;
2.3-13 to manage and operate any real property which shall at any time
constitute an asset of the Trust Fund; to make repairs, alterations, and
improvements thereto; to insure such property against loss by fire or other
casualty; to lease or grant options for the sale of such property, which lease
or option may be for a period of time which may extend beyond the life of this
Trust; and to take any other action or enter into any other contract respecting
such property which is consistent with the best interests of the Trust;
2.3-14 to pay any and all reasonable and normal expenses incurred in
connection with the exercise of any power, right, authority or discretion
granted herein, and, upon prior notice to the Company, to employ and compensate
agents, investment counsel, custodians, actuaries, attorneys, and accountants in
such connection;
2.3-15 to employ and consult with any legal counsel, who also may be
counsel to an Employer or the Administrator, with respect to the meaning or
construction of this Trust Agreement, the extent of the Trustee's obligations
and duties hereunder, and whether the Trustee should take or decline to take a
particular action hereunder, and the Trustee shall be fully protected with
respect to any action taken or omitted by it in good faith pursuant to such
advice;
2.3-16 to defend any action or proceeding instituted against the Trust
Fund, to institute any action on behalf of the Trust Fund, and to compromise or
submit to arbitration any dispute concerning the Trust Fund;
2.3-17 to make, execute, acknowledge and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be necessary
or appropriate to carry out the powers herein granted;
2.3-18 to commingle the Trust Fund created pursuant hereto, in whole or in
part, in a single trust with all or any portion of any other trust fund,
assigning an undivided interest to each such commingled trust fund, provided
that such commingled trust is itself exempt from taxation pursuant to Section
501(a) of the Code, or its successor Section; and provided further that the
trust agreement governing such commingled trust shall be deemed incorporated by
reference in the Plan;
2.3-19 where two or more trusts governed by this Trust Agreement have an
undivided interest in any property, to credit the income from such property to
such trusts in proportion to their undivided interests, and when non pro rata
distributions of property or money are made
-6-
<PAGE>
from such trusts, to make appropriate adjustments to the undivided fractional
interests of such trusts;
2.3-20 to invest all or any portion of the Trust Fund in one or more group
annuity contracts, deposit administration contracts, and other such contracts
with insurance companies, including any commingled separate accounts established
under such contracts;
2.3-21 generally, with respect to all cash, stocks and other securities,
and property, both real and personal, received or held in the Trust Fund by the
Trustee, to exercise all the same rights and powers as are or may be lawfully
exercised by persons owning cash, or stocks and other securities, or such
property in their own right; and to do all other acts, whether or not expressly
authorized, which it may deem necessary or proper for the protection of the
Trust Fund; and
2.3-22 whenever more than two persons shall qualify to act as co-trustees,
to exercise and perform every power (including discretionary powers), authority
or duty by the concurrence of a majority of them the same effect as if all had
joined therein, except that the unanimous vote of such persons shall be
necessary to determine the number (one or more) and identity of persons who may
sign checks, make withdrawals from financial institutions, have access to safe
deposit boxes, or direct the sale of trust assets and the disposition of the
proceeds.
2.4 Brokerage. If permitted in writing by the Committee, the Trustee
----------
shall have the power and authority to be exercised in its sole discretion at any
time and from time to time to issue and place orders for the purchase or sale of
securities with qualified brokers and dealers. Such orders may be placed with
such qualified brokers and/or dealers who also provide investment information or
other research or statistical services to the Trustee in its capacity as a
fiduciary or investment manager for other clients.
Section 3. Compensation and Indemnification of Trustee and Payment of
----------------------------------------------------------
Expenses and Taxes.
-------------------
3.1 Fees and Expenses from Fund. Compensation of Trustee. In
---------------------------
consideration for rendering services pursuant to this Trust Agreement the
Trustee shall be paid fees in accordance with the Trustee's fee schedule as in
effect from time to time. Fee changes resulting in fee increases shall be
effective upon not less than 30 days' notice to the Company. In addition, the
Trustee shall be reimbursed for any reasonable expenses, including reasonable
attorneys' fees, incurred in the administration of the Trust created hereby.
Fees and expenses shall be allocated to Participant Accounts, if any, unless
paid directly by the Employer. All compensation and expenses of the Trustee
shall be paid out of the Trust Fund or by the Employer as specified in the Plan.
If and to the extent the Trust Fund shall not be sufficient, such compensation
and expenses shall be paid by the Employer upon demand. If payment is due but
not paid by the Employer, such amount shall be paid from the assets of the
Trust Fund. The Trustee is hereby empowered to withdraw all such compensation
and expenses which are 60 days past due from the Trust
-7-
<PAGE>
Fund, and, in furtherance thereof, liquidate any assets of the Trust Fund,
without further authorization or direction from or by any person.
3.2 Indemnification. Notwithstanding any other provision of this Trust
----------------
Agreement, any individual designated as a trustee hereunder shall be indemnified
and held harmless by the Employer to the fullest extent permitted by law against
any and all costs, damages, expenses and liabilities including, but not limited
to attorneys' fees and disbursements reasonably incurred by or imposed upon such
individual in connection with any claim made against him or in which he may be
involved by reason of his being, or having been, a trustee hereunder, to the
extent such amounts are not satisfied by insurance maintained by the Employer,
except liability which is adjudicated to have resulted from the gross negligence
or willful misconduct of the Trustee by reason of any action so taken. Further,
any corporate trustee and its officers, directors and agents may be indemnified
and held harmless by the Employer to the fullest extent permitted by law against
any and all costs, damages, expenses and liabilities including, but not limited
to attorneys' fees and disbursements reasonably incurred by or imposed upon such
persons and/or corporation in connection with any claim made against it or them
or in which it or them may be involved by reason of its being, or having been, a
trustee hereunder as may be agreed between the Employer and such trustee, except
liability which is adjudicated to have resulted from the gross negligence or
willful misconduct of the Trustee by reason of any action so taken.
3.3 Expenses. All expenses of administering this Trust and the Plan,
---------
whether incurred by the Trustee or the Committee, shall be paid by the Trustee
from the Trust Fund to the extent such expenses shall not have been assumed by
the Employer.
3.4 Taxes. All taxes that may be levied or assessed upon or in respect of
------
the Trust Fund shall be paid from the Trust Fund. The Trustee shall notify the
Committee of any proposed or final assessments of taxes and may assume that any
such taxes are lawfully levied or assessed unless the Committee advises it in
writing to the contrary within fifteen days after receiving the above notice
from the Trustee. In such case, the Trustee, if requested by the Committee in
writing, shall contest the validity of such taxes in any manner deemed
appropriate by the Committee; the Employer may itself contest the validity of
any such taxes, in which case the Committee shall so notify the Trustee and the
Trustee shall have no responsibility or liability respecting such contest. If
either party to this Agreement contests any such proposed levy or assessments,
the other party shall provide such information and cooperation as the party
conducting the contest shall reasonably request.
Section 4. Records and Valuation.
----------------------
4.1 Records. The Trustee, and any investment manager appointed pursuant
--------
to Section 2.2, shall maintain accurate and detailed records and accounts of all
investments, receipts, disbursements and other transactions made by it with
respect to the Trust Fund, and all accounts, books and records relating thereto
shall be open at all reasonable time to inspection and audit by the Committee
and the Employer.
-8-
<PAGE>
4.2 Valuation. From time to time upon the request of the Committee, but
----------
at least annually as of the last day of each Plan Year, the Trustee shall
prepare a balance sheet of the Investment Fund in accordance with Section 8.2
of the Plan and shall deliver copies of the balance sheet to the Committee and
the Employer.
4.3 Discharge of Trustee. Ninety days after the filing of any balance
---------------------
sheet under Section 4.2 or any accounting under Section 6, the Trustee shall be
forever released and discharged from any liability or accountability other than
for gross negligence or wilful misconduct on the part of the Trustee to anyone
with respect to the transactions shown or reflected in such balance sheet or
accounting, except with respect to any acts or transactions as to which the
Committee, within such ninety-day period, files written objections with the
Trustee. The written approval of the Committee of any balance sheet or
accounting so filed by the Trustee, or the Committee's failure to file written
objections within ninety days, shall be a settlement of such balance sheet or
accounting as against all persons, and shall forever release and discharge the
Trustee from any liability of accountability to anyone with respect to the
transactions shown or reflected in such balance sheet or accounting other than
liability arising out of the Trustee's gross negligence or wilful misconduct.
If a statement of objections is filed by the Committee and the Committee is
satisfied that its objections should be withdrawn or if the balance sheet or
accounting is adjusted to its satisfaction, the Committee shall indicate its
approval of the balance sheet or accounting in a written statement filed with
the Trustee and the Trustee shall be forever released and discharged from any
liability of accountability to anyone in accordance with the immediately
preceding sentence. If an objection is not settled by the Committee and the
Trustee, the Trustee may start a proceeding for a judicial settlement of the
balance sheet or accounting in any court of competent jurisdictions; the only
parties that need be joined in such a proceeding are the Trustee, the Committee,
the Employer and any other parties whose participation is required by law.
4.4 Right to Judicial Settlement. Nothing in this Agreement shall prevent
-----------------------------
the Trustee from having its account settled by a court of competent jurisdiction
at any time. The only parties that need be joined in any such proceeding are
the Employer, the Committee, the Trustee and any other parties whose
participation is required by law.
Section 5. Instructions from Committee.
----------------------------
5.1 Certification of Members and Employees. From time to time the Company
---------------------------------------
shall certify to the Trustee in writing the names of the individuals comprising
the Committee and shall furnish to the Trustee specimens of their signatures and
the signatures of their agents, if any. The Trustee shall be entitled to
presume that the identities of such individuals and their agents are unchanged
until it receives a certification from the Company notifying it of any changes.
5.2 Instructions to Trustee.
------------------------
(a) The Trustee shall pay benefits and administrative expenses under the
Plan only when it receives (and in accordance with) written instructions of the
Committee indicating the amount
-9-
<PAGE>
of the payment and the name and address of the recipient in accordance with the
terms of the Plan. The Trustee need not inquire into whether any payment the
Committee instructs it to make is consistent with the terms of the Plan or
applicable law or otherwise proper. Any payment made by the Trustee in
accordance with such instructions shall be a complete discharge and acquittance
to the Trustee. If the Committee advises the Trustee that benefits have become
payable with respect to a Participant's interest in the Trust Fund but does not
instruct the Trustee as to the manner of payment, the Trustee shall hold the
Participant's interest in the Trust until it receives written instructions from
the Committee as to the manner of payment. The Trustee shall not pay benefits
from the Trust Fund without such instructions, even though it may be informed
from other sources, including, without limitation, a Participant or Beneficiary,
that benefits are payable under the Plan. The Trustee shall have no
responsibility to determine when, to whom or in what amount benefits and
expenses are payable under the Plan. Further, the Trustee shall have no power,
authority or duty to interpret the Plan or inquire into the decisions or
determinations of the Committee, or to question the instructions given to it by
the Committee. If the Committee so directs, the Trustee shall segregate amounts
payable with respect to the interest in the Plan of any Participant and
administer them separately from the rest of the Trust Fund in accordance with
the Committee's instructions.
(b) The Trustee may require the Committee to certify in writing that any
payment of benefits or expenses it instructs the Trustee to make pursuant to
Section 5.2(a) above is: (i) in accordance with the terms of the Plan and/or
(ii) one which the Committee is authorized by the Plan and any other applicable
instruments to direct and/or (iii) made for the exclusive purpose of providing
benefits to Participants and Beneficiaries, or defraying reasonable expenses of
Plan administration and/or (iv) not made to a party in interest (within the
meaning of ERISA Section 3(14)), and/or (v) not a prohibited transaction (within
the meaning of Code Section 4975 and ERISA Section 406). If the Trustee
requests, instructions to pay benefits shall be made by the Committee on forms
prepared by the Trustee to include any or all of the above representations. The
Trustee shall be fully protected in relying on the truth of any such
representation by the Committee and shall have no duty to investigate whether
such representations are correct or to see to the application of any amounts
paid to and received by the recipient.
5.3 Plan Change. In the event of an amendment, merger, division, or
------------
termination of the Plan, the Trustee shall continue to disburse funds and to
take other proper actions in accordance with the instructions of the Committee.
Section 6. Change of Trustees.
-------------------
The Company may at any time remove any person or entity serving as a
trustee hereunder by giving to such person or entity written notice of removal
and, if applicable, the name and address of the successor trustee. Any person
or entity serving as a trustee hereunder may resign at any time by giving
written notice to the Company. Any such removal or resignation shall take
effect within 30 days after notice has been given by the trustee or by the
Company, as the case may be. Within those 30 days, the removed or resigned
trustee shall transfer, pay over and
-10-
<PAGE>
deliver any portion of the Trust Fund in its possession or control (less an
appropriate reserve for any unpaid fees, expenses, and liabilities) and all
pertinent records to the successor or remaining trustee; provided, however, that
any assets which are invested in a collective fund or in some other manner which
prevents their immediate transfer shall be transferred and delivered to the
successor trustee as soon as may be practicable. Thereafter, the removed or
resigned trustee shall have no liability for the Trust Fund or for its
administration by the successor or remaining trustee, but shall render an
accounting to the Committee of its administration of the Trust Fund to the date
on which its trusteeship shall have been terminated. The Company may also, upon
30 days' notice to each person currently serving as a trustee, appoint one or
more persons to serve as co-trustees hereunder.
Section 7. Miscellaneous.
--------------
7.1 Right to Amend. This Trust Agreement may be amended from time to time
---------------
by an instrument executed by the Company; provided, however, that any amendment
affecting the powers, duties or liabilities of the Trustee must be approved by
the Trustee, and provided, further, that no amendment may divert any portion of
the Trust Fund to purposes other than the exclusive benefit of the Participants
and their Beneficiaries prior to the satisfaction of all liabilities for
benefits. Any amendment shall apply to the Trust Fund as constituted at the
time of the amendment as well as to that portion of the Trust Fund which is
subsequently acquired.
7.2 Compliance with ERISA. In the exercise of its powers and the
----------------------
performance of its duties, the Trustee shall act in good faith and in accordance
with the applicable requirements under ERISA. Except as may be otherwise
required by ERISA, the Trustee shall not be required to furnish any bond in any
jurisdiction for the performance of its duties and, if a bond is required
despite this provision, no surety shall be required on it.
7.3 Nonresponsibility for Funding. The Trustee shall be under no duty to
------------------------------
enforce the payment of any contributions and shall not be responsible for the
adequacy of the Trust Fund to satisfy any obligations for benefits, expenses,
and liabilities under the Plan.
7.4 Reports. The Trustee shall file any report which it is required by
--------
law to file with any governmental authority with respect to this Trust, and the
Committee shall furnish to the Trustee whatever information is necessary to
prepare the report.
7.5 Dealings with Trustee. Persons dealing with the Trustee, including
----------------------
but not limited to banks, brokers, dealers, and insurers, shall be under no
obligation to inquire concerning the validity of anything which the Trustee
purports to do, nor need any person see to the proper application of any money
paid or any property transferred upon the order of the Trustee or to inquire
into the Trustee's authority as to any transaction.
7.6 Limitation Upon Responsibilities. The Trustee shall have no
---------------------------------
responsibilities with respect to the Plan or Trust other than those specifically
enumerated or explicitly allocated to it
-11-
<PAGE>
under this Trust Agreement or the provisions of ERISA. All other
responsibilities are retained and shall be performed by one or more of the
Employer, the Committee, and such advisors or agents as they choose to engage.
The Trustee may execute any of the trusts or powers hereof and perform any
of its duties by or through attorneys, agents, receivers or employees and shall
not be answerable for the conduct of the same if chosen with reasonable care and
shall be entitled to advice of counsel concerning all matters of trust hereof
and the duties hereunder, and may in all cases pay such reasonable compensation
to all such attorneys, agents, receivers and employees as may reasonably be
employed in connection with the trusts hereof. The Trustee may act upon the
opinion or advice of any attorney (who may be the attorney for the trustee or
attorney for the Committee), approved by the Trustee in the exercise of
reasonable care. The Trustee shall not be responsible for any loss or damage
resulting from any action or non-action in good faith in reliance upon such
opinion or advice.
The Trustee shall be protected in acting upon any notice, request, consent,
certificate, order, affidavit, letter, telegram or other paper or document
believed to be genuine and correct and to have been signed or sent by the proper
person or persons, and the Trustee shall be under no duty to make any
investigation or inquiry as to any statement contained in any such writing but
may accept the same as conclusive evidence of the truth and accuracy of the
statements therein contained.
The Trustee shall not be liable for other than its gross negligence or
willful misconduct. Except in the case of gross negligence or wilful misconduct
on the part of the Trustee, the Trustee in its corporate capacity shall not be
liable for claims of any persons in any manner regarding the Plan; such claims
shall be limited to the Trust Fund. Unless the Trustee participates knowingly
in, or knowingly undertakes to conceal, an act or omission of the Committee or
any other fiduciary, knowing such act or omission to be a breach of fiduciary
responsibility, the Trustee shall be under no liability for any loss of any kind
which may result by reason of such act or omission.
Before taking any action hereunder at the request or direction of the
Committee, the Trustee may require that indemnity in form and amount
satisfactory to the Trustee be furnished for the reimbursement of any and all
costs and expenses to which it may be put including, without limitation,
reasonable attorneys' fees and to protect it against all liability, except
liability which is adjudicated to have resulted from the gross negligence or
willful misconduct of the Trustee by reason of any action so taken.
No provision of this Agreement shall require the Trustee to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties hereunder, or in the exercise of any of its rights or powers.
-12-
<PAGE>
7.7 Qualification of Plan and Trust. The Trustee shall be fully protected
--------------------------------
in assuming that the Plan and Trust meet the requirements of Code Section 401
and 501, respectively, and all the applicable provisions of ERISA unless it is
advised to the contrary in writing by the Committee or a governmental agency.
7.8 Party in Interest Information. The Employer shall provide the Trustee
------------------------------
with such information concerning the relationship between any person or
organization and the Plan as the Trustee reasonably requests in order to
determine whether such person or organization is a party in interest with
respect to the Plan within the meaning of ERISA Section 3(14).
7.9 Disputes. If a dispute arises as to the payment of any funds or
---------
delivery of any assets by the Trustee, the Trustee may withhold such payment or
delivery until the dispute is determined by a court of competent jurisdiction or
finally settled in writing by the parties concerned.
7.10 Successor Trustees. This Trust Agreement shall apply to any person
-------------------
who shall be appointed to succeed the person currently appointed as the Trustee;
and any reference herein to the Trustee shall be deemed to include any one or
more individuals or corporations or any combination thereof who or which shall
at any time act as a co-trustee or as the sole trustee.
7.11 Governing State Law. This Trust Agreement shall be interpreted in
--------------------
accordance with the laws of the Commonwealth of Virginia to the extent those
laws may be applicable under the provisions of ERISA.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
<TABLE>
<CAPTION>
ATTEST: FREDERICKSBURG SAVINGS AND LOAN
ASSOCIATION, F.A.
<S> <C>
/s/ Peggy J. Newman By: /s/ Samuel C. Harding, Jr.
- ------------------------------------- -----------------------------------
Samuel C. Harding, Jr.
President
ATTEST: FIRST BANKERS TRUST COMPANY, N.A.
as TRUSTEE
/s/ Patricia Mayfield By: /s/ Carmen Walch
- ------------------------------------- -----------------------------------
Carmen Walch
Trust Officer
</TABLE>
-13-
<PAGE>
[VIRGINIA CAPITAL BANCSHARES, INC. LETTERHEAD]
Mr. Samuel J. Harding. Jr.
Fredericksburg Savings and Loan Association, F.A.
400 George Street
Fredericksburg, Virginia 22404
Dear Mr. Harding:
This letter confirms Virginia Capital Bancshares, Inc.'s commitment to fund
a leveraged ESOP in an amount up to $________________. The commitment is
subject to the following terms and conditions:
1. Lender: Virginia Capital Bancshares, Inc. (the "Company").
------
2. Borrower: Fredericksburg Savings Bank Employee Stock Ownership
--------
Plan.
3. Trustee: _________________________
-------
4. Security: Unallocated shares of stock of the Company held in the
--------
Fredericksburg Savings Bank Employee Stock Ownership
Plan.
5. Maturity: Up to ____ years
--------
6. Amortization: Equal annual principal and interest payments
------------
7. Pricing: The Prime Rate as published in the Wall Street Journal
-------
on the date of the loan transaction.
8. Interest Payments: Annual on a 360 day basis.
-----------------
9. Prepayment: Voluntary prepayments are permitted at any time.
----------
10. Conditions Precedent to Closing: Receipt by the Company of all
-------------------------------
supporting loan documents in a form and with terms and conditions
satisfactory to the Company and its counsel. Consummation of the
transaction will also be contingent upon no material adverse change
occurring in the condition of Fredericksburg Savings Bank or the
Company.
<PAGE>
11. Closing Date: Not later than ____________, 199__ unless such date is
------------
waived by the Company.
If the terms and conditions are agreeable to you, please indicate your
acceptance by signing the enclosed copy and returning it to my attention.
Sincerely,
Lending Officer
Accepted on Behalf of
Fredericksburg Savings Bank
By: _________________________________ Date: _____________________
Samuel C. Harding, Jr.
President
<PAGE>
FREDERICKSBURG SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN TRUST
LOAN AND SECURITY AGREEMENT
Virginia Capital Bancshares, Inc.
400 George Street
Fredericksburg, Virginia 22404
December 23, 1998
Gentlemen:
The undersigned, First Bankers Trust Company, N.A. ("Trustee"), not
individually but solely as Trustee under the Fredericksburg Savings Bank
Employee Stock Ownership Plan Trust (the "Trust") effective November 30, 1998
(the "Borrower"), applies to you, Virginia Capital Bancshares, Inc. (hereinafter
referred to as the "Lender") for your commitment, subject to all of the terms
and conditions hereof and on the basis of the representations hereinafter set
forth, to make a loan available to the Borrower as hereinafter set forth. The
term "Bank" as used herein refers to the sponsoring employer of the
Fredericksburg Savings Bank Employee Stock Ownership Plan (the "ESOP").
SECTION ONE. THE TERM LOAN.
1.1 AMOUNT AND TERMS. Subject to and upon the terms and conditions herein
----------------
set forth, the Lender agrees to lend amounts to the Borrower, (the "Loan") from
time to time during the period of this agreement up to but not including the
maturity date of September 30, 2018, in an aggregate principal amount (the "Loan
Amount") sufficient to permit the Borrower to acquire a number of shares
("Shares") of common stock, par value $0.01 ("Common Stock") of Virginia Capital
Bancshares, Inc., a Virginia corporation, and the Holding Company of the Bank,
equal to 8% of the Shares issued in connection with the conversion of the Bank
from the mutual to stock form (the "Conversion") including the shares issued to
the Fredericksburg Savings Charitable Foundation, a charitable foundation being
established in connection with the Conversion.
The Loan is intended to be an "exempt loan" as described in Section 4975(d)
of the Internal Revenue Code of 1986, as amended (the "Code"), as defined in
Section 54.4975-7(b) of the Treasury Regulations (the "Regulations"), as
described in Section 408(b)(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and as described in Department of Labor Regulations
Section 2550.408b-3 (collectively, the "Exempt Loan Rules").
1.2 THE NOTE. The disbursement of the Loan pursuant to Section 1.1 hereof
--------
shall be made against and evidenced by a promissory note of the Borrower in the
form annexed hereto as
<PAGE>
Exhibit A (the "Note"), such Note to bear interest as hereinafter provided, and
to mature in eighty (80) equal quarterly installments consisting of both
principal and interest amortized over an eighty (80) month period in an amount
sufficient to repay all borrowed amounts plus interest, commencing on December
31, 1998 and on the last day of each and every March, June, September and
December of each year thereafter, except that the final installment in the
amount of all principal and interest not sooner paid shall be due on September
30, 2018, the final maturity thereof.
Without regard to the principal amount of the Note stated on its face, the
actual principal amount at any time outstanding and owed by the Borrower on
account of the Note shall be the amount of the disbursement of the Loan made by
the Lender under Section 1.1 hereof less all payments of principal actually
received by the Lender. The amount of such disbursement made by the Lender and
any repayments of principal thereof shall be recorded by the Lender on its books
or records or, at its option, endorsed on the reverse side of the Note by the
Lender and the unpaid principal balance at any time so recorded or endorsed by
the Lender shall be prima facie evidence in any court or other proceedings
brought to enforce the Note of the principal amount remaining unpaid thereon.
1.3 EXEMPT LOAN RULES. Notwithstanding anything to the contrary contained
------------------
in this Loan and Security Agreement (the "Agreement") or in the Note, the
Borrower shall be obligated to make repayments of the Loan only to the extent
that such repayments when added to the repayments theretofore made during the
applicable plan year would not exceed an amount which would cause the
limitations of Section 415 of the Code to be exceeded for any ESOP participant.
Except as set forth in the next succeeding sentence and to the extent
permitted by applicable law, including, without limitation, the Exempt Loan
Rules, the principal amount of the Loan and any interest thereon shall be
payable solely from contributions (other than contributions of employer
securities) made to the Trust in accordance with the ESOP, and cash dividends
received on the Shares, to enable the Borrower to pay its obligations under the
Loan and from earnings attributable to the Shares and the investment of such
contributions and dividends.
The Lender acknowledges and agrees that it shall have no other recourse
against the Borrower for repayment of the Loan and that it shall have no
recourse against assets of the ESOP included in the Trust other than pursuant to
Sections 3 and 8 hereof.
SECTION TWO. INTEREST AND FEES.
2.1 INTEREST RATE. The Loan shall bear interest (which the Borrower
-------------
hereby promises to pay) prior to maturity (whether by lapse of time,
acceleration or otherwise) at a rate per annum equal at all times to the
"Interest Rate" defined for purposes of this Agreement to mean the lowest prime
rate reported in the Wall Street Journal on the date of the Conversion.
2
<PAGE>
2.2 BASIS AND PAYMENT DATES. All interest accruing on the Note prior to
------------------------
maturity shall be due and payable on a quarterly basis on the last day of each
March, June, September and December in each year (commencing December 31, 1998)
and at maturity (unless prepaid in whole prior to such date, then on the date of
such prepayment in whole) and interest accruing after maturity shall be due and
payable upon demand. All interest on the Note shall be computed on the basis of
a year of 360 days.
SECTION THREE. COLLATERAL.
3.1 GRANT OF SECURITY INTEREST-PLEDGED SHARES. The Borrower hereby
-----------------------------------------
grants, pledges and assigns to the Lender all Shares of the issued and
outstanding common stock, par value $.01 per share all of which were either (i)
purchased by the Borrower from the proceeds of the disbursement of the Loan;
(ii) acquired by the Borrower with the proceeds of a prior exempt loan within
the meaning of Section 54.4975-7(b) of the Regulations, and pledged as
collateral for such prior exempt loan, where the balance of such prior exempt
loan has been repaid with the proceeds of the disbursement of the Loan (the
"Pledged Shares" being hereinafter referred to as the "Collateral"). The
Pledged Shares shall be evidenced by a stock certificate. The assignment and
pledge herein granted and provided for is made and given to secure and shall
secure the prompt payment of principal of and interest on the Note as and when
the same becomes due and payable and the payment, observance and performance of
any and all obligations and liabilities arising under or provided for in this
Agreement or the Note or any of them in each instance as the same may be amended
or modified and whether now existing or hereafter arising.
3.2 FURTHER ASSURANCES. The Borrower covenants and agrees that it will at
------------------
any time and from time to time as requested by the Lender execute and deliver
such further instruments and perform such other acts as the Lender may
reasonably deem necessary or desirable to provide for or perfect the lien of the
Lender in the Collateral hereunder.
3.3 VOTING. Upon the occurrence of a Default as defined in Section 9
------
hereunder, the Lender shall have the right to transfer the Collateral or any
part thereof into its name or into the name of its nominee. The Lender shall
not be entitled to vote the Pledged Shares unless and until an Event of Default
has occurred and so long as the same shall not have been waived by the Lender.
3.4 PARTIAL RELEASES. The Lender agrees, provided always that no Default
----------------
shall have occurred and be continuing, as promptly as is practicable after
December 31 in each year (the period commencing the date hereof and ending
December 31 and each subsequent 12-month period ending on December 31 being
hereinafter referred to as a "Plan Year"), to release that number of Pledged
Shares then being held to secure the Loan which is equal to the number of such
Pledged Shares held as of the last day of the Plan Year multiplied by a
fraction, the numerator of which is the aggregate amount of all principal and
interest payments made on the
3
<PAGE>
Note during the Plan Year and the denominator of which is the sum of the
numerator plus the unpaid principal and interest of the Note as of the last day
of such Plan Year.
SECTION FOUR. PAYMENTS.
4.1 PLACE AND APPLICATION. All payments of principal, interest, fees and
---------------------
all other amounts payable hereunder shall be made to the Lender at 400 George
Street, Fredericksburg, Virginia 22404 for the account of the Lender (or at such
other place for the account of the Lender as the Lender may from time to time in
writing specify to the Borrower) in immediately available and freely
transferable funds at the place of payment. All payments shall be paid in full
without setoff or counterclaim and without reduction for and free from any and
all taxes, levies, duties, fees, charges, deductions, withholdings, restrictions
or conditions of any nature imposed by any government or any political
subdivision or taxing authority thereof.
4.2 PREPAYMENTS. The Borrower shall have the privilege of prepaying in
-----------
whole or in part the Note at any time upon giving three (3) Business Days' prior
notice to the Lender, each such prepayment to be made by the payment of the
principal amount to be prepaid and accrued interest thereon to the date fixed
for prepayment. The term "Business Day" shall mean any day on which savings
institutions are generally open for business in Virginia, other than Saturday
and Sunday. All such prepayments shall be made without premium or penalty.
Prepayments shall first be applied to the several installments of the Note in
the inverse order of their respective maturities.
SECTION FIVE. REPRESENTATIONS AND WARRANTIES.
The Borrower, to the best of its knowledge, represents and warrants to the
Lender as follows:
5.1 The Trust is a duly organized, validly existing employee stock
ownership trust.
5.2 The proceeds of the disbursement of the Loan shall be applied in their
entirety to the payment of the purchase price for the Pledged Shares.
5.3 The Borrower has full right, power and authority to enter into this
Agreement, to make the borrowings hereunder provided for, to issue the Note in
evidence thereof and to perform each and all of the matters and things herein
and therein provided for and this Agreement does not, and the Note when issued
will not, nor will the performance or observance by the Borrower of any of the
matters or things herein or therein provided, contravene any provision of law or
the Trust or any other covenant or agreement affecting the Trust or any of its
assets. Once acquired by the Trust, the Pledged Shares will be fully paid and
non-assessable and will be owned by the Borrower free and clear of all liens,
charges and encumbrances whatsoever, except for any lien of Lender provided for
herein.
4
<PAGE>
5.4 Except as disclosed to the Lender in writing, there is no litigation
or governmental proceeding pending, nor to the knowledge of the Borrower
threatened, against the ESOP and Trust.
5.5 The ESOP and Trust have no material liabilities, whether absolute or
contingent, except for those heretofore disclosed to the Lender.
SECTION SIX. REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender represents and warrants that:
6.1 The Lender is a corporation duly organized under the laws of the
Commonwealth of Virginia, and is validly existing and in good standing under the
laws of the Commonwealth of Virginia. The Lender has full power and authority
and legal right to make and perform this Agreement.
6.2 The execution, delivery and performance by the Lender of this
Agreement have been duly authorized by all necessary action by the Lender, and
is not in violation of, and will not violate, any provisions of law applicable
to the Lender, any rules, regulations or orders applicable to the Lender or any
judgments or decrees binding upon the Lender. This Agreement is a valid and
legally binding obligation of the Lender enforceable against the Lender in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
credits' rights generally and the general principles of equity (regardless of
whether considered in a proceeding at law or in equity).
6.3 No authorizations, approvals or consents of, and no filings or
registrations with, any governmental regulatory authority or agency are required
for the execution, delivery or performance by the Lender of this Agreement, or
any transaction contemplated hereby, or for the validity or enforceability
against the Lender hereof except as have already been received or accomplished.
6.4 The execution, delivery and performance of the Agreement and the
consummation of the transactions contemplated hereby will not violate, conflict
with or constitute a default under (i) any of the provisions of the Lender's
Certificate of Incorporation or Bylaws, (ii) any provision of any agreement,
instrument, order, arbitration award, judgment or decree to which the Lender is
a party or by which it is or its assets are bound (iii) any statute, rule or
regulation of any federal, state or local government or agency applicable to the
Lender, except in any such case described in (i), (ii), (iii) above, for any
such conflicts, violations, defaults which either individually or in the
aggregate do not have a material adverse effect on the business properties of
the Lender and its subsidiaries, taken as a whole.
6.5 The Bank has taken such actions as are required by applicable law to
be taken by it to establish the ESOP and the Trust.
5
<PAGE>
6.6 There is no action, suit, investigation or proceeding pending, or to
the best knowledge of the Holding Company or the Bank, threatened against or
affecting the ESOP before any court or governmental department, agency or
instrumentality.
6.7 The Loan will be an "exempt loan" as that term is defined under
Section 54.4975-7(b)(1)(iii) of the Regulations, provided the ESOP Committee
determines that the interest rate is not more than reasonable; and the
transactions contemplated by this Agreement which are "prohibited transactions"
within the meaning of Section 4975 of the Code or Section 406(a) of ERISA are
subject to exemption pursuant to Section 4975(d)(3) of the Code and Section 408
of ERISA.
6.8 Except as otherwise provided in this Agreement, the Shares are not
subject to any restriction on transfer under applicable Federal securities law
and may be freely traded over-the-counter.
6.9 DETERMINATION LETTER. The Bank shall apply for a determination letter
from the Internal Revenue Service that the Plan and the Trust, taken together,
qualify as an employee stock ownership plan for purposes of Section 4975(e)(7)
of the Code and the rules and regulations thereunder.
6.10 The Bank or its affiliates shall make contributions to the ESOP
sufficient to enable the Trustee to make payments on the Loan as prescribed by
Section 4.01(b) and related provisions of the ESOP document.
SECTION SEVEN. CONDITIONS PRECEDENT.
The obligation of the Lender to make the Loan shall be subject to
satisfaction of the following conditions precedent:
7.1 The Lender shall have received executed originals of this Agreement
and the Note duly signed and properly completed.
7.2 The Lender shall have received either (i) the certificate evidencing
all the Pledged Shares together with duly executed blank stock power therefore
or (ii) if such Pledged Shares are not yet available, a duly executed agreement
to pledge such stock in the form attached hereto as Exhibit B (in which event
such certificate and stock power will be delivered within 6 days of the date of
the Lender makes the Loan).
7.3 The Lender shall have received copies (executed or certified, as may
be appropriate) of all legal documents or proceedings taken in connection with
the execution and delivery of this Agreement and the Note.
6
<PAGE>
SECTION EIGHT. COVENANTS.
Borrower covenants and agrees that so long as any amount remains unpaid on
the Note or the Commitment is outstanding, except to the extent compliance in
any case or cases is waived in writing by the Lender:
8.1 COMPLIANCE. The Borrower will comply with all requirements of the
----------
Code, ERISA and any other law, rule or regulation applicable to it as such laws,
rules or regulations affect the ESOP or the Trust.
8.2 REPORTS.
-------
(a) The Borrower will maintain a system of accounting for the ESOP
and the Trust in accordance with sound accounting practice and will, from
time to time, furnish to the Lender and its duly authorized
representatives, such information and data with respect to the financial
condition of the ESOP and the Trust as the Lender may reasonably request.
(b) Without any request the Borrower will furnish to the Lender
promptly after knowledge thereof shall have come to the attention of the
Borrower, written notice of the occurrence of any Default or Event of
Default hereunder or of any threatened or pending litigation or
governmental proceeding against the Plan or the Trust.
SECTION NINE. DEFAULT AND REMEDIES.
9.1 DEFAULT. Any one or more of the following shall constitute Default
--------
hereunder:
(a) As of the date when due, the Borrower fails to make payment of
principal and/or interest with respect to the Note or any other amounts
payable under this Agreement within five (5) business days of the date when
due;
(b) As of the date proven false, the Borrower makes any
representation, warranty or statement herein or in connection with the
making of the Loan which proves to be incorrect in any material respect;
(c) As of the date the Borrower fails to perform or observe any term,
covenant or agreement (other than those referred to in subparts (a) and
(b), inclusive, of this Section 9.1) contained in this Agreement and such
failure continues unremedied for a period of 30 days after notice to the
Borrower by the Lender or any other holder of the Note;
(d) As of the date of termination of the ESOP if such termination is
prior to the expiration of the term of this Agreement.
7
<PAGE>
9.2 LIMITATIONS ON USE OF TRUST ASSETS. When any Default described in
-----------------------------------
subsections (a) to (c), of Section 9.1 has occurred and is continuing, the
Lender or the holder of the Note shall have no rights to assets of the Trust
other than (i) contributions (other than contributions of employer securities)
that are made by the Lender to enable the Borrower to meet its obligations
pursuant to the Loan, cash dividends received by the Borrower on the Pledged
Shares and earnings attributable to the investment of such contributions and
dividends and (ii) the Pledged Stock; provided further, however, that the value
of Trust assets transferred to the Lender as a result of a Default shall not
exceed the amount of the repayment then in default, and, provided further, that
so long as the Lender is a "party in interest" within the meaning of ERISA
Section 3(14) or a "disqualified person" within the meaning of Section
4975(e)(2) of the Code, a transfer of Trust assets upon default shall be made
only if, and to the extent of, the Borrower's failure to meet the loan's payment
schedule.
9.3 RIGHTS UPON DEFAULT. When Default has occurred and is continuing the
--------------------
Lender may, in addition to such other rights or remedies as it may have, then or
at any time or times thereafter exercise with respect to the Collateral any and
all of the rights, options and remedies of a secured party under the Uniform
Commercial Code of Virginia ("UCC") including without limitation the sale of all
or any part of the Collateral at any brokers' board or any public or private
sale, provided, however that the Lender shall only be able to exercise such
rights and remedies to the extent of all interest and principal payments which
are due and payable as of the date of the Default and provided further that
prior to such exercise the Lender shall release from the Collateral so much
thereof as it would have been required to release under Section 3.4 hereof if
the period from the previous December 31 to the date of such release constituted
a Plan Year and no Default had occurred. The net proceeds of any such sale,
after deducting all costs and expenses incurred in the collection, protection,
sale and delivery of the Collateral (which expenses Borrower promises to pay)
shall be applied first to the payment of any costs and expenses incurred by the
Lender in selling or otherwise disposing of the Collateral, second, to the
payment of the principal of and the interest on the Note, and, third, ratably as
among any other items of the indebtedness hereby secured. Any surplus remaining
after the full payment and satisfaction of the foregoing shall be returned to
the Borrower or to whomsoever a court of competent jurisdiction shall determine
to be entitled thereto. Any requirement of said UCC as to reasonable notice
shall be met by the Lender personally delivering or mailing notice (by certified
mail - return receipt requested) to the Borrower at its address as provided in
Section 10.6 hereof at least ten (10) days prior to the event giving rise to the
requirement of such notice. In connection with any offer, solicitation or sale
of the Collateral, the Lender may restrict bidders and otherwise proceed in
whatever manner it reasonably believes appropriate in order to comply or assure
compliance with applicable legal requirements pertaining to the offer and sale
of securities of the same type as the Collateral.
9.4 ERISA RESTRICTIONS. The number of shares of Pledged Stock as to which
-------------------
the Lender may exercise the rights set forth in this Section 9 may not exceed
that number of shares (then remaining subject to pledge hereunder) which is then
equal in current value to the amount in default under the Note. The remedies
set forth in this Section 9 may only be exercised to the
8
<PAGE>
extent consistent with the restrictions on remedies set forth in Section
408(b)(3) of ERISA and the regulations thereunder and Section 4975(d)(3) of the
Code and the regulations thereunder.
SECTION TEN. MISCELLANEOUS.
10.1 HOLIDAYS. If any principal of the Note shall fall due on Saturday,
--------
Sunday or on another day which is a legal holiday for savings institutions in
the Commonwealth of Virginia interest at the rate the Note bears for the period
prior to maturity shall continue to accrue on such principal from the stated due
date thereof to and including the next succeeding Business Day on which the same
is payable.
10.2 NO WAIVER, CUMULATIVE REMEDIES. No delay or failure on the part of
------------------------------
the Lender or the part of the holder of the Note in the exercise of any power
or right shall preclude any other or further exercise thereof, or the exercise
of any other power or right, and the rights and remedies hereunder of the Lender
and of any holder of the Note are cumulative to, and not exclusive of, any
rights or remedies which any of them would otherwise have.
10.3 AMENDMENTS, ETC. No amendment, modification, termination or waiver
----------------
of any provision of this Agreement or of the Note nor consent to any departure
by the Borrower therefrom, shall in any event be effective unless the same shall
be in writing and signed by the Lender, and then such consent, modification or
waiver shall be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other further notice or demand in similar or
other circumstances.
10.4. SURVIVAL OF REPRESENTATIONS. All representations and warranties
---------------------------
made herein or in certificates given in connection with the Loan shall survive
the execution and delivery of this Agreement and of the Note, and shall continue
in full force and effect with respect to the date as of which they were made as
long as any credit is in use or available hereunder.
10.5 PAYMENTS. So long as the Lender is the holder of the Note, the
--------
Borrower will promptly and punctually pay the principal of and interest on the
Note without presentment of the Note and without any notation of any such
payment being made on the Note.
10.6 ADDRESSES FOR NOTICES. All communications provided for herein shall
---------------------
be in writing and shall be deemed to have been given or made when served
personally or when deposited in the United States mail addressed, if to the
Borrower at First Bankers Trust Company, N.A., 1201 Broadway, Quincy, Illinois
62301, Attn: Carmen Walch, if to the Lender at 400 George Street,
Fredericksburg, Virginia 22404 Attn: Samuel C. Harding, Jr., with a copy to
Muldoon, Murphy & Faucette, 5101 Wisconsin Avenue, N.W., Washington, D.C. 20016,
Attn: Joseph Muldoon, Esq. or at such other address as shall be designated by
any party hereto in a written notice to each other party pursuant to this
Section 10.6.
9
<PAGE>
10.7 HEADINGS. Article and Section headings used in this Agreement are
--------
for convenience or reference only and are not a part of this Agreement for any
other purpose.
10.8 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is
--------------------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such unenforceability without impairing the enforceability of
the remaining provisions hereof affecting the enforceability of such provision
in any other jurisdiction.
10.9 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, and by different parties hereto on separate counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument.
10.10 BINDING NATURE, GOVERNING LAW, ETC. This Agreement shall be binding
-----------------------------------
upon the Borrower and its successors and assigns and shall inure to the benefit
of the Lender and the benefit of its successors and assigns, including any
subsequent holder of the Note. To the extent not preempted by Federal law, this
Agreement and the rights and duties of the parties hereto shall be construed and
determined in accordance with the laws of the Commonwealth of Virginia without
regard to principles of conflicts of laws. This Agreement constitutes the
entire understanding of the parties with respect to the subject matter hereof
and any prior agreements, whether written or oral, with respect thereto are
superseded hereby.
10.11 CONCERNING THE BORROWER. The term "Borrower" as used herein shall
-----------------------
mean and include the undersigned as Trustee of the Trust and its successors in
trust not individually but solely as Trustee under that certain Fredericksburg
Savings Bank Employee Stock Ownership Plan Trust effective November 30, 1998, by
and between the undersigned and Fredericksburg Savings Bank and this Agreement
shall be binding upon the undersigned and its successors and assigns and upon
the trust estate. The undersigned assumes no personal or individual liability
or responsibility for payment of the indebtedness evidenced by the Note or for
observance or performance of the covenants and agreements herein contained or
for the truthfulness of the representations and warranties herein contained, the
undersigned having executed this Agreement and the Note solely in its capacity
as trustee as aforesaid to bind the undersigned, its successors in trust and the
trust estates.
10.12 LIMITED LIABILITY. Anything contained herein or in the Note to the
-----------------
contrary notwithstanding, the sole and only recourse of the Lender and any other
holder of the Note for payment of the obligations hereunder and under the Note ,
as against the Borrower for the payment of the obligations hereunder and under
the Note shall be to (i) the Collateral, (ii) contributions, other than employer
securities not constituting Collateral hereunder, made to the ESOP and the Trust
by sponsoring employers to enable the Borrower to meet its obligations hereunder
and under the Note, and (iii) earnings attributable to the Pledged Shares and to
the investment of such employer contributions, but only to the extent of the
failure of the Borrower to meet the payment schedule of the Loan provided for
herein. The Trust assets may be transferred to Lender upon the occurrence of a
Default hereunder only upon and to the extent of
10
<PAGE>
the failure of the Plan to meet the payment schedule of the Loan. In no event
may the value of the Trust assets so transferred exceed the amount of the
Default.
10.13 LENDER'S DUTY OF CARE. It is agreed and understood that the
---------------------
Lender's duty with respect to the Collateral shall be solely to use reasonable
care in the custody and preservation of the Collateral in the Lender's
possession, which shall not include any steps necessary to preserve rights
against prior parties.
All provisions in this Agreement shall be construed so as to maintain (i)
the ESOP as a qualified leveraged employee stock ownership plan under Sections
401(a) and 4975(e)(7) of the Code, (ii) the Trust as exempt from taxation under
Section 501(a) of the Code, and (iii) the Loan as an "exempt loan" under the
Exempt Loan Rules.
[Remainder of this page intentionally left blank]
11
<PAGE>
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this 23rd day of December, 1998
First Bankers Trust Company, N.A., and its successors
in trust, as Trustee under that certain Fredericksburg
Savings Bank Employee Stock Ownership Trust effective
November 30, 1998, by and between the undersigned and
Fredericksburg Savings Bank (formerly Fredericksburg
Savings and Loan Association, F.A.)
By: /s/ Carmen Walch, Trust Officer
------------------------------------
Accepted and agreed to at Fredericksburg, Virginia as of the date last
above written.
VIRGINIA CAPITAL BANCSHARES, INC.
By: /s/ Samuel C. Harding, Jr.
------------------------------------
12
<PAGE>
EXHIBIT A
PROMISSORY NOTE
Amount sufficient to satisfy the Loan Amount December 23, 1998
Fredericksburg, Virginia
For VALUE RECEIVED, the undersigned, First Bankers Trust Company, N.A, not
individually but solely as Trustee under that certain Fredericksburg Savings
Bank Employee Stock Ownership Plan Trust effective November 30, 1998, by and
between the undersigned ("Borrower") and Fredericksburg Savings Bank (formerly
Fredericksburg Savings and Loan Association, F.A.) promises to pay to the order
of Virginia Capital Bancshares, Inc. (the "Lender") at its office at 400 George
Street, Fredericksburg, Virginia 22404, the aggregate unpaid principal amount of
all loan amounts or advances under the loan made to the Borrower under Section
1.1 of the Loan and Security Agreement hereinafter referred to in eighty (80)
consecutive quarterly equal installments, consisting of both principal and
interest, amortized over an eighty (80) month period in an amount sufficient to
repay all borrowed amounts plus interest, payable quarterly on December 31, 1998
and on the last day of each and every March, June, September and December in
each year thereafter, except that the final installment in the amount of all
principal and interest not sooner paid shall be due on September 30, 2018, the
final maturity hereof.
The Borrower promises to pay interest (computed on the basis of a year of
365 days) at said office on the balance of principal from time to time remaining
outstanding and unpaid hereon at the rate per annum equal at all times to the
Interest Rate as defined in Section 2.1 of the Loan and Security Agreement (as
defined below) on the last business day of each and every December, March, June
and September commencing December 31, 1998, and in each year thereafter and on
the final maturity date of this Note. On demand, the Borrower promises to pay
interest on any overdue principal hereof (whether by lapse of time,
acceleration, or otherwise) until paid at the stated rate.
This Note is issued under the terms and provisions of that certain
Fredericksburg Savings Bank Employee Stock Ownership Plan Trust Loan and
Security Agreement bearing even date herewith by and between the Borrower and
the Lender (the "Loan and Security Agreement") and this Note and the holder
hereof are entitled to all the benefits and security provided for by or referred
to in such Loan and Security Agreement.
This Note may be declared due prior to its express maturity and voluntary
prepayments may be made hereon, all in the events, on the terms and in the
manner as provided in such Loan and Security Agreement.
<PAGE>
Recourse for the payment of this Note has been limited by the provisions of
the Loan and Security Agreement and this Note is expressly made subject to such
provisions. This Note shall be governed by and construed in accordance with the
laws of the Commonwealth of Virginia without regard to principles of conflicts
of laws. The Borrower hereby waives presentment for payment and demand.
Upon the occurrence of Default as such term is defined in the Loan and
Security Agreement at the option of the Lender, all amounts payable by the
Borrower to the Lender under the terms of this Note may immediately become due
and payable by the Borrower to the Lender pursuant to the provisions of Section
9.3 of the Loan and Security Agreement, and the Lender shall have all of the
rights, powers, and remedies available under the terms of this Note, any of the
other documents evidencing and securing this Loan and all applicable laws. The
Borrower and all endorsers, guarantors, and other parties who may now or in the
future be primarily or secondarily liable for the payment of the indebtedness
evidenced by this Note hereby severally waive presentment, protest and demand,
notice of protest, notice of demand and of dishonor and non-payment of this Note
and expressly agree that this Note and any payment hereunder may be extended
from time to time without in any way affecting the liability of the Borrower,
guarantors and endorsers.
First Bankers Trust Company, N.A. and its
successors in trust, as Trustee under that
certain Fredericksburg Savings Bank Employee
Stock Ownership Trust effective November 30,
1998 by and between the undersigned and
Fredericksburg Savings Bank (formerly
Fredericksburg Savings and Loan Association,
F.A.)
By: /s/ Carmen Walch
------------------
<PAGE>
EXHIBIT B
SECURITY AGREEMENT
INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED
For new value contemporaneously given by Virginia Capital Bancshares, Inc.
("Lender") to the undersigned ("Borrower"), the receipt whereof is hereby
acknowledged and subject to the terms and provisions of the Loan and Security
Agreement described below, the Borrower does hereby grant a security interest to
said Lender in the instruments or negotiable documents hereafter described
("Collateral"), in all of which Collateral the Borrower warrants that the
Borrower has good, valid and effective rights to the ownership and possession
thereof and to the grant of the security interest hereby made:
All Shares of the common stock, par value $.01 per share, of Virginia
Capital Bancshares, Inc., a Virginia corporation, acquired with the proceeds
of the Loan Amount.
Borrower agrees to deliver said collateral to said Lender as soon as
practicable after Borrower's receipt of one or more certificates therefor.
Said security interest secures the payment of all indebtedness and
liabilities as undertaken in the Loan and Security Agreement to which this is a
part, now existing or hereafter arising, and the Lender has all the rights with
respect to said Collateral and said security interest as more fully set forth in
the form of secured note or notes executed and delivered by the undersigned to
said Lender prior hereto or contemporaneously herewith.
This agreement, including matters of interpretation and construction, and
the rights of the Lender and the duties and obligations of the debt hereunder
are to be determined in accordance with the laws of the Commonwealth of
Virginia, particularly the Uniform Commercial Code, except where preempted by
federal law.
Dated at Quincy, Illinois on the 23rd day of December, 1998.
First Bankers Trust Company, N.A. and its
successors in trust, as Trustee under that
certain Fredericksburg Savings Bank Employee
Stock Ownership Trust effective November 30,
1998, by and between the undersigned and
Fredericksburg Savings Bank (formerly
Fredericksburg Savings and Loan Association,
F.A.)
By: /s/ Carmen Walch, Trust Officer
-------------------------------------
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of December 23, 1998, by
and between Virginia Capital Bancshares, Inc. (the "Holding Company"), a
corporation organized under the laws of Virginia with its principal offices at
400 George Street, Fredericksburg, Virginia 22404 and Samuel C. Harding, Jr.
("Executive"). Any reference to "Institution" herein shall mean Fredericksburg
Savings Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as President of the Holding Company. The Executive shall render
administrative and management services to the Holding Company such as are
customarily performed by persons in a similar executive capacity. During said
period, Executive also agrees to serve, if elected, as an officer or director of
any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder, including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
<PAGE>
subsidiaries ("Subsidiaries") and participation in community, professional and
civic organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Holding Company may be terminated by the Holding Company or
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. However, Executive shall not perform, in any respect,
directly or indirectly, during the pendency of his temporary or permanent
suspension or termination from the Institution, duties and responsibilities
formerly performed at the Institution as part of his duties and responsibilities
as President of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company or
its Subsidiaries of $194,775 per year ("Base Salary"). Base Salary shall
include any amounts of compensation deferred by Executive under any tax-
qualified retirement or welfare benefit plan or any other deferred compensation
arrangement maintained by the Holding Company and its Subsidiaries. Such Base
Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by the Board or by a Committee of the Board
delegated such responsibility by the Board. The Committee or the Board may
increase Executive's Base Salary. Any increase in Base Salary shall become the
"Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Holding Company shall also provide Executive,
at no premium cost to Executive, with all such other benefits as provided
uniformly to permanent full-time employees of the Holding Company and its
Subsidiaries. In addition, Executive shall be entitled to incentive
compensation and bonuses as provided in any plan or arrangement of the Holding
Company or its Subsidiaries in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company and its
Subsidiaries will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under all plans relating to stock options, restricted
2
<PAGE>
stock awards, stock purchases, pension, thrift, supplemental retirement, profit-
sharing, employee stock ownership, group life insurance, medical and other
health and welfare coverage, education, cash or stock bonuses that are now or
hereafter made available by the Holding Company or its Subsidiaries to its
senior executives and key management employees, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Executive shall be entitled to incentive compensation and
bonuses as provided in any plan of the Holding Company and its Subsidiaries in
which Executive is eligible to participate. Nothing paid to the Executive under
any such plan or arrangement will be deemed to be in lieu of other compensation
to which the Executive is entitled under this Agreement.
(c) The Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the performance of Executive's
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as President, unless consented to by the
Executive, (B) a material change in Executive's function, duties, or
responsibilities with the Holding Company or its Subsidiaries, which change
would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by the Executive, (C) a relocation of
Executive's principal place of employment by more than 25 miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
Holding Company. Upon the occurrence of any event described in clauses (A),
(B), (C), (D), (E) or (F), above, Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within six full calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of:
(i) the Base Salary and bonuses in accordance with Section 3(a) of this
Agreement that would have been paid to Executive for the remaining term of this
Agreement had the Event of Termination not occurred, plus the value as
calculated by a recognized firm
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customarily performing such valuation, of any stock options or related rights
which as of the Date of Termination have been granted to Executive but are not
exercisable by Executive and the value of any restricted stock or related rights
which have been granted to Executive; but in which Executive does not have a
non-forfeitable or fully-vested interest as of the Date of Termination; and (ii)
all benefits, including health insurance in accordance with Section 3(b) that
would have been provided to Executive for the remaining term of this Agreement
had an Event of Termination not occurred. At the election of the Executive,
which election is to be made prior to an Event of Termination, such payments
shall be made in a lump sum. In the event that no election is made, payment to
the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall not
be reduced in the event the Executive obtains other employment following
termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he
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were a member of the Incumbent Board, or (C) a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Institution or
the Holding Company or similar transaction occurs or is effectuated in which the
Institution or Holding Company is not the resulting entity; provided, however,
that such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required federal regulatory approvals not
including the lapse of any statutory waiting periods, or (D) a proxy statement
has been distributed soliciting proxies from stockholders of the Holding
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Institution with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Institution or
the Holding Company shall be distributed, or (E) a tender offer is made for 20%
or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or reduction
in benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the change in control, unless such
termination is because of his death or termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of:
(i) the Base Salary and bonuses in accordance with Section 3(a) of this
Agreement that would have been paid to Executive for the remaining term of this
Agreement had the event described in Subsection (b) of this Section 5 not
occurred, plus the value, as calculated by a recognized firm customarily
performing such valuation, of any stock option or related rights which as of the
Date of Termination have been granted to Executive, but are not exercisable by
Executive and the value of restricted stock awards or related rights which have
been granted to Executive, but which Executive does not have a non-forfeitable
or fully vested interest as of the Date of Termination and all benefits,
including health insurance, in accordance with Section 3(b) that would have been
provided to Executive for the remaining term of this Agreement had the event
described in Subsection (b) of this Section 5 not occurred; or (ii) three (3)
times Executive's Average Annual Compensation (as defined herein) for the five
(5) preceding taxable years that Executive has been employed by the Holding
Company or its Subsidiaries or such lesser number of years in the event
Executive shall have been employed with the Holding Company or its Subsidiaries
less than five (5) years. Such Average Annual Compensation shall include all
taxable income paid by the Holding Company or its Subsidiaries, including but
not limited to, Base Salary, commissions and bonuses, as well as contributions
on
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behalf of Executive to any pension and profit sharing plan, severance payments,
directors or committee fees and fringe benefits paid or to be paid to the
Executive during such years. At the election of the Executive, which election is
to be made prior to a Change in Control, such payment shall be made in a lump
sum. In the event that no election is made, payment to the Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event Executive
obtains other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Company will cause to be continued life, medical, dental and disability
coverage substantially equivalent to the coverage maintained by the Institution
for Executive at no premium cost to Executive prior to his severance. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the "Non-
Triggering Amount"), the value of which is one dollar ($1.00)
less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G and
the Non-Triggering Amount less the product of the marginal rate
of any applicable state and federal income tax and the Non-
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount.
The allocation of the reduction required hereby among the Termination Benefits
shall be determined by the Executive.
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7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the
date of the Notice of Termination for Cause pursuant to Section 8 hereof through
the Date of Termination, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the
Institution, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination, such stock options and related limited rights and
any such unvested awards shall become null and void and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be
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extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Holding Company will continue to pay Executive his full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, Base Salary) and continue him as a participant in all compensation, benefit
and insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement.
Amounts paid under this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other amounts due
under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
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(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated December 23, 1998,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
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13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the Commonwealth of
Virginia regardless of the laws that might otherwise govern under applicable
principles of conflicts of law.
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18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Virginia law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to
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perform the Holding Company's obligations under this Agreement, in the same
manner and to the same extent that the Holding Company would be required to
perform if no such succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, Virginia Capital Bancshares, Inc. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and its directors, and Executive has signed this Agreement,
on the 23rd day of February, 1999.
ATTEST: VIRGINIA CAPITAL BANCSHARES, INC.
/s/ Peggy J. Newman By: /s/ H. Smith McKann
- ----------------------- ------------------------------
H. Smith McKann
For the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Peggy J. Newman By: /s/ Samuel C. Harding, Jr.
- ----------------------- ------------------------------
Samuel C. Harding, Jr.
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VIRGINIA CAPITAL BANCSHARES, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of December 23, 1998, by
and between Virginia Capital Bancshares, Inc. (the "Holding Company"), a
corporation organized under the laws of Virginia with its principal offices at
400 George Street, Fredericksburg, Virginia 22404 and Peggy J. Newman
("Executive"). Any reference to "Institution" herein shall mean Fredericksburg
Savings Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees to
serve as Executive Vice President, Secretary and Treasurer of the Holding
Company. The Executive shall render administrative and management services to
the Holding Company such as are customarily performed by persons in a similar
executive capacity. During said period, Executive also agrees to serve, if
elected, as an officer or director of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all her
business time, attention, skill, and efforts to the faithful performance of her
duties hereunder, including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in community, professional and
civic
<PAGE>
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Holding Company or its
Subsidiaries, or materially affect the performance of Executive's duties
pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary, Executive's
employment with the Holding Company may be terminated by the Holding Company or
Executive during the term of this Agreement, subject to the terms and conditions
of this Agreement. However, Executive shall not perform, in any respect,
directly or indirectly, during the pendency of her temporary or permanent
suspension or termination from the Institution, duties and responsibilities
formerly performed at the Institution as part of her duties and responsibilities
as Executive Vice President, Secretary and Treasurer of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company or
its Subsidiaries of $189,525 per year ("Base Salary"). Base Salary shall
include any amounts of compensation deferred by Executive under any tax-
qualified retirement or welfare benefit plan or any other deferred compensation
arrangement maintained by the Holding Company and its Subsidiaries. Such Base
Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by the Board or by a Committee of the Board
delegated such responsibility by the Board. The Committee or the Board may
increase Executive's Base Salary. Any increase in Base Salary shall become the
"Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Holding Company shall also provide Executive,
at no premium cost to Executive, with all such other benefits as provided
uniformly to permanent full-time employees of the Holding Company and its
Subsidiaries. In addition, Executive shall be entitled to incentive
compensation and bonuses as provided in any plan or arrangement of the Holding
Company or its Subsidiaries in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company and its
Subsidiaries will not, without Executive's prior written consent, make any
changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under all plans relating to stock options, restricted stock
awards, stock purchases, pension, thrift, supplemental retirement, profit-
sharing, employee
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stock ownership, group life insurance, medical and other health and welfare
coverage, education, cash or stock bonuses that are now or hereafter made
available by the Holding Company or its Subsidiaries to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Holding Company and its Subsidiaries in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) The Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the performance of Executive's
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as Executive Vice President, Secretary and
Treasurer, unless consented to by the Executive, (B) a material change in
Executive's function, duties, or responsibilities with the Holding Company or
its Subsidiaries, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by the Executive, (C)
a relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by the Executive, (D) a material reduction in the benefits and perquisites to
the Executive from those being provided as of the effective date of this
Agreement, unless consented to by the Executive, (E) a liquidation or
dissolution of the Holding Company or the Institution, or (F) breach of this
Agreement by the Holding Company. Upon the occurrence of any event described in
clauses (A), (B), (C), (D), (E) or (F), above, Executive shall have the right to
elect to terminate her employment under this Agreement by resignation upon not
less than sixty (60) days prior written notice given within six full calendar
months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of her subsequent death, her beneficiary or
beneficiaries, or her estate, as the case may be, a sum equal to the sum of:
(i) the Base Salary and bonuses in accordance with Section 3(a) of this
Agreement that would have been paid to Executive for the remaining term of this
Agreement had the Event of Termination not occurred, plus the value as
calculated by a recognized firm
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customarily performing such valuation, of any stock options or related rights
which as of the Date of Termination have been granted to Executive but are not
exercisable by Executive and the value of any restricted stock or related rights
which have been granted to Executive; but in which Executive does not have a
non-forfeitable or fully-vested interest as of the Date of Termination; and (ii)
all benefits, including health insurance in accordance with Section 3(b) that
would have been provided to Executive for the remaining term of this Agreement
had an Event of Termination not occurred. At the election of the Executive,
which election is to be made prior to an Event of Termination, such payments
shall be made in a lump sum. In the event that no election is made, payment to
the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall not
be reduced in the event the Executive obtains other employment following
termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to her termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries, or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though she
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were a member of the Incumbent Board, or (C) a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Institution or
the Holding Company or similar transaction occurs or is effectuated in which the
Institution or Holding Company is not the resulting entity; provided, however,
that such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required federal regulatory approvals not
including the lapse of any statutory waiting periods, or (D) a proxy statement
has been distributed soliciting proxies from stockholders of the Holding
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Institution with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Institution or
the Holding Company shall be distributed, or (E) a tender offer is made for 20%
or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d), of this Section 5
upon her subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or reduction
in benefits or relocation of her principal place of employment by more than 25
miles from its location immediately prior to the change in control, unless such
termination is because of her death or termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company shall pay Executive, or in the event of her subsequent
death, her beneficiary or beneficiaries, or her estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of:
(i) the Base Salary and bonuses in accordance with Section 3(a) of this
Agreement that would have been paid to Executive for the remaining term of this
Agreement had the event described in Subsection (b) of this Section 5 not
occurred, plus the value, as calculated by a recognized firm customarily
performing such valuation, of any stock option or related rights which as of the
Date of Termination have been granted to Executive, but are not exercisable by
Executive and the value of restricted stock awards or related rights which have
been granted to Executive, but which Executive does not have a non-forfeitable
or fully vested interest as of the Date of Termination and all benefits,
including health insurance, in accordance with Section 3(b) that would have been
provided to Executive for the remaining term of this Agreement had the event
described in Subsection (b) of this Section 5 not occurred; or (ii) three (3)
times Executive's Average Annual Compensation (as defined herein) for the five
(5) preceding taxable years that Executive has been employed by the Holding
Company or its Subsidiaries or such lesser number of years in the event
Executive shall have been employed with the Holding Company or its Subsidiaries
less than five (5) years. Such Average Annual Compensation shall include all
taxable income paid by the Holding Company or its Subsidiaries, including but
not limited to, Base Salary, commissions and bonuses, as well as contributions
on
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behalf of Executive to any pension and profit sharing plan, severance payments,
directors or committee fees and fringe benefits paid or to be paid to the
Executive during such years. At the election of the Executive, which election is
to be made prior to a Change in Control, such payment shall be made in a lump
sum. In the event that no election is made, payment to the Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event Executive
obtains other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Company will cause to be continued life, medical, dental and disability
coverage substantially equivalent to the coverage maintained by the Institution
for Executive at no premium cost to Executive prior to her severance. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive, which are deemed to be parachute payments as defined
in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess parachute
payment" under Section 280G of the Code; and
(ii) if such Termination Benefits were reduced to an amount (the "Non-
Triggering Amount"), the value of which is one dollar ($1.00)
less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G and
the Non-Triggering Amount less the product of the marginal rate
of any applicable state and federal income tax and the Non-
Triggering Amount would be greater than the aggregate value of
the Termination Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive thereon by
Section 4999 of the Code and further minus (ii) the product of
the Termination Benefits and the marginal rate of any applicable
state and federal income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount.
The allocation of the reduction required hereby among the Termination Benefits
shall be determined by the Executive.
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7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to her a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for her,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the
date of the Notice of Termination for Cause pursuant to Section 8 hereof through
the Date of Termination, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the
Institution, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination, such stock options and related limited rights and
any such unvested awards shall become null and void and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive shall
be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be
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extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Holding Company will continue to pay Executive her full compensation in effect
when the notice giving rise to the dispute was given (including, but not limited
to, Base Salary) and continue her as a participant in all compensation, benefit
and insurance plans in which she was participating when the notice of dispute
was given, until the dispute is finally resolved in accordance with this
Agreement. Amounts paid under this Section are in addition to all other amounts
due under this Agreement and shall not be offset against or reduce any other
amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of her employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
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(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of her employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Holding Company subject to Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated December 23, 1998,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Holding Company or any
predecessor of the Holding Company and Executive, except that this Agreement
shall not affect or operate to reduce any benefit or compensation inuring to the
Executive of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to her without reference to this Agreement.
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13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the Commonwealth of
Virginia regardless of the laws that might otherwise govern under applicable
principles of conflicts of law.
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18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of her
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including her heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and her heirs, executors and administrators) to the fullest extent
permitted under Virginia law against all expenses and liabilities reasonably
incurred by her in connection with or arising out of any action, suit or
proceeding in which she may be involved by reason of her having been a director
or officer of the Holding Company (whether or not she continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to
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perform the Holding Company's obligations under this Agreement, in the same
manner and to the same extent that the Holding Company would be required to
perform if no such succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Virginia Capital Bancshares, Inc. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and its directors, and Executive has signed this Agreement,
on the 23rd day of February, 1999.
ATTEST: VIRGINIA CAPITAL BANCSHARES, INC.
/s/ Samuel C. Harding, Jr. By: /s/ H. Smith McKann
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H. Smith McKann
For the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Samuel C. Harding, Jr. By: /s/ Peggy J. Newman
- ---------------------------- ---------------------------------------
Peggy J. Newman
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FREDERICKSBURG SAVINGS BANK
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of December 23, 1998, by
and among Fredericksburg Savings Bank (the "Bank"), a federally chartered stock
savings bank, with its principal administrative office at, 400 George Street,
Fredericksburg, Virginia 22404, Virginia Capital Bancshares, Inc., a corporation
organized under the laws of the Commonwealth of Virginia, the holding company
for the Bank (the "Holding Company"), and Samuel C. Harding, Jr. ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a full-
time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
President of the Bank. Executive shall render administrative and management
services to the Bank such as are customarily performed by persons situated in a
similar executive capacity. During said period, Executive also agrees to serve,
if elected, as an officer and director of the Holding Company or any subsidiary
of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be thirty-six (36) months unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 8 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to extend the Agreement and the rationale and results thereof shall be
included in the minutes of the Board's meeting. The Board shall give notice to
the Executive as soon as possible after such review as to whether the Agreement
is to be extended.
<PAGE>
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Bank and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Bank, or materially affect
the performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Bank may be terminated by the Bank or the Executive during the term of
this Agreement, subject to the terms and conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of $194,775 per
year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any tax-qualified retirement or welfare benefit plan
or any other deferred compensation arrangement maintained by the Bank. Such
Base Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by the Board or by a Committee of the Board,
delegated such responsibility by the Board. The Committee or the Board may
increase Executive's Base Salary. Any increase in Base Salary shall become the
"Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Bank shall also provide Executive, at no
premium cost to Executive, with all such other benefits as are provided
uniformly to permanent full-time employees of the Bank. In addition, Executive
shall be entitled to incentive compensation and bonuses as provided in any plan
or arrangement of the Bank in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would materially adversely affect Executive's rights or
benefits thereunder; except to the extent such changes are made applicable to
all Bank employees on a non-discriminatory basis. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under all plans relating to
stock options, restricted stock awards, stock purchases, pension, thrift,
supplemental retirement, profit-sharing, employee stock ownership, group life
insurance, medical and other health and welfare coverage, education, cash or
stock bonuses that are now or hereafter made available by the Bank to its senior
executives and key management
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employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) The Bank shall pay or reimburse Executive for all reasonable travel and
other reasonable expenses incurred by Executive performing his obligations under
this Agreement and may provide such additional compensation in such form and
such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a termination governed by Section 5(a) hereof, or Termination
for Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Bank's employ upon any (A) material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (B)
relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by the Executive, (C) material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (D) a liquidation or dissolution of the
Bank or Holding Company, or (E) breach of this Agreement by the Bank. Upon the
occurrence of any event described in clauses (A), (B), (C), (D), or (E) above,
Executive shall have the right to elect to terminate his employment under this
Agreement by resignation upon not less than sixty (60) days prior written notice
given within six full months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be a sum equal to the sum of:
(i) the Base Salary and bonuses in accordance with Section 3(a) of this
Agreement that would have been paid to Executive for the remaining term of this
Agreement had the Event of Termination not occurred; and (ii) all benefits,
including health insurance in accordance with Section 3(b) that would have been
provided to Executive for the remaining term of the this Agreement had an Event
of Termination not occurred ; provided, however, that any payments pursuant to
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this subsection and subsection 4(c) below shall not, in the aggregate, exceed
three times Executive's average annual compensation for the five most recent
taxable years that Executive has been employed by the Bank or such lesser number
of years in the event that Executive shall have been employed by the Bank for
less than five years. In the event the Bank is not in compliance with its
minimum capital requirements or if such payments pursuant to this
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subsection (b) would cause the Bank's capital to be reduced below its minimum
regulatory capital requirements, such payments shall be deferred until such time
as the Bank or successor thereto is in capital compliance. At the election of
the Executive, which election is to be made prior to an Event of Termination,
such payments shall be made in a lump sum as of the Executive's Date of
Termination. In the event that no election is made, payment to Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event the
Executive obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to his termination at no premium cost to the Executive, except
to the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act and
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company representing
25% or more of the Bank's or the Holding Company's outstanding voting securities
or right to acquire such securities except for any voting securities of the Bank
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; provided, however, that such an event listed above will be
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deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation during the twelve (12) month period following the date of the Change
in Control following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death, disability, retirement or termination for
Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of: (1) the Base Salary and bonuses in accordance with Section 3(a)
of this Agreement that would have been paid to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred and all benefits, including health insurance, in accordance with
Section 3(b) that would have been provided to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred ; or 2) three (3) times Executive's Average Annual Compensation (as
defined herein) for the five (5) most recent taxable years that Executive has
been employed by the Bank or such lesser number of years in the event that
Executive shall have been employed by the Bank for less than five (5) years.
Such "Average Annual Compensation" shall include all taxable income paid by the
Bank, including but not limited to, Base Salary, commissions, and bonuses, as
well as contributions on Executive's behalf to any pension and/or profit sharing
plan, retirement payments, directors or committee fees and fringe benefits paid
or to be paid to the Executive in any such year and payment of any expense items
without accountability or business purpose or that do not meet the Internal
Revenue Service requirements for deductibility by the Bank; provided, however,
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that any payment under this provision and subsection 5(d) below shall not exceed
three (3) times the Executive's average annual compensation. In the event the
Bank is not in compliance with its minimum capital requirements or if such
payments would cause the Bank's capital to be reduced below its minimum
regulatory capital requirements, such payments shall be deferred until such time
as the Bank or successor thereto is in capital compliance. At the election of
the Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum as of the Executive's Date of Termination.
In the event that no election is made, payment to the Executive will be made in
approximately equal installments on a monthly basis over a period of thirty-six
(36) months following the Executive's termination. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to
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the coverage maintained by the Bank for Executive prior to his severance at no
premium cost to the Executive, except to the extent that such coverage may be
changed in its application for all Bank employees on a non-discriminatory basis.
Such coverage and payments shall cease upon the expiration of thirty-six (36)
months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended, or any
successor thereto, and in order to avoid such a result, Termination Benefits
will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the
value of which is one dollar ($1.00) less than an amount equal to three (3)
times Executive's "base amount", as determined in accordance with said Section
280G. The allocation of the reduction required hereby among the Termination
Benefits provided by Section 5 shall be determined by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination for Cause, stock options and related limited
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to Executive under any stock benefit plan
of the Bank, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination for Cause, such stock options and related limited
rights and any unvested awards shall become null and void and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
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8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and,
provided further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause, the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
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10. NON-COMPETITION AND NON-DISCLOSURE OF BANK BUSINESS.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which the
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Subsection 10(a) agree that in the event of
any such breach by Executive, the Bank, will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employees and all
persons acting for or under the direction of Executive. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank.
Further, Executive may disclose information regarding the business activities of
the Bank to the OTS and the Federal Deposit Insurance Corporation ("FDIC")
pursuant to a formal regulatory request. In the event of a breach or threatened
breach by Executive of the provisions of this Section, the Bank will be entitled
to an injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if
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such amounts and benefits due from the Bank are not timely paid or provided by
the Bank, such amounts and benefits shall be paid or provided by the Holding
Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated December 23, 1998,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement.
Payments pursuant to this Agreement and the Holding Company Agreement shall be
allocated in proportion to the services rendered and time expended on such
activities by Executive as determined by the Holding Company and the Bank on a
quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
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15. REQUIRED PROVISIONS.
In the event any of the foregoing provisions of this Section 15 are in
conflict with the terms of this Agreement, this Section 15 shall prevail.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1); the Bank 's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i)
pay Executive all or part of the compensation withheld while their contract
obligations were suspended; and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of the Bank under
this contract shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the Director of the OTS
(or his designee), the FDIC or the Resolution Trust Corporation, at the time the
FDIC enters into an agreement to provide assistance to or on behalf of the Bank
under the authority contained in Section 13(c) of the Federal Deposit Insurance
Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS (or his designee)
at the time the Director (or his designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
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(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k) and 12 C.F.R. Section 545.121 and any rules and regulations promulgated
thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the Commonwealth of Virginia without regards to
principles of conflicts of law of this state, but only to the extent not
superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
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In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits pursuant
to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Section 545.121 and any rules or regulations promulgated thereunder.
23. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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SIGNATURES
IN WITNESS WHEREOF, Fredericksburg Savings Bank and Virginia Capital
Bancshares, Inc. have caused this Agreement to be executed and their seals to be
affixed hereunto by their duly authorized officers and directors, and Executive
has signed this Agreement, on the 23rd day of February, 1999.
ATTEST: FREDERICKSBURG SAVINGS BANK
/s/ Peggy J. Newman By: /s/ H. Smith McKann
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H. Smith McKann
For the Entire Board of Directors
[SEAL]
ATTEST: VIRGINIA CAPITAL BANCSHARES, INC.
(Guarantor)
/s/ Peggy J. Newman By: /s/ H. Smith McKann
- ------------------------- -----------------------------------
H. Smith McKann
For the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Peggy J. Newman /s/ Samuel C. Harding, Jr.
- ------------------------- ---------------------------------
Samuel C. Harding, Jr.
<PAGE>
FREDERICKSBURG SAVINGS BANK
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of December 23, 1998, by
and among Fredericksburg Savings Bank (the "Bank"), a federally chartered stock
savings bank, with its principal administrative office at, 400 George Street,
Fredericksburg, Virginia 22404, Virginia Capital Bancshares, Inc., a corporation
organized under the laws of the Commonwealth of Virginia, the holding company
for the Bank (the "Holding Company"), and Peggy J. Newman ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a full-
time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of her employment hereunder, Executive agrees to serve as
Executive Vice President, Secretary and Treasurer of the Bank. Executive shall
render administrative and management services to the Bank such as are
customarily performed by persons situated in a similar executive capacity.
During said period, Executive also agrees to serve, if elected, as an officer
and director of the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be thirty-six (36) months unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 8 of this Agreement. The Board will review the
Agreement and Executive's performance annually for purposes of determining
whether to extend the Agreement and the rationale and results thereof shall be
included in the minutes of the Board's meeting. The Board shall give notice to
the Executive as soon as possible after such review as to whether the Agreement
is to be extended.
<PAGE>
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all her
business time, attention, skill, and efforts to the faithful performance of her
duties hereunder including activities and services related to the organization,
operation and management of the Bank and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Bank, or materially affect
the performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's employment
with the Bank may be terminated by the Bank or the Executive during the term of
this Agreement, subject to the terms and conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of $189,525 per
year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any tax-qualified retirement or welfare benefit plan
or any other deferred compensation arrangement maintained by the Bank. Such
Base Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by the Board or by a Committee of the Board,
delegated such responsibility by the Board. The Committee or the Board may
increase Executive's Base Salary. Any increase in Base Salary shall become the
"Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Bank shall also provide Executive, at no
premium cost to Executive, with all such other benefits as are provided
uniformly to permanent full-time employees of the Bank. In addition, Executive
shall be entitled to incentive compensation and bonuses as provided in any plan
or arrangement of the Bank in which Executive is eligible to participate.
(b) The Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would materially adversely affect Executive's rights or
benefits thereunder; except to the extent such changes are made applicable to
all Bank employees on a non-discriminatory basis. Without limiting the
generality of the foregoing provisions of this Subsection (b), Executive shall
be entitled to participate in or receive benefits under all plans relating to
stock options, restricted stock awards, stock purchases, pension, thrift,
supplemental retirement, profit-sharing, employee stock ownership, group life
insurance, medical and other health and welfare coverage, education, cash or
stock bonuses that are now or hereafter made available by the Bank to its senior
executives and key management
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employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
(c) The Bank shall pay or reimburse Executive for all reasonable travel and
other reasonable expenses incurred by Executive performing his obligations under
this Agreement and may provide such additional compensation in such form and
such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a termination governed by Section 5(a) hereof, or Termination
for Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Bank's employ upon any (A) material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (B)
relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by the Executive, (C) material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (D) a liquidation or dissolution of the
Bank or Holding Company, or (E) breach of this Agreement by the Bank. Upon the
occurrence of any event described in clauses (A), (B), (C), (D), or (E) above,
Executive shall have the right to elect to terminate her employment under this
Agreement by resignation upon not less than sixty (60) days prior written notice
given within six full months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of her subsequent death, her beneficiary or
beneficiaries, or her estate, as the case may be a sum equal to the sum of:
(i) the Base Salary and bonuses in accordance with Section 3(a) of this
Agreement that would have been paid to Executive for the remaining term of this
Agreement had the Event of Termination not occurred; and (ii) all benefits,
including health insurance in accordance with Section 3(b) that would have been
provided to Executive for the remaining term of the this Agreement had an Event
of Termination not occurred ; provided, however, that any payments pursuant to
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this subsection and subsection 4(c) below shall not, in the aggregate, exceed
three times Executive's average annual compensation for the five most recent
taxable years that Executive has been employed by the Bank or such lesser number
of years in the event that Executive shall have been employed by the Bank for
less than five years. In the event the Bank is not in compliance with its
minimum capital requirements or if such payments pursuant
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to this subsection (b) would cause the Bank's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Bank or successor thereto is in capital compliance. At the
election of the Executive, which election is to be made prior to an Event of
Termination, such payments shall be made in a lump sum as of the Executive's
Date of Termination. In the event that no election is made, payment to Executive
will be made on a monthly basis in approximately equal installments during the
remaining term of the Agreement. Such payments shall not be reduced in the event
the Executive obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to her termination at no premium cost to the Executive, except
to the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event of a nature that: (i) would be required to
be reported in response to Item 1 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act and
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company representing
25% or more of the Bank's or the Holding Company's outstanding voting securities
or right to acquire such securities except for any voting securities of the Bank
purchased by the Holding Company and any voting securities purchased by any
employee benefit plan of the Bank or the Holding Company, or (B) individuals who
constitute the Board on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by the Holding Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (B), considered as though he were a member
of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Holding Company
or similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; provided, however, that such an event listed above will be
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deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon her subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation during the twelve (12) month period following the date of the Change
in Control following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the Change in Control, unless such
termination is because of her death, disability, retirement or termination for
Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b), the
Bank shall pay Executive, or in the event of her subsequent death, her
beneficiary or beneficiaries, or her estate, as the case may be, a sum equal to
the greater of: (1) the Base Salary and bonuses in accordance with Section 3(a)
of this Agreement that would have been paid to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred and all benefits, including health insurance, in accordance with
Section 3(b) that would have been provided to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred ; or 2) three (3) times Executive's Average Annual Compensation (as
defined herein) for the five (5) most recent taxable years that Executive has
been employed by the Bank or such lesser number of years in the event that
Executive shall have been employed by the Bank for less than five (5) years.
Such "Average Annual Compensation" shall include all taxable income paid by the
Bank, including but not limited to, Base Salary, commissions, and bonuses, as
well as contributions on Executive's behalf to any pension and/or profit sharing
plan, retirement payments, directors or committee fees and fringe benefits paid
or to be paid to the Executive in any such year and payment of any expense items
without accountability or business purpose or that do not meet the Internal
Revenue Service requirements for deductibility by the Bank; provided, however,
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that any payment under this provision and subsection 5(d) below shall not exceed
three (3) times the Executive's average annual compensation. In the event the
Bank is not in compliance with its minimum capital requirements or if such
payments would cause the Bank's capital to be reduced below its minimum
regulatory capital requirements, such payments shall be deferred until such time
as the Bank or successor thereto is in capital compliance. At the election of
the Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum as of the Executive's Date of Termination.
In the event that no election is made, payment to the Executive will be made in
approximately equal installments on a monthly basis over a period of thirty-six
(36) months following the Executive's termination. Such payments shall not be
reduced in the event Executive obtains other employment following termination of
employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to
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the coverage maintained by the Bank for Executive prior to her severance at no
premium cost to the Executive, except to the extent that such coverage may be
changed in its application for all Bank employees on a non-discriminatory basis.
Such coverage and payments shall cease upon the expiration of thirty-six (36)
months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended, or any
successor thereto, and in order to avoid such a result, Termination Benefits
will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the
value of which is one dollar ($1.00) less than an amount equal to three (3)
times Executive's "base amount", as determined in accordance with said Section
280G. The allocation of the reduction required hereby among the Termination
Benefits provided by Section 5 shall be determined by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination for Cause, stock options and related limited
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to Executive under any stock benefit plan
of the Bank, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination for Cause, such stock options and related limited
rights and any unvested awards shall become null and void and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
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8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and,
provided further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause, the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
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10. NON-COMPETITION AND NON-DISCLOSURE OF BANK BUSINESS.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which the
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Subsection 10(a) agree that in the event of
any such breach by Executive, the Bank, will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employees and all
persons acting for or under the direction of Executive. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank.
Further, Executive may disclose information regarding the business activities of
the Bank to the OTS and the Federal Deposit Insurance Corporation ("FDIC")
pursuant to a formal regulatory request. In the event of a breach or threatened
breach by Executive of the provisions of this Section, the Bank will be entitled
to an injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if
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such amounts and benefits due from the Bank are not timely paid or provided by
the Bank, such amounts and benefits shall be paid or provided by the Holding
Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated December 23, 1998,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement.
Payments pursuant to this Agreement and the Holding Company Agreement shall be
allocated in proportion to the services rendered and time expended on such
activities by Executive as determined by the Holding Company and the Bank on a
quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to her without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
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15. REQUIRED PROVISIONS.
In the event any of the foregoing provisions of this Section 15 are in
conflict with the terms of this Agreement, this Section 15 shall prevail.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1); the Bank 's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i)
pay Executive all or part of the compensation withheld while their contract
obligations were suspended; and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of the Bank under
this contract shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the Director of the OTS
(or her designee), the FDIC or the Resolution Trust Corporation, at the time the
FDIC enters into an agreement to provide assistance to or on behalf of the Bank
under the authority contained in Section 13(c) of the Federal Deposit Insurance
Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS (or her designee)
at the time the Director (or her designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
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(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k) and 12 C.F.R. Section 545.121 and any rules and regulations promulgated
thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the Commonwealth of Virginia without regards to
principles of conflicts of law of this state, but only to the extent not
superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
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In the event any dispute or controversy arising under or in connection with
Executive's termination is resolved in favor of Executive, whether by judgment,
arbitration or settlement, Executive shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive pursuant
to any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits pursuant
to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including her heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and her
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by her in connection with or
arising out of any action, suit or proceeding in which she may be involved by
reason of her having been a director or officer of the Bank (whether or not she
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
(b) Any payments made to Executive pursuant to this Section are subject to
and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Section 545.121 and any rules or regulations promulgated thereunder.
23. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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SIGNATURES
IN WITNESS WHEREOF, Fredericksburg Savings Bank and Virginia Capital
Bancshares, Inc. have caused this Agreement to be executed and their seals to be
affixed hereunto by their duly authorized officers and directors, and Executive
has signed this Agreement, on the 23rd day of February, 1999.
ATTEST: FREDERICKSBURG SAVINGS BANK
/s/ Samuel C. Harding, Jr. By: /s/ H. Smith McKann
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H. Smith McKann
For the Entire Board of Directors
[SEAL]
ATTEST: VIRGINIA CAPITAL BANCSHARES, INC.
(Guarantor)
/s/ Samuel C. Harding, Jr. By: /s/ H. Smith McKann
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H. Smith McKann
For the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Samuel C. Harding, Jr. /s/ Peggy J. Newman
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Peggy J. Newman
<PAGE>
FREDERICKSBURG SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE>
FREDERICKSBURG SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article I - Introduction........................................ 1
Article II - Definitions........................................ 2
Article III - Eligibility and Participation..................... 5
Article IV - Benefits........................................... 6
Article V - Accounts............................................ 9
Article VI - Supplemental Benefit Payments...................... 10
Article VII - Claims Procedures................................. 12
Article VIII - Amendment and Termination........................ 14
Article IX - General Provisions................................. 15
Article X - Required Regulatory Provisions...................... 18
</TABLE>
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ARTICLE I
INTRODUCTION
SECTION 1.01 PURPOSE, DESIGN AND INTENT.
--------------------------
(a) The purpose of the Fredericksburg Savings Bank Supplemental Executive
Retirement Plan (the "Plan") is to assist Fredericksburg Savings Bank (the
"Bank") and its affiliates in retaining the services of key employees until
their retirement, to induce such employees to use their best efforts to
enhance the business of the Bank and its affiliates, and to provide certain
supplemental retirement benefits to such employees.
(b) The Plan, in relevant part, is intended to constitute an unfunded "excess
benefit plan" as defined in Section 3(36) of the Employee Retirement Income
Security Act of 1974, as amended. The Plan is specifically designed to
provide certain key employees with retirement benefits that would have been
payable under the various tax-qualified retirement plans sponsored by the
Bank but for the limitations placed on the benefits and contribution under
such plans by various provisions of the Internal Revenue Code of 1986, as
amended.
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ARTICLE II
DEFINITIONS
SECTION 2.01 DEFINITIONS. In this Plan, whenever the context so indicates,
-----------
the singular or the plural number and the masculine or feminine gender shall be
deemed to include the other, the terms "he," "his," and "him," shall refer to a
Participant or Beneficiary, as the case may be, and, except as otherwise
provided, or unless the context otherwise requires, the capitalized terms shall
have the following meanings:
(a) "AFFILIATE" means any "parent corporation" or any "subsidiary corporation"
of the Bank, as such terms are defined in Sections 424(e) and 424(f),
respectively, of the Code.
(b) "APPLICABLE LIMITATIONS" means one of the following:
(i) the maximum limitation on annual benefits payable by a qualified
defined benefit plan under Section 415(b) of the Code;
(ii) the maximum limitations on annual additions to a qualified defined
contribution plan under Section 415(c) of the Code;
(iii) the maximum limitation on the aggregate projected annual benefits
payable by qualified defined benefit plans and the annual
additions to qualified defined contribution plans under Section
415(e) of the Code;
(iv) the maximum limitation on the annual amount of compensation that
may, under Section 401(a)(17) of the Code, be taken into account
in determining contributions to and benefits under qualified
plans; and
(v) the maximum limitations, under Sections 401(k), 401(m), or 402(g)
of the Code, on pre-tax contributions that may be made to a
qualified defined contribution plan.
(c) "BANK" means Fredericksburg Savings Bank, and its successors.
(d) "BOARD OF DIRECTORS" means the Board of Directors of the Bank.
(e) "CHANGE IN CONTROL" means with respect to the Bank or the Company, an event
of a nature that: (i) would be required to be reported in response to Item 1 of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Exchange Act; or (ii) results in a "change in
control" of the Bank or the Company within the meaning of the Home Owners' Loan
Act of 1933, as amended, the Federal Deposit Insurance Act or the Rules and
Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its
predecessor agency), as in effect on the date hereof (provided, that in applying
the definition of "change in control" as set forth under the rules and
regulations of the OTS, the Committee shall substitute its judgment for that of
the OTS); or (iii)
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without limitation such a Change in Control shall be deemed to have occurred at
such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank
or the Company representing 20% or more of the Bank's or the Company's
outstanding securities except for any securities of the Bank purchased by the
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any tax-qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board of Directors of either the Bank or the
Company on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination, in the case of the Company, for election by the Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Company or similar transaction occurs in which the Bank or Company is not
the resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods.
(f) "CODE" means the Internal Revenue Code of 1986, as amended.
(g) "COMMITTEE" means the person(s) designated by the Board of Directors,
pursuant to Section 9.02 of the Plan, to administer the Plan.
(h) "COMMON STOCK" means the common stock of the Company.
(i) "COMPANY" means Virginia Capital Bancshares, Inc. and its successors.
(j) "ELIGIBLE INDIVIDUAL" means any Employee of the Bank or an Affiliate who
participates in the ESOP or the Pension Plan, as the case may be, and whom the
Board of Directors determines is one of a "select group of management or highly
compensated employees," as such phrase is used for purposes of Sections 101,
201, and 301 of ERISA.
(k) "EMPLOYEE" means any person employed by the Bank or an Affiliate.
(l) "EMPLOYER" means the Bank or Affiliate that employs the Employee.
(m) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
(n) "ESOP" means the Fredericksburg Savings Bank Employee Stock Ownership Plan,
as amended from time to time.
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(o) "ESOP ACQUISITION LOAN" means a loan or other extension of credit incurred
by the trustee of the ESOP in connection with the purchase of Common Stock on
behalf of the ESOP.
(p) "ESOP VALUATION DATE" means any day as of which the investment experience of
the trust fund of the ESOP is determined and individuals' accounts under the
ESOP are adjusted accordingly.
(q) "EFFECTIVE DATE" means January 1, 1998.
(r) "PARTICIPANT" means an Eligible Employee who is entitled to benefits under
the Plan.
(s) "PENSION PLAN" means the Fredericksburg Savings and Loan Association Fixed
Benefit Pension Plan, as amended from time to time.
(t) "PLAN" means this Fredericksburg Savings Bank Supplemental Executive
Retirement Plan.
(u) "RETIREMENT" means termination of employment at any time following the
satisfaction the requirements for early or normal retirement under either the
ESOP or the Pension Plan, as appropriate.
(v) "SAVINGS PLAN" means the Fredericksburg Savings and Loan Association Salary
Savings Plan, as amended from time to time.
(w) "SUPPLEMENTAL ESOP ACCOUNT" means an account established by an Employer,
pursuant to Section 5.01 of the Plan, with respect to a Participant's
Supplemental ESOP Benefit.
(x) "SUPPLEMENTAL ESOP BENEFIT" means the benefit credited to a Participant
pursuant to Section 4.01 of the Plan.
(y) "SUPPLEMENTAL PENSION ACCOUNT" means an account established by an Employer,
pursuant to Section 5.03 of the Plan, with respect to a Participant's
Supplemental Pension Benefit.
(z) "SUPPLEMENTAL PENSION BENEFIT" means the benefit earned by a Participant
pursuant to Section 4.03 of the Plan.
(aa) "SUPPLEMENTAL SAVINGS BENEFIT" means the benefit credited to a Participant
pursuant to Section 4.04 of the Plan.
(bb) "SUPPLEMENTAL SAVINGS ACCOUNT" means an account established by an Employer,
pursuant to Section 5.04 of the Plan, with respect to a Participant Supplement
Savings Benefit.
(cc) "SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT" means an account established by an
Employer, pursuant to Section 5.02 of the Plan, with respect to a Participant's
Supplemental Stock Ownership Benefit.
(dd) "SUPPLEMENTAL STOCK OWNERSHIP BENEFIT" means the benefit credited to a
Participant pursuant to Section 4.02 of the Plan.
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ARTICLE III
ELIGIBILITY AND PARTICIPATION
SECTION 3.01 ELIGIBILITY AND PARTICIPATION.
-----------------------------
(a) Each Eligible Employee may participate in the Plan. An Eligible Employee
shall become a Participant in the Plan upon designation as such by the
Board of Directors. An Eligible Employee whom the Board of Directors
designates as a Participant in the Plan shall commence participation as of
the date established by the Board of Directors. The Board of Directors
shall establish an Eligible Employee's date of participation at the same
time it designates the Eligible Employee as a Participant in the Plan.
(b) The Board of Directors may, at any time, designate an Eligible Employee as
a Participant for any or all supplemental benefits provided for under
Article IV of the Plan.
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ARTICLE IV
BENEFITS
SECTION 4.01 SUPPLEMENTAL ESOP BENEFIT.
-------------------------
As of the last day of each plan year of the ESOP, the Employer shall credit the
Participant's Supplemental ESOP Account with a Supplemental ESOP Benefit equal
to the excess of (a) over (b), where:
(a) Equals the annual contributions made by the Employer and/or the number of
shares of Common Stock released for allocation in connection with the
repayment of an ESOP Acquisition Loan that would otherwise be allocated to
the accounts of the Participant under the ESOP for the applicable plan year
if the provisions of the ESOP were administered without regard to and of the
Applicable Limitations; and
(b) Equals the annual contributions made by the Employer and for the number of
shares of common stock released for allocation in connection with the
repayment of an ESOP Acquisition Loan that are actually allocated to the
accounts of the Participant under the provisions of the ESOP for that
particular plan year after giving effect to any reduction of such allocation
required by the limitations imposed by any of the Applicable Limitations.
SECTION 4.02 SUPPLEMENTAL STOCK OWNERSHIP BENEFIT.
------------------------------------
(a) Upon a Participant's Retirement from the Employer, the Employer shall credit
to the Participant's Supplemental Stock Ownership Account a Supplemental
Stock Ownership Benefit equal to (i) less (ii), the result of which is
multiplied by (iii), where:
(i) Equals the total number of shares of Common Stock acquired with the
proceeds of all ESOP Acquisition Loans (together with any dividends,
cash proceeds, or other medium related to such ESOP Acquisition Loans)
that would have been allocated or credited for the benefit of the
Participant under the ESOP and/or this Plan, as the case may be, had
the Participant continued in the employ of the Employer through the
first ESOP Valuation Date following the last scheduled payment of
principal and interest on all ESOP Acquisition Loans outstanding at the
time of the Participant's Retirement; and
(ii) Equals the total number of shares of Common Stock acquired with the
proceeds of all ESOP Acquisition Loans (together with any dividends,
cash proceeds, or other medium related to such ESOP acquisition Loans)
and allocated for the benefit of the Participant under the ESOP as of
the first ESOP Valuation Date following the Participant's Retirement;
and
(iii) Equals the higher of the closing price of the Common Stock as of:
(A) The first ESOP Valuation Date following the Participant's
Retirement, or
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(B) The last day of the Participant's employment with the Employer.
(b) For purposes of clause
(i) of subsection (a) of this Section 4.02, the total number of shares
of Common Stock shall be determined by multiplying the sum of (i)
and (ii) by (iii), where: (i) equals the average of the total shares
of Common Stock acquired with the proceeds of an ESOP Acquisition
Loan and allocated for the benefit of the Participant under the ESOP
as of three most recent ESOP Valuation Dates preceding the
Participant's Retirement (or lesser number if the Participant has
not participated in the ESOP for three full years),
(ii) equals the average number of shares of Common Stock credited to the
Participant's Supplemental ESOP Account for the three most recent
plan years of the ESOP (such that the three recent plan years
coincide with the three most recent ESOP Valuation Dates referred to
in (i) above); and
(iii) equals the total number of scheduled annual payments remaining on
the ESOP Acquisition Loans as of the Participant's Retirement.
(c) In the event of a Change in Control:
(i) A Participant's Retirement shall be deemed to have occurred as of
the effective date of the Change in Control, as determined by the
Board of Directors, regardless of whether the Participant continues
in the employ of the Employer following the Change in Control; and
(ii) The determination of fair market value of the Common Stock shall be
made as the effective date of the Change in Control.
SECTION 4.03 SUPPLEMENTAL PENSION BENEFIT.
----------------------------
A Participant or, in the event of his death, his beneficiary, whose retirement
or survivor benefits under the Pension Plan are limited by one or more of the
Applicable Limitations shall be entitled to a supplemental retirement benefit or
survivor benefit (Supplemental Pension Benefit) under this Plan in an amount
equal to the excess of:
(i) the benefit to which he would be entitled under the Pension Plan in
the absence of the Applicable Limitations, computed as of the day
the Participant separates from service with the Employer on the
basis of the benefit form elected under the Pension Plan; over
(ii) the actual benefit to which he is entitled under the Pension Plan,
computed as of the day the Participant separates from service with
the Employer on the basis of the benefit form elected under the
Pension Plan;
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provided, however, that, if the Plan is terminated with respect to a Participant
prior to his separation from service with the Employer, such Supplemental
Pension Benefit shall not exceed the Supplemental Pension Benefit that would
have been payable under this Section 4.03, on the basis of the benefit form
elected under the Pension Plan, if his separation from service had occurred as
of the date of the termination of the Plan.
SECTION 4.04 SUPPLEMENTAL SAVINGS BENEFIT.
----------------------------
A Participant's Supplemental Savings Benefit under the Plan shall be equal to
the excess of (a) over (b), where:
(a) is matching contributions that would otherwise be allocated to an account of
the Participant under the Savings Plan for a particular year if the
provisions of the Savings Plan were administered without regard to any of
the Applicable Limitations; and
(b) is the matching contributions made by the Employer that are actually
allocated to an account of the Participant under the provisions of the
Savings Plan for that particular year after giving effect to any reduction
of such allocation required by any of the Applicable Limitations.
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ARTICLE V
ACCOUNTS
SECTION 5.01 SUPPLEMENTAL ESOP BENEFIT ACCOUNT.
---------------------------------
For each Participant who is credited with a benefit pursuant to Section 4.01 of
the Plan, the Employer shall establish, as a memorandum account on its books, a
Supplemental ESOP Account. Each year, the Committee shall credit to the
Participant's Supplemental ESOP Account the amount of benefits determined under
Section 4.01 of the Plan for that year. The Committee shall credit the account
with an amount equal to the appropriate number of shares of Common Stock or
other medium of contribution that would have otherwise been made to the
Participant's accounts under the ESOP but for the limitations imposed by the
Code. Shares of Common Stock shall be valued under this Plan in the same manner
as under the ESOP. Cash contributions credited to a Participant's Supplemental
ESOP Account shall be credited annually with interest at a rate equal to the
combined weighted return provided to the Participant's non-stock accounts under
the ESOP.
SECTION 5.02 SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT.
------------------------------------
The Employer shall establish, as a memorandum account on its books, a
Supplemental Stock Ownership Account. Upon a Participant's Retirement or in the
event of a Change in Control, the Committee shall credit to the Participant's
Supplemental Stock Ownership Account the amount of benefits determined under
Section 4.02 of the Plan. The Committee shall credit the account with an amount
equal to the appropriate number of shares of Common Stock or other medium of
contribution that would have otherwise been made to the Participant's accounts
under the ESOP but for the Participant's Retirement. Shares of Common Stock
shall be valued under this Plan in the same manner as under the ESOP. Cash
contributions credited to a Participant's Supplemental ESOP Account shall be
credited annually with interest at a rate equal to the combined weighted return
provided to the Participant's non-stock accounts under the ESOP.
SECTION 5.03 SUPPLEMENTAL PENSION ACCOUNT.
----------------------------
RESERVED
SECTION 5.04 SUPPLEMENTAL SAVINGS ACCOUNT.
----------------------------
The Employer shall establish a memorandum account, the "Supplemental Savings
Account" for each Participant on its books, and each year the Committee will
credit the amount of contributions determined under Section 4.04 of the Plan.
Contributions credited to a Participant's Supplemental Savings Account shall be
credited monthly with interest at a rate equal to the combined weighted return
provided to the Participant's matching contribution account under the Savings
Plan.
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ARTICLE VI
SUPPLEMENTAL BENEFIT PAYMENTS
SECTION 6.01 PAYMENT OF SUPPLEMENTAL ESOP BENEFIT.
------------------------------------
(a) A Participant's Supplemental ESOP Benefit shall be paid to the Participant
or in the event of the Participant's death, to his beneficiary in the same
form, time and medium (i.e., cash and/or shares of Common Stock) as his
benefits are paid under the ESOP.
(b) A Participant shall have a non-forfeitable right to the Supplemental ESOP
Benefit credited to him under this Plan in the same percentage as he has to
benefits allocated to him under the ESOP at the time the benefits become
distributable to him under the ESOP.
SECTION 6.02 PAYMENT OF SUPPLEMENTAL STOCK OWNERSHIP BENEFIT.
-----------------------------------------------
(a) A Participant's Supplemental Stock Ownership Benefit shall be paid to the
Participant or in the event of the Participant's death, to his beneficiary
in the same form, time and medium (i.e., cash and/or shares of Common Stock)
as his benefits are paid under the ESOP.
(b) A Participant shall always have a fully non-forfeitable right to the
Supplemental Stock Ownership Benefit credited to him under this Plan.
SECTION 6.03 PAYMENT OF SUPPLEMENTAL PENSION BENEFIT.
---------------------------------------
(a) A Participant's Supplemental Pension Benefit shall be paid to the
Participant or in the event of the Participant's death, to his beneficiary
in the same form, and at the same time as his benefits are paid under the
Pension Plan.
(b) A Participant shall have a non-forfeitable right to his Supplemental Pension
Benefit under this Plan in the same percentage as he has to his accrued
benefits under the Pension Plan at the time the benefits become
distributable to him under the Pension Plan.
SECTION 6.04 PAYMENT OF SUPPLEMENTAL SAVINGS BENEFIT.
---------------------------------------
(a) A Participant's Supplemental Savings Benefit shall be paid to the
Participant or in the event of the Participant's death, to his beneficiary
in the same form, and at the same time as his benefits are paid under the
Savings Plan.
(b) A Participant shall have a non-forfeitable right to his Supplemental Savings
Benefit under this Plan in the same percentage as he has to his accrued
benefits under the Pension Plan at the time the benefits become
distributable to him under the Savings Plan.
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SECTION 6.05 ALTERNATIVE PAYMENT OF BENEFITS.
-------------------------------
Notwithstanding the other provisions of this Article VI, a Participant may, with
prior written consent of the Committee and upon such terms and conditions as the
Committee may impose, request that the Supplemental ESOP Benefit and/or the
Supplemental Stock Ownership Benefit and/or the Supplemental Pension Benefit
and/or Supplemental Savings Benefit to which he is entitled, and the survivor
benefit to which his beneficiary under the Pension Plan may be entitled under
Section 4.03 be paid commencing at a different time, over a different period, in
a different form, or to different persons, than the benefit to which he or his
beneficiary may be entitled under the ESOP or the Pension Plan; provided,
however, that in the event of any difference with respect to his Supplemental
Pension Benefit, the benefit actually paid under this Section 6.04 shall be the
actuarial equivalent (as determined based on applicable tables, factors, and
assumption set forth in the Pension Plan) of the benefit that would be paid in
accordance with the provisions of Section 6.03 of the Plan.
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ARTICLE VII
CLAIMS PROCEDURES
SECTION 7.01 CLAIMS REVIEWER.
---------------
For purposes of handling claims with respect to this Plan, the "Claims Reviewer"
shall be the Committee, unless the Committee designates another person or group
of persons as Claims Reviewer.
SECTION 7.02 CLAIMS PROCEDURE.
----------------
(a) An initial claim for benefits under the Plan must be made by the Participant
or his or her beneficiary or beneficiaries in accordance with the terms of
this Section 7.02.
(b) Not later than ninety (90) days after receipt of such a claim, the Claims
Reviewer will render a written decision on the claim to the claimant, unless
special circumstances require the extension of such 90-day period. If such
extension is necessary, the Claims Reviewer shall provide the Participant or
the Participant's beneficiary or beneficiaries with written notification of
such extension before the expiration of the initial 90-day period. Such
notice shall specify the reason or reasons for the extension and the date by
which a final decision can be expected. In no event shall such extension
exceed a period of ninety (90) days from the end of the initial 90-day
period.
(c) In the event the Claims Reviewer denies the claim of a Participant or any
beneficiary in whole or in part, the Claims Reviewer's written notification
shall specify, in a manner calculated to be understood by the claimant, the
reason for the denial; a reference to the Plan or other document or form
that is the basis for the denial; a description of any additional material
or information necessary for the claimant to perfect the claim; an
explanation as to why such information or material is necessary; and an
explanation of the applicable claims procedure.
(d) Should the claim be denied in whole or in part and should the claimant be
dissatisfied with the Claims Reviewer's disposition of the claimant's claim,
the claimant may have a full and fair review of the claim by the Committee
upon written request submitted by the claimant or the claimant's duly
authorized representative and received by the Committee within sixty (60)
days after the claimant receives written notification that the claimant's
claim has been denied. In connection with such review, the claimant or the
claimant's duly authorized representative shall be entitled to review
pertinent documents and submit the claimant's views as to the issues, in
writing. The Committee shall act to deny or accept the claim within sixty
(60) days after receipt of the claimant's written request for review unless
special circumstances require the extension of such 60-day period. If such
extension is necessary, the Committee shall provide the claimant with
written notification of such extension before the expiration of such initial
60-day period. In all events, the Committee shall act to deny or accept the
claim within 120 days of the receipt of the claimant's written request for
review. The action of the
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Committee shall be in the form of a written notice to the claimant and its
contents shall include all of the requirements for action on the original
claim.
(e) In no event may a claimant commence legal action for benefits the claimant
believes are due the claimant until the claimant has exhausted all of the
remedies and procedures afforded the claimant by this Article VII.
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ARTICLE VIII
AMENDMENT AND TERMINATION
SECTION 8.01 AMENDMENT OF THE PLAN.
---------------------
The Bank may from time to time and at any time amend the Plan; provided,
however, that such amendment may not adversely affect the rights of any
Participant or beneficiary with respect to any benefit under the Plan to which
the Participant or beneficiary may have previously become entitled prior to the
effective date of such amendment without the consent of the Participant or
beneficiary. The Committee shall be authorized to make minor or administrative
changes to the Plan, as well as amendments required by applicable federal or
state law (or authorized or made desirable by such statutes); provided, however,
that such amendments must subsequently be ratified by the Board of Directors.
SECTION 8.02 TERMINATION OF THE PLAN.
-----------------------
The Bank may at any time terminate the Plan; provided, however, that such
termination may not adversely affect the rights of any Participant or
beneficiary with respect to any benefit under the Plan to which the Participant
or beneficiary may have previously become entitled prior to the effective date
of such termination without the consent of the Participant or beneficiary. Any
amounts credited to the supplemental accounts of any Participant shall remain
subject to the provisions of the Plan and no distribution of benefits shall be
accelerated because of termination of the Plan.
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ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01 UNFUNDED, UNSECURED PROMISE TO MAKE PAYMENTS IN THE FUTURE.
----------------------------------------------------------
The right of a Participant or any beneficiary to receive a distribution under
this Plan shall be an unsecured claim against the general assets of the Bank or
its Affiliates and neither a Participant nor his designated beneficiary or
beneficiaries shall have any rights in or against any amount credited to any
account under this Plan or any other assets of the Bank or an Affiliate. The
Plan at all times shall be considered entirely unfunded both for tax purposes
and for purposes of Title I of ERISA. Any funds invested hereunder shall
continue for all purposes to be part of the general assets of the Bank or an
Affiliate and available to its general creditors in the event of bankruptcy or
insolvency. Accounts under this Plan and any benefits which may be payable
pursuant to this Plan are not subject in any manner to anticipation, sale,
alienation, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of a Participant or a Participant's beneficiary. The
Plan constitute a mere promise by the Bank or Affiliate to make benefit payments
in the future. No interest or right to receive a benefit may be taken, either
voluntarily or involuntarily, for the satisfaction of the debts of, or other
obligations or claims against, such Participant or beneficiary, including claims
for alimony, support, separate maintenance and claims in bankruptcy proceedings.
SECTION 9.02 COMMITTEE AS PLAN ADMINISTRATOR.
-------------------------------
(a) The Plan shall be administered by the Committee designated by the Board of
Directors.
(b) The Committee shall have the authority, duty and power to interpret and
construe the provisions of the Plan as it deems appropriate. The Committee
shall have the duty and responsibility of maintaining records, making the
requisite calculations and disbursing the payments hereunder. In addition,
the Committee shall have the authority and power to delegate any of its
administrative duties to employees of the Bank or Affiliate, as they may
deem appropriate. The Committee shall be entitled to rely on all tables,
valuations, certificates, opinions, data and reports furnished by any
actuary, accountant, controller, counsel or other person employed or
retained by the Bank with respect to the Plan. The interpretations,
determination, regulations and calculations of the Committee shall be final
and binding on all persons and parties concerned.
SECTION 9.03 EXPENSES.
--------
Expenses of administration of the Plan shall be paid by the Bank or an
Affiliate.
SECTION 9.04 STATEMENTS.
----------
The Committee shall furnish individual annual statements of accrued benefits to
each Participant, or current beneficiary, in such form as determined by the
Committee or as required by law.
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SECTION 9.05 RIGHTS OF PARTICIPANTS AND BENEFICIARIES.
----------------------------------------
(a) The sole rights of a Participant or beneficiary under this Plan shall be to
have this Plan administered according to its provisions, to receive whatever
benefits he or she may be entitled to hereunder.
(b) Nothing in the Plan shall be interpreted as a guaranty that any funds in any
trust which may be established in connection with the Plan or assets of the
Bank or an Affiliate will be sufficient to pay any benefit hereunder.
(c) The adoption and maintenance of this Plan shall not be construed as creating
any contract of employment or service between the Bank or an Affiliate and
any Participant or other individual. The Plan shall not affect the right of
the Bank or an Affiliate to deal with any Participants in employment or
service respects, including their hiring, discharge, compensation, and
conditions of employment or other service.
SECTION 9.06 INCOMPETENT INDIVIDUALS.
-----------------------
The Committee may from time to time establish rules and procedures which it
determines to be necessary for the proper administration of the Plan and the
benefits payable to a Participant or beneficiary in the event that such
Participant or beneficiary is declared incompetent and a conservator or other
person legally charged with that Participant's or beneficiary's care is
appointed. Except as otherwise provided herein, when the Committee determines
that such Participant or beneficiary is unable to manage his or her financial
affairs, the Committee may pay such Participant's or beneficiary's benefits to
such conservator, person legally charged with such Participant's or
beneficiary's care, or institution then contributing toward or providing for the
care and maintenance of such Participant or beneficiary. Any such payment shall
constitute a complete discharge of any liability of the Bank or an Affiliate and
the Plan for such Participant or beneficiary.
SECTION 9.07 SALE, MERGER, OR CONSOLIDATION OF THE BANK.
------------------------------------------
The Plan may be continued after a sale of assets of the Bank, or a merger or
consolidation of the Bank into or with another corporation or entity only if and
to the extent that the transferee, purchaser or successor entity agrees to
continue the Plan. Additionally, upon a merger, consolidation or other change
in control any amounts credited to Participant's deferral accounts shall be
placed in a grantor trust to the extent not already in such a trust. In the
event that the Plan is not continued by the transferee, purchaser or successor
entity, then the Plan shall be terminated subject to the provisions of Section
7.2 of the Plan. Any legal fees incurred by a Participant in determining
benefits to which such Participant is entitled under the Plan following a sale,
merger, or consolidation of the Bank or an Affiliate of which the Participant is
an Employee or, if applicable, a member of the Board of Directors, shall be paid
by the resulting or succeeding entity.
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SECTION 9.08 LOCATION OF PARTICIPANTS.
------------------------
Each Participant shall keep the Bank informed of his or her current address and
the current address of his or her designated beneficiary or beneficiaries. The
Bank shall not be obligated to search for any person. If such person is not
located within three (3) years after the date on which payment of the
Participant's benefits payable under this Plan may first be made, payment may be
made as though the Participant or his or her beneficiary had died at the end of
such three-year period.
SECTION 9.09 LIABILITY OF THE BANK AND ITS AFFILIATES.
----------------------------------------
Notwithstanding any provision herein to the contrary, neither the Bank nor any
individual acting as an employee or agent of the Bank shall be liable to any
Participant, former Participant, beneficiary, or any other person for any claim,
loss, liability or expense incurred in connection with the Plan, unless
attributable to fraud or willful misconduct on the part of the Bank or any such
employee or agent of the Bank.
SECTION 9.10 GOVERNING LAW.
-------------
All questions pertaining to the construction, validity and effect of the Plan
shall be determined in accordance with the laws of the United States and to the
extent not preempted by such laws, by the laws of the Commonwealth of Virginia.
17
<PAGE>
ARTICLE X
REQUIRED REGULATORY PROVISIONS
SECTION 10.01 REQUIRED REGULATORY PROVISIONS.
------------------------------
(a) The Employer may terminate an Employee's employment at any time, but any
termination by the Employer, other than termination for cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. An Employee shall not have the right to receive compensation or other
benefits for any period after a termination for cause as otherwise provided
hereunder.
(b) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1), the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this Plan shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations of the Bank under
this Plan shall terminate as of the date of default, but this paragraph shall
not affect any vested rights of the Participants.
(e) All obligations of the Bank under this Plan shall be terminated, except
to the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the OTS (or his
designee), the FDIC or the Resolution Trust Corporation, at the time the FDIC
enters into an agreement to provide assistance to or on behalf of the Bank under
the authority contained in Section 13(c) of the Federal Deposit Insurance Act,
12 U.S.C. (S)1823(c); or (ii) by the Director of the OTS (or his designee) at
the time the Director (or his designee) approves a supervisory merger to resolve
problems related to the operations of the Bank or when the Bank is determined by
the Director to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
(f) Any payments made to Participants pursuant to this Plan, or otherwise,
are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k),
12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.
18
<PAGE>
Having been adopted by its Board of Directors on the 25th day of August, 1998,
this Plan is executed by its duly authorized officer this 23rd day of February,
1999.
FREDERICKSBURG SAVINGS BANK
Attest:
/s/ Peggy J. Newman By: /s/ Samuel C. Harding, Jr.
- ------------------------- ----------------------------------
Samuel C. Harding, Jr.
President
19
<PAGE>
FREDERICKSBURG SAVINGS BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of the Fredericksburg Savings Bank Employee Severance
Compensation Plan is to assure for Fredericksburg Savings Bank (the "Bank") the
services of Employees of the Bank in the event of a Change in Control
(capitalized terms are defined in section 2.1) of Virginia Capital Bancshares,
Inc. (the "Holding Company") or the Bank. The benefits contemplated by the Plan
recognize the value to the Bank of the services and contributions of the
Employees of the Bank and the effect upon the Bank resulting from the
uncertainties of continued employment, reduced Employee benefits, management
changes and relocations that may arise in the event of a Change in Control of
the Bank or the Holding Company. The Bank's and the Holding Company's Boards of
Directors believe that it is in the best interests of the Bank and the Holding
Company to provide Employees of the Bank who have been with the Bank for a
minimum of six (6) months with such benefits in order to defray the costs and
changes in Employee status that could follow a Change in Control. The Board of
Directors believes that the Plan will also aid the Bank in attracting and
retaining highly qualified individuals who are essential to its success and the
Plan's assurance of fair treatment of the Bank's Employees will reduce the
distractions and other adverse effects on Employees' performance in the event of
a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes an employee severance compensation plan to be known as the
"Fredericksburg Savings Bank Employee Severance Compensation Plan."
1.2 Applicability of Plan
---------------------
The benefits provided by this Plan shall be available to all Employees of
the Bank, who, at or after the Effective Date, meet the eligibility requirements
of Article III, except for those executive officers who have entered into, or
who enter into in the future, and continue to be subject to an employment or
change in control agreement with the Employer.
<PAGE>
1.3 Contractual Right to Benefits
-----------------------------
This Plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder, enforceable by the
Participant against the Employer.
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings set
forth below.
(a) "Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and cash compensation, if any, paid (including accrued amounts)
by an Employer as consideration for the Participant's service during the 12
months ended the date as of which Annual Compensation is to be determined, which
are or would be includable in the gross income of the Participant receiving the
same for federal income tax purposes.
(b) "Bank" means Fredericksburg Savings Bank or any successor as provided
for in Article VII hereof.
(c) "Change in Control" shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act or
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency) as in effect on the date hereof (provided
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
tax qualified employee benefit plan of the Bank; or (B) individuals who
constitute the Board of Directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or
<PAGE>
(C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity.
(d) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or
approved by the Board of Directors must advise the Board that it is either not
possible to determine if or when such Disability will terminate or that it
appears probable that such Disability will be permanent during the remainder of
said employees lifetime.
(e) "Effective Date" means the date the Plan is approved by the Board of
Directors of the Bank, or such other date as the Board of Directors of the Bank
shall designate in its resolution approving the Plan.
(f) "Employee" means any Employee of the Bank or any subsidiary of the Bank
or any parent of the Bank who has completed at least Six Months of Service with
the Bank, or any subsidiary thereof, provided, however, that any Employee who is
covered or hereinafter becomes covered by an employment contract or change in
control agreement with the Employer shall not be considered to be an "Employee"
for purposes of this Plan.
(g) "Employer" means the Bank or a subsidiary of the Bank or a parent of
the Bank which has adopted the Plan pursuant to Article VI hereof.
(h) "ERISA" means Employee Retirement Income Security Act of 1974, as
amended.
(i) "Expiration Date" means the date ten (10) years from the Effective
Date, unless the Plan is earlier terminated pursuant to Section 8.2 of the Plan
or extended pursuant to Section 8.1 of the Plan.
(j) "Termination for Cause" shall include termination because of a
Participant's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or violation of any final cease-and desist
order, or material breach of any provision of the plan. In determining
incompetence, the acts or omissions shall be measured against standards
generally prevailing in the savings institutions industry.
(k) "Leave of Absence" and "LOA" mean (i) the taking of an authorized or
approved leave of absence under the provisions of the federal Family and Medical
Leave Act ("FMLA"), (ii) any state law providing qualitatively similar benefits
as the FMLA, or (iii) a leave of absence authorized under the policies of the
Bank. "Leave of Absence" and "LOA" are defined in this paragraph for the
exclusive purposes of this Plan.
<PAGE>
(l) "Payment" means the payment of severance compensation as provided for
in Article IV hereof.
(m) "Participant" means an Employee who meets the eligibility requirements
of Article III.
(n) "Plan Year" means the period beginning on the Effective Date and ending
on December 31 and the 12 consecutive-month period ending each year thereafter.
(o) "Plan" means this Fredericksburg Savings Bank Employee Severance
Compensation Plan.
(p) "Six Months of Service" means each consecutive 6 month period,
beginning with an Employee's date of hire in which an Employee is credited with
at least one hour of service in each of the 6 calendar months in such period.
The taking of a LOA shall not eliminate a period of time from being Six Months
of Service if such period of time otherwise qualifies as such. Further if a
particular 6 month period of time would not otherwise qualify under the Plan as
Six Months of Service because one hour of service is not credited during each
month of such period due to the taking of a LOA, then such period of time shall
be deemed to be Six Months of Service for all other purposes of this Plan.
2.2 Applicable Law
--------------
The laws of the Commonwealth of Virginia shall be the controlling law in
all matters relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
The term Participant shall include all Employees of the Employer who have
completed at least Six Months of Service with the Employer at the time of any
termination pursuant to Section 4.2 of this Plan. Notwithstanding the
foregoing, persons who have entered into and continue to be covered by an
employment contract or change in control agreement with the Employer shall not
be entitled to participate in this Plan.
<PAGE>
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to
receipt of a Payment shall remain a Participant in this Plan until the full
amount of such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his respective Employer a
Payment in the amount provided in Section 4.3 of the Plan if there has been a
Change in Control of the Bank or the Holding Company and if, within one (1) year
thereafter, the Participant's employment by an Employer shall terminate for any
reason specified in Section 4.2 of the Plan, whether the termination of
employment is voluntary or involuntary. A Participant shall not be entitled to
a Payment if termination occurs by reason of death, voluntary retirement,
voluntary termination other than for reasons specified in Section 4.2 of the
Plan, Disability, or as a result of Termination for Cause .
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a Payment
if employment by an Employer is terminated, voluntarily or involuntarily, for
any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control.
(b) The Employer materially changes the Participant's function, duties
or responsibilities which would cause the Participant's position to be one of
lesser responsibility, importance or scope with the Employer than immediately
prior to the change in control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than thirty (30) miles from the location of the Participant's job
or office immediately prior to the Change in Control provided that such new
location is not closer to the Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control,
provided, however, that a material reduction in benefits and perquisites
generally provided to all Employees of the Employer on a nondiscriminatory basis
would not trigger a payment pursuant to this Plan.
<PAGE>
(e) A successor to the Bank fails or refuses to assume the Employer's
obligations under this Plan, as required by Article VII.
(f) The Bank or any successor to the Bank breaches any other
provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Termination for Cause.
4.3 Amount of Payment
-----------------
(a) Each Participant entitled to a Payment under this Plan shall
receive from the Bank, a lump sum cash payment equal to one-twelfth of his
Annual Compensation for each year of service up to a maximum of 199% of Annual
Compensation.
(b) Notwithstanding the provisions of paragraph (a) above, if a
Payment to a Participant who is a "Disqualified Individual" shall be in an
amount which includes an "Excess Parachute Payment," the Payment hereunder to
that Participant shall be reduced to the maximum amount which does not include
an Excess Parachute Payment. The terms "Disqualified Individual" and "Excess
Parachute Payment" shall have the same meanings as under Section 280G of the
Internal Revenue Code of 1986, as amended, or any successor provision thereto.
The Participant shall not be required to mitigate damages on the amount of
the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than twenty (20) business days after the termination of the
Participant's employment. If any Participant should die after termination of
the employment but before all amounts have been paid, such unpaid amounts shall
be paid to the Participant's named beneficiary, if living, otherwise to the
personal representative on behalf of or for the benefit of the Participant's
estate.
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an Employee
<PAGE>
of an Employer, whether existing now or hereafter, under any benefit, incentive,
retirement, stock option, stock bonus, stock ownership or any employment
agreement or other plan or arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant or the Participant's Employer any obligation to retain the
Participant as an Employee, to change the status of the Participant's
employment, or to change the Employer's policies regarding termination of
employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of Directors of the Bank, this Plan may be
adopted by any "Subsidiary" or "Parent" of the Bank. Upon such adoption, the
Subsidiary or Parent shall become an Employer hereunder and the provisions of
the Plan shall be fully applicable to the Employees of that Subsidiary or
Parent. The term "Subsidiary" means any corporation in which the Bank, directly
or indirectly, holds a majority of the voting power of its outstanding shares of
capital stock. The term "Parent" means any corporation which holds a majority
of the voting power of the Bank's outstanding shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Employer shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Employer, expressly and
unconditionally to assume and agree to perform the Employer's obligations under
this plan, in the same manner and to the same extent that the Employer would be
required to perform if no such succession or assignment had taken place.
<PAGE>
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2 of the
Plan, or unless extended for an additional period or periods by resolution
adopted by the Board of Directors of the Bank.
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of Directors of the Bank, unless a Change in Control
has previously occurred. If a Change in Control occurs, the Plan no longer
shall be subject to amendment, change, substitution, deletion, revocation or
termination in any respect whatsoever.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board of
Directors. A proper amendment of the Plan automatically shall effect a
corresponding amendment to each Participant's rights hereunder. A proper
termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
8.4 No Attachment
-------------
(a) Except as required by law, no right to receive payments under this
Plan shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect such action shall be null, void,
and of no effect.
(b) This Plan shall be binding upon, and inure to the benefit of,
Employee and the Bank and their respective successors and assigns.
<PAGE>
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Employer may terminate an Employee's employment at any time, but
any termination by the Employer, other than Termination for Cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. Employee shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as otherwise provided
hereunder.
10.2 If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1), the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
10.3 If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1), all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations under the Plan shall be terminated, except to the
extent determined that continuation of the Plan is necessary for the continued
operation of the Bank:
(a) by the Director or her designee, at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or
<PAGE>
(b) by the Director or her designee, at the time the Director or her
designee approves a supervisory merger to resolve problems related to operation
of the Bank or when the Bank is determined by the Director to be in an unsafe or
unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
10.6 Any payments made to a Participant pursuant to this Plan, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
ARTICLE XI
ADMINISTRATIVE PROVISIONS
11.1 Plan Administrator. The administrator of the Plan shall be under the
-------------------
supervision of the Board of Directors of the Bank or a Committee appointed by
the Board of Directors of the Bank (the "Board"). It shall be a principal duty
of the Board to see that the Plan is carried out in accordance with its terms,
for the exclusive benefit of persons entitled to participate in the Plan without
discrimination among them. The Board will have full power to administer the
Plan in all of its details subject, however, to the requirements of ERISA if the
Plan is subject to such requirements. For this purpose, the Board's powers will
include, but will not be limited to, the following authority, in addition to all
other powers provided by this Plan: (a) to make and enforce such rules and
regulations as it deems necessary or proper for the efficient administration of
the Plan; (b) to interpret the Plan, its interpretation thereof in good faith
to be final and conclusive on all persons claiming benefits under the Plan; (c)
to decide all questions concerning the Plan and the eligibility of any person to
participate in the Plan; (d) to compute the amount of Payment that will be
payable to any Participant or other person in accordance with the provisions of
the Plan, and to determine the person or persons to whom such benefits will be
paid; (e) to authorize Payments; (f) to appoint such agents, counsel,
accountants, consultants and actuaries as may be required to assist in
administering the Plan; and (g) to allocate and delegate its responsibilities
under the Plan and to designate other persons to carry out any of its
responsibilities under the Plan, any such allocation, delegation or designation
to be by written instrument and in accordance with Section 405 of ERISA if
applicable.
11.2 Named fiduciary. The Board will be a "named fiduciary" for purposes
----------------
of Section 402(a)(1) of ERISA with authority to control and manage the operation
and administration of the Plan, and will be responsible for complying with all,
if any, of the reporting and disclosure requirements of Part 1 of Subtitle B of
Title I of ERISA.
11.3 Claims and review procedures.
-----------------------------
(a) Claims procedure. If any person believes he is being denied any
-----------------
rights or benefits under the Plan, such person may file a claim in writing with
the Board. If any such claim is wholly or partially denied, the Board will
notify such person of its decision in writing.
<PAGE>
Such notification will be written in a manner calculated to be understood by
such person and will contain (i) specific reasons for the denial, (ii) specific
reference to pertinent Plan provisions, (iii) a description of any additional
material or information necessary for such person to perfect such claim and an
explanation of why such material or information is necessary and (iv)
information as to the steps to be taken if the person wishes to submit a request
for review. Such notification will be given within 90 days after the claim is
received by the Board (or within 180 days, if special circumstances require an
extension of time for processing the claim, and if written notice of such
extension and circumstances is given to such person within the initial 90 day
period). If such notification is not given within such period, the claim will be
considered denied as of the last day of such period and such person may request
a review of his claim.
(b) Review procedure. Within 60 days after the date on which a
-----------------
person receives a written notice of a denied claim (or, if applicable, within 60
days after the date on which such denial is considered to have occurred) such
person (or his duly authorized representative) may (i) file a written request
with the Board for a review of his denied claim and of pertinent documents and
(ii) submit written issues and comments to the Board. The Board will notify
such person of its decision in writing. Such notification will be written in a
manner calculated to be understood by such person and will contain specific
reasons for the decision as well as specific references to pertinent Plan
provisions. The decision on review will be made within 60 days after the
request for review is received by the Board (or within 120 days, if special
circumstances require an extension of time for processing the requests such as
an election by the Board to hold a hearing, and if written notice of such
extension and circumstances is given to such person within the initial 60 day
period). If the decision on review is not made within such period, the claim
will be considered denied.
11.4 Nondiscriminatory exercise of authority. Whenever, in the
----------------------------------------
administration of the Plan, any discretionary action by the Board is required,
the Board shall exercise its authority in a nondiscriminatory manner so that all
persons similarly situated will receive substantially the same treatment.
11.5 Indemnification of Board. The Bank will indemnify and defend to the
-------------------------
fullest extent permitted by law any person serving on the Board or as a member
of a committee designated as Board (including any person who formerly served as
a Board member or as a member of such committee) against all liabilities,
damages, costs and expenses (including attorneys fees and amounts paid in
settlement of any claims approved by the Bank) occasioned by any act or omission
to act in connection with the Plan, if such act or omission is in good faith.
<PAGE>
11.6 Benefits solely from general assets. The benefits provided hereunder
------------------------------------
will be paid solely from the general assets of the Employer. Nothing herein
will be construed to require the Employer or the Board to maintain any fund or
segregate any amount for the benefit of any Participant, and no Participant or
other person shall have any claim against, right to, or security or other
interest in, any fund, account or asset of the Employer from which any payment
under the Plan may be made.
Having been adopted by its Board of Directors on August 25, 1998, this Plan is
executed by its duly authorized officers this 23rd day of February, 1999.
Attest FREDERICKSBURG SAVINGS BANK
/s/ Peggy J. Newman By: Samuel C. Harding, Jr.
- ------------------------ -----------------------------------
Samuel C. Harding, Jr.
President
<PAGE>
Exhibit 11
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------
1998(1) 1997
------------ ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net Income $ 1,396 --
Weighted average common shares 11,404,800 N/A
outstanding
Common stock equivalents due to dilutive 11,404,800 N/A
effect of stock options
Total weighted average common shares and 11,404,800 N/A
common share equivalents outstanding
Basic earnings per common share and $ .003 N/A
common share equivalents
Diluted earnings per common share $ .003 N/A
</TABLE>
___________________________
(1) Earnings per share is calculated since December 23, 1998, date of the
initial public offering. Had the weighted average shares been outstanding
the entire fiscal year, pro forma earnings per share would have been $.12.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-K and is qualified in its entirety by reference to the audited financial
statements contained therein.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 771
<INT-BEARING-DEPOSITS> 114,963
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,381
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 990
<LOANS> 417,475
<ALLOWANCE> (5,684)
<TOTAL-ASSETS> 576,676
<DEPOSITS> 354,788
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 33,682
<LONG-TERM> 0
0
0
<COMMON> 114
<OTHER-SE> 185,092
<TOTAL-LIABILITIES-AND-EQUITY> 576,676
<INTEREST-LOAN> 33,430
<INTEREST-INVEST> 2,085
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 36,477
<INTEREST-DEPOSIT> 962
<INTEREST-EXPENSE> 19,212
<INTEREST-INCOME-NET> 36,477
<LOAN-LOSSES> 461
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,886
<INCOME-PRETAX> 2,399
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,396
<EPS-PRIMARY> .003
<EPS-DILUTED> .003
<YIELD-ACTUAL> 7.75
<LOANS-NON> 4,720
<LOANS-PAST> 202
<LOANS-TROUBLED> 2,756
<LOANS-PROBLEM> 1,221
<ALLOWANCE-OPEN> 5,478
<CHARGE-OFFS> 260
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 5,684
<ALLOWANCE-DOMESTIC> 3,494
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,190
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC.
AND SUBSIDIARY
FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC.
AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Comprehensive Income 4
Consolidated Statements of Changes in Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Virginia Capital Bancshares, Inc.
Fredericksburg, Virginia
We have audited the accompanying consolidated balance sheets of Virginia Capital
Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Company'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 consolidated financial position of Virginia Capital
Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Richmond, Virginia
January 21, 1999
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 2
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents (includes interest-bearing deposits
of $114,963 in 1998; $10,634 in 1997) $115,734 $ 11,287
Investment securities
Held-to-maturity (fair value $1,003 in 1998; $1,335 in 1997) 990 1,291
Available-for-sale (cost $29,709 in 1998; $30,865 in 1997) 30,381 31,151
Federal Home Loan Bank stock, restricted, at cost 3,539 3,448
Loans receivable, net 411,791 413,032
Accrued interest receivable 2,588 2,597
Foreclosed real estate for sale, net 1,177 1,959
Property and equipment, less accumulated depreciation
($4,309 in 1998; $3,999 in 1997) 3,587 3,508
Other assets 472 269
Deferred tax asset 6,417 3,378
-------- --------
$576,676 $471,920
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $354,788 $374,114
Official bank checks 21,064 3,002
Advances from Federal Home Loan Bank 8,000 8,000
Retirement obligations 6,093 5,480
Advances from borrowers for taxes and insurance 1,048 936
Accrued expenses and other liabilities 477 315
-------- --------
Total liabilities 391,470 391,847
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 5,000,000 shares authorized, none issued - -
Common stock, $.01 par value 75,000,000 shares authorized,
issued and outstanding 11,404,800 in 1998 114 -
Additional paid-in capital 112,303 -
Unallocated common stock held by Employee Stock Ownership Plan (8,920) -
Retained earnings, substantially restricted 81,292 79,896
Accumulated other comprehensive income 417 177
-------- --------
Total stockholders' equity 185,206 80,073
-------- --------
Total liabilities and stockholders' equity $576,676 $471,920
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 3
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $33,430 $33,575 $32,713
Interest on investment securities 3,047 2,929 3,285
------- ------- -------
TOTAL INTEREST INCOME 36,477 36,504 35,998
------- ------- -------
INTEREST EXPENSE
Deposits 18,717 18,816 19,076
Advances and other borrowings 495 602 459
------- ------- -------
TOTAL INTEREST EXPENSE 19,212 19,418 19,535
------- ------- -------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 17,265 17,086 16,463
PROVISION FOR LOAN LOSSES 461 375 325
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,804 16,711 16,138
------- ------- -------
NONINTEREST INCOME
Fees and service charges 258 318 240
Other 223 142 169
------- ------- -------
TOTAL NONINTEREST INCOME 481 460 409
------- ------- -------
NONINTEREST EXPENSE
Compensation and benefits 3,552 3,511 3,716
Occupancy and equipment 740 717 762
Federal deposit insurance premium 228 240 3,283
Charitable contributions 8,591 95 92
Other 1,775 2,231 1,712
------- ------- -------
TOTAL NONINTEREST EXPENSE 14,886 6,794 9,565
------- ------- -------
INCOME BEFORE INCOME TAXES 2,399 10,377 6,982
------- ------- -------
INCOME TAXES
Current 4,180 3,990 2,943
Deferred (3,177) (38) (542)
------- ------- -------
1,003 3,952 2,401
------- ------- -------
NET INCOME $ 1,396 $ 6,425 $ 4,581
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C>
Net income $1,396 $6,425 $4,581
Other comprehensive income:
Unrealized gains (losses) on securities available-for-sale,
net of tax of $216, $146 and $92, for 1998, 1997 and 1996,
respectively 240 352 150
Less: reclassification adjustment for gains included
in net income, net of tax of $85 for 1996 - - 138
------ ------ ------
Total other comprehensive income 240 352 12
------ ------ ------
Comprehensive income $1,636 $6,777 $4,593
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Unallocated
Common Retained Accumulated
Additional Stock Earnings Other
Preferred Common Paid-in Held by Substantially Comprehensive Total
Stock Stock Capital ESOP Restricted Income Equity
--------- ------ ---------- ----------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ - $ - $ - $68,890 $(187) $ 68,703
Net income - - - - 4,581 - 4,581
Other comprehensive income - - - - - 12 12
------ ---- -------- ------- ------- ----- --------
Balance, December 31, 1996 - - - - 73,471 (175) 73,296
Net income - - - - 6,425 - 6,425
Other comprehensive income - - - - - 352 352
------ ---- -------- ------- ------- ----- --------
Balance, December 31, 1997 - - - - 79,896 177 80,073
Net income - - - - 1,396 - 1,396
Issuance of 10,560,000 shares
of $.01 par value common
stock in the initial public
offering at $10.00 per share - 106 103,863 - - - 103,969
Issuance of 844,800 shares of
$.01 par value common stock
to charitable foundation - 8 8,440 - - - 8,448
Loan to ESOP for purchase
of common stock - - - (9,124) - - (9,124)
Allocation of shares
purchased with
loan to ESOP - - - 204 - - 204
Other comprehensive income - - - - - 240 240
------ ---- -------- ------- ------- ----- --------
Balance, December 31, 1998 $ - $114 $112,303 $(8,920) $81,292 $ 417 $185,206
====== ==== ======== ======= ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,396 $ 6,425 $ 4,581
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 370 371 377
Provision for loan losses 461 375 325
Realized gain on investment securities - - (223)
Charitable contribution funded with Company stock 8,448 - -
Provision for loss on real estate owned (106) 87 (21)
Premium/discount on investment securities (80) (66) (108)
Deferred loan fees and costs, net 332 266 192
Deferred income tax benefit (3,177) (38) (542)
(Increase) decrease in accrued interest receivable (13) (150) 358
(Increase) decrease in other assets (553) 543 (590)
Increase (decrease) in advances by borrowers for taxes
and insurance 112 92 (35)
Increase in retirement obligations 613 547 657
Increase (decrease) in other liabilities 525 (542) (714)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,328 7,910 4,257
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available-for-sale - - 25,673
Proceeds from redemption of securities available-for-sale 11,515 6,812 -
Purchase of FHLB stock (91) (215) (158)
Purchase of securities available-for-sale (10,322) (5,420) (8,347)
Principal payments on mortgaged-backed securities held-to-maturity 346 281 456
Loan originations and principal payments, net (1,462) (11,422) (17,487)
Loan to ESOP, net of repayments (8,920) - -
Capital expenditures (459) (271) (241)
Proceeds from sale of real estate owned 2,878 3,214 3,528
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (6,515) (7,021) 3,424
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings accounts 9,973 (4,894) (7,706)
Net increase (decrease) in certificates of deposit (11,235) 6,355 (3,018)
Net increase (decrease) in advance from Federal Home Loan Bank - (7,000) 7,000
Proceeds from common stock issuance 103,896 - -
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 102,634 (5,539) (3,724)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 104,447 (4,650) 3,957
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,287 15,937 11,980
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $115,734 $ 11,287 $ 15,937
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Virginia Capital Bancshares, Inc. (the "Company") is a stock holding company.
Substantially all of the business of the Company is conducted by its wholly-
owned subsidiary Fredericksburg Savings Bank (the "Bank"), Fredericksburg,
Virginia. The Bank is a Federal stock savings bank engaged in the business 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 Company and the Bank are subject to the
regulations of Federal banking agencies and are periodically examined by them.
Most of the Bank's loans and loan commitments have been granted to customers in
Fredericksburg, Virginia and surrounding counties. Many of the Bank's loan
customers are also depositors of the Bank. The Bank provides services from four
locations.
The accounting and reporting policies of Virginia Capital Bancshares, Inc. and
its subsidiary follow generally accepted accounting principles and conform to
the general practices within the financial services industry. Significant
principles used in preparing the financial statements are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary Bank. Significant intercompany accounts and transactions have
been eliminated in consolidation.
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 AND CASH EQUIVALENTS
The Company considers cash on hand, cash due from banks, which are maintained in
financial institutions, and interest-earning deposits, which are maintained with
the Federal Home Loan Bank, as cash and cash equivalents. Amounts due from
banks and interest-earning deposits may exceed insured amounts.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company classifies investment securities and mortgage-backed securities as
held-to-maturity, available-for-sale, or trading.
Securities held-to-maturity are purchased with the intent and ability to hold to
maturity or call date and are 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 identified as available to meet
liquidity needs, assist in portfolio restructuring, or manage interest rate
risk. They are reported at fair value, with unrealized gains and losses, net of
related income tax effects, reported in other comprehensive income. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities. The Company has not classified any
securities as trading securities. Gains or losses on disposition of securities
are computed on the specific identification method.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 8
NOTES TO CONSOLIDATED 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 interests of 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 established through a provision for
losses charged to expense. Loans are charged to the allowance for loan losses
when management of the Bank believes the collectibility of the principal is
unlikely. 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 loan portfolio, adverse situations that may affect the ability of borrowers
to repay, the estimated value of 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 may generate 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.
PROPERTY AND DEPRECIATION
The various classes of property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the estimated useful
lives of the assets (from 5 to 39 years) primarily 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.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and its subsidiary Bank provide for income taxes on a separate
entity basis.
Provisions for deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
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.
ADVERTISING
Advertising costs are expensed as incurred.
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.
EARNINGS PER SHARE
Earnings per share data have not been presented as such data would not be
meaningful given the short period during which common stock of the Company was
outstanding. Presentation of earnings per share amounts will follow the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share". As the Company has not presented earnings per share
amounts prior to conversion to a stock institution, the adoption of the
provisions of this Statement have no impact on comparative information.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 - Reporting Comprehensive
Income
This Statement establishes standards for reporting and display of comprehensive
income and its components in a set of financial statements. The Company adopted
this Statement during the 1998 year and has presented a statement of
comprehensive income for the three-year period ended December 31, 1998. As this
Statement is a matter of presentation, the adoption of this Statement did not
have a material effect on the Company's accounting practices.
Statement of Financial Accounting Standards No. 132 - Employers Disclosures
About Pensions and Other Postretirement Benefits
This Statement standardizes disclosure requirements for employer pension and
postretirement benefits. The Company adopted this Statement during the 1998
year end. As this Statement is a matter of presentation, the adoption of this
Statement did not have a material effect on the Company's accounting practices.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP
On July 14, 1998, the Board of Directors of the Fredericksburg Savings and Loan
Association (now "Fredericksburg Savings Bank") adopted the Plan of Conversion
(the "Plan"). Pursuant to the Plan, on December 23, 1998, the Bank converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank and became the wholly-owned subsidiary of Virginia Capital
Bancshares, Inc., a Federal corporation. The Company was incorporated on
September 4, 1998, to serve as the Bank's holding company, and prior to December
23, 1998, had no operations and insignificant assets and liabilities. In
addition, pursuant to the Plan of Conversion, the Company sold 10,560,000 shares
of its $.01 par value common stock to the Bank's eligible customers for $10.00
per share (the "Offering"). Eligible customers were account holders as of June
30, 1997. Additionally, account holders as of September 30, 1998, who were not
account holders at June 30, 1997, were eligible. Gross proceeds of the Offering
totaled $105,600, and expenses associated with the Conversion totaled
approximately $1,700. The ESOP established by the Bank and formed in connection
with the Conversion, purchased 912,384 shares of the Common Stock issued in the
Conversion utilizing proceeds of a loan from the Company for $9,123. Net
proceeds of the Offering were approximately $103,900.
Pursuant to the Plan, the Company established Fredericksburg Savings Charitable
Foundation (the "Foundation") in connection with the Conversion. The Plan
provided that the Bank and the Company would create the Foundation and donate an
amount of the Company's common stock equal to 8% of the common stock sold in the
Conversion. The Foundation is dedicated to charitable purposes within the
communities in which the Bank operates. As a result of the Conversion, the
Company donated 844,800 shares of common stock valued at $8,448 to the
Foundation.
The Foundation has submitted a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and will likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company is tax deductible, under Federal regulations, subject to a limitation
based on 10 percent of the Company's taxable income. The Company, however, is
able to carry forward any unused portion of the deduction for five years
following the contribution. Upon funding the Foundation, the Company recognized
an expense of $8,448, the full amount of the contribution, offset in part by a
tax benefit of $3,523.
At the time of Conversion, the Bank established a liquidation account in an
amount equal to $83,500, its equity as reflected in the latest balance sheet
used in the final conversion prospectus. The liquidation account is 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 is 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.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP (CONTINUED)
Subsequent to the conversion, the Bank may not declare or pay dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholder's equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements. The Company, unlike the Bank, is not subject
to the same restrictions regarding the declaration or payment of dividends to
its shareholders, although the source of the Company's dividends may depend upon
the Bank's ability to pay dividends.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of mortgage-backed securities and
investment securities are as follows as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
December 31, 1998
Mortgage Backed Securities
FNMA pass-through securities $ 731 $ - $ 7 $ 724
GNMA certificates 259 20 - 279
------- ------ ------ -------
$ 990 $ 20 $ 7 $ 1,003
======= ====== ====== =======
December 31, 1997
Mortgage Backed Securities
FNMA pass-through securities $ 838 $ - $ - $ 838
GNMA certificates 453 44 - 497
------- ------ ------ -------
$ 1,291 $ 44 $ - $ 1,335
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
December 31, 1998
U.S. Treasury and agency obligations $14,897 $ 182 $ 21 $15,058
Corporate securities 6,858 88 12 6,934
State and local municipal bonds 1,868 28 - 1,896
Equity securities 2,263 1,001 63 3,201
Mutual fund 1,323 - 18 1,305
Dual Index Consolidated Bonds 2,500 - 513 1,987
------- ------ ------- -------
$29,709 $1,299 $ 627 $30,381
======= ====== ======= =======
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 3 - 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
======= ====== ====== =======
</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 December
31, 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. Therefore, mortgage backed securities are not included in the
following maturity summary. As equity type securities do not have maturity
dates, these have not been classified to maturity categories below.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
Mutual Fund $ 1,323 $ 1,305 $ 1,262 $ 1,242
Equity Securities 2,263 3,201 3,596 4,343
Due in one year or less 6,298 6,347 10,997 11,008
Due after one year through five years 16,124 16,255 11,651 11,778
Due after five years through ten years 3,602 3,167 2,997 2,409
Due after ten years 99 106 362 371
------- ------- ------- -------
$29,709 $30,381 $30,865 $31,151
======= ======= ======= =======
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 3 - 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 Offered 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 Other Comprehensive Income.
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>
December 31,
---------------------------------------
1998 1997
----------------- -----------------
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 3.545% $ 789 3.408% $ 786
FHLB 08/26/05 1,000 (10 yr CMT+3.00%)-6 mo LIBOR 3.713 813 3.472 788
FHLB 11/18/05 500 (10 yr CMT+2.75%)-6 mo LIBOR 4.000 385 2.764 372
------ ------ ------
$2,500 $1,987 $1,946
====== ====== ======
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 4 - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Real estate mortgage loans
One to four family $365,296 $358,561
Multi-family 3,335 3,455
Non-residential real estate 33,117 40,951
Land and land development 1,175 3,091
-------- --------
Total real estate mortgage loans 402,923 406,058
Less: Amounts owned by holders
of participating interests, net (2,958) (4,217)
-------- --------
Net real estate mortgage loans 399,965 401,841
-------- --------
Real estate construction and development loans 19,295 16,046
Less: Undisbursed loan funds (7,206) (4,978)
-------- --------
Net real estate construction loans 12,089 11,068
-------- --------
Other loans
Consumer and other installment loans 9,065 8,913
-------- --------
Total other loans 9,065 8,913
-------- --------
421,119 421,822
Less: Deferred loan fees (3,644) (3,312)
Allowance for loan losses (5,684) (5,478)
-------- --------
Net loans receivable $411,791 $413,032
======== ========
</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,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
FNMA, net of discount $ 1,393 $ 2,222
FHLMC 624 872
Other 941 1,123
-------- --------
$ 2,958 $ 4,217
======== ========
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 4 - LOANS RECEIVABLE (CONCLUDED)
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $156, $215, and $130 at December 31, 1998, 1997 and 1996,
respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of period $5,478 $5,543 $5,480
Provision charged to operations 461 375 325
Loans charged off (260) (440) (263)
Recoveries 5 - 1
------ ------ ------
Balance, end of period $5,684 $5,478 $5,543
====== ====== ======
</TABLE>
Impairment of loans having recorded investments of $7,954 at December 31, 1998
and $9,801 at December 31, 1997 have been recognized in conformity with FASB No.
114, as amended by FASB No. 118. The total allowance for loan losses related to
these loans was $847, $669 and $729 on December 31, 1998, 1997, and 1996,
respectively. The average recorded investment in impaired loans during 1998,
1997, and 1996 was $8,625, $10,466, and $13,257, respectively. There was no
significant reduction in interest associated with impaired loans for 1998, 1997
or 1996.
Loans having carrying values of $707, $937 and $4,815 were transferred to
foreclosed real estate in 1998, 1997, and 1996, respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Unspecified residential loans of approximately $224,000 at December 31, 1998,
approximately $208,000 at December 31, 1997, and $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.
NOTE 5 - FORECLOSED REAL ESTATE FOR SALE
Foreclosed real estate consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Foreclosed real estate $1,197 $2,085
Less allowance for losses (20) (126)
------ ------
$1,177 $1,959
====== ======
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 5 - FORECLOSED REAL ESTATE FOR SALE (CONCLUDED)
A summary of the foreclosed real estate operations is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Foreclosed real estate
Foreclosed real estate sales $2,878 $3,397 $3,528
Cost of sales 2,704 3,392 3,512
Increase (decrease) in reserve (106) 87 (21)
Selling and other expenses 278 81 167
------ ------ ------
$ 2 $ (163) $ (130)
====== ====== ======
</TABLE>
Activity in the allowance for losses for real estate owned is summarized as
follows:
<TABLE>
<S> <C> <C> <C>
Balance, beginning of period $ 126 $ 39 $ 60
Provision for losses 21 167 122
Charge-offs (127) (80) (143)
------ ------ ------
Balance, end of period $ 20 $ 126 $ 39
====== ====== ======
</TABLE>
NOTE 6 - DEPOSITS
Deposits summarized by interest rates were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1998 1997
-------------------- --------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Transaction accounts (weighted average
rate of 3.25% and - %) $ 779 0.22% $ - - %
Non-interest bearing deposits 583 0.16 266 0.07
Savings accounts (weighted average rate of 2.96% and 3.25%) 75,360 21.24 84,547 22.60
-------- ------ -------- ------
76,722 21.62 84,813 22.67
-------- ------ -------- ------
Certificates:
Up to 4.00% - - - -
4.01% to 5.00% 62,254 17.55 17,303 4.63
5.01% to 6.00% 196,415 55.36 233,582 62.44
6.01% to 7.00% 16,532 4.66 32,589 8.71
7.01% to 8.00% 2,865 .81 5,827 1.55
-------- ------ -------- ------
278,066 78.38 289,301 77.33
-------- ------ -------- ------
Total deposits $354,788 100.00% $374,114 100.00%
======== ====== ======== ======
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 6 - DEPOSITS (CONCLUDED)
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100 was approximately $37,875, and $21,270 at December 31, 1998
and 1997, respectively. Deposits in excess of $100 are not federally insured.
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Over Year or Less $191,999 $192,592
Over One Through Two Years 43,060 56,227
Over Two Through Three Years 21,702 25,827
Over Three through Four Years 11,203 3,645
Over Four Through Five Years 10,102 11,010
-------- --------
$278,066 $289,301
======== ========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Transaction accounts $ 11 $ 7 $ 6
Savings 2,674 2,818 2,977
Certificates of deposit 16,032 15,991 16,093
-------- -------- --------
$ 18,717 $ 18,816 $ 19,076
======== ======== ========
</TABLE>
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK
The advances to the Bank consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Advances from FHLB due:
Less than 1 year $ 3,000 $ -
1 to 2 years - 3,000
2 to 3 years 5,000 -
3 to 4 years - 5,000
-------- --------
$ 8,000 $ 8,000
======== ========
</TABLE>
The Bank had approved borrowing capacity at the FHLB for $45 million as of
December 31, 1998 and 1997. The unused portion of this aggregated $37 million
at December 31, 1998 and 1997. Interest rates on the outstanding balances range
from 6.09% to 6.25% for 1998 and 1997.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 8 - BENEFIT AND RETIREMENT PLANS
The Company and Bank sponsor qualified and non-qualified pension and benefit
plans for employees and directors of the Company and Bank. Presented below is
information regarding the plans' benefit obligations, fair value of assets and
funded status, in addition to descriptive plan information.
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 Bank contributes to the plan the maximum allowable
amount in accordance with ERISA funding standards.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Reconciliation of benefit obligation
Obligation at January 1 $ 4,061 $ 4,093
Service cost 225 212
Interest cost 268 277
Benefit payments (611) (850)
Actuarial loss 213 329
------- -------
Obligation at December 31 $ 4,156 $ 4,061
======= =======
Reconciliation of fair value of assets
Fair value of plan assets at January 1 $ 4,761 $ 4,713
Actual return on plan assets 204 537
Employer contributions 258 361
Benefit payments (611) (850)
------- -------
Fair value of plan assets at December 31 $ 4,612 $ 4,761
======= =======
Funded status
Funded status at December 31 $ 456 $ 699
Unrecognized transition obligation 584 668
Unrecognized prior service costs (200) (219)
Unrecognized net (gain) (1,143) (1,572)
------- -------
Net amount recognized as accrued benefit liability $ (303) $ (424)
======= =======
</TABLE>
The plan's accumulated benefit obligation was $2,556 and $2,511 at December 31,
1998 and 1997, respectively.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 8 - RETIREMENT OBLIGATIONS (CONTINUED)
Net periodic benefit cost for the plan was as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service cost $ 225 $ 212 $ 201
Interest cost 268 277 313
Expected return on plan assets (356) (341) (306)
Net amortization and deferral 1 12 28
------ ------ ------
Net periodic benefit cost $ 138 $ 136 $ 236
====== ====== ======
</TABLE>
The assumptions used in the measurement of the benefit obligation are presented
below:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Discount rate 7.00% 7.50%
Expected return on plan assets 7.75% 7.75%
Rate of compensation increase 5.50% 5.50%
</TABLE>
The plan assets are invested in interest-bearing cash accounts, common stock and
debt securities, including certificates of deposit at the Bank in the amount of
$2,473 for 1998 and $2,137 for 1997.
Prior service costs are amortized on the straight-line method over 19 years,
based on the average remaining service period of active employees expected to
receive benefits.
401(K) PLAN
The Bank maintains a tax qualified profit-sharing plan with a qualified cash or
deferred arrangement. All employees of the Bank are eligible to participate
upon completion of one-half of one year of service and attainment of age 21.
The Bank contributes to the plan based on a percentage of the participant's
contributions. The Bank contributed $65, $58 and $67 for the years ended
December 31, 1998, 1997 and 1996, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Bank established an employee stock
ownership plan (ESOP). The ESOP is a tax-qualified retirement plan designed to
invest primarily in the Company's common stock. All employees of the Bank who
have attained age 21 and completed one year of service with the Bank will be
eligible to participate in the ESOP. The ESOP utilized funds borrowed from the
Company totaling $9,123, to purchase approximately 8%, or 912,384 shares of the
Company's common stock issued in the Conversion. The loan to the ESOP will be
primarily repaid with contributions from the Bank to the ESOP over a period not
to exceed 20 years. The Bank will contribute to the ESOP sufficient amounts to
cover all payments and interest as they become due. At December 31, 1998 the
balance of the loan to the ESOP was $8,920. The loan has a fixed interest rate
of 7.75%.
Shares are released from the ESOP relative to the reduction in the interest and
principal balance of the total loan from the Company to the ESOP. Dividends on
allocated shares may, at the direction of the Bank, be credited to participants'
accounts, distributed to participants or used to repay the loan from the Bank.
Dividends on unallocated shares may be used for debt service.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 8 - RETIREMENT OBLIGATIONS (CONCLUDED)
Compensation expense is measured based on the fair value of the Company's common
stock when shares are committed to be released. Compensation expense recognized
for the year ended December 31, 1998 was $275.
At December 31, 1998, 11,404 shares were allocated.
The fair value of uncommitted ESOP shares at December 31, 1998 was $12,042.
MANAGEMENT SECURITY PLAN AND SUPPLEMENTAL AGREEMENT
The Bank has established non-qualified deferred compensation arrangements for
certain key management personnel structured to provide benefits upon retirement
based on years of service to the Bank. Deferred compensation expense was $699,
$647 and $297 for the years ended December 31, 1998, 1997 and 1996,
respectively. The accrued obligation presented on the Company's balance sheet
was $5,790 and $5,056 at December 31, 1998 and 1997, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Bank has made loans to various officers and directors of the Bank,
collateralized by the personal residences of the borrowers or their deposits in
the Bank. Loans outstanding to officers and directors totaled $2,108 at
December 31, 1998, $2,302 at December 31, 1997 and $2,350 at December 31, 1996.
In addition, at December 31, 1998 the Bank held deposit accounts from officers
and directors of $1,045.
Loans to executive officers and directors of the Bank 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. Following is a summary of this loan
activity:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Beginning balance $ 493 $ 543 $ 690
Additions 288 - -
Repayments (208) (50) (147)
------ ------ ------
Ending balance $ 573 $ 493 $ 543
====== ====== ======
</TABLE>
NOTE 10 - 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). The Bank's actual capital amounts and ratios are also
presented in the table. Management believes, as of December 31, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 10 - REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Core Capital
(To adjusted total assets) $138,489 26.11% $21,217 4.00% $26,521 5.00%
Tangible Capital
(To adjusted total assets) 138,489 26.11 7,956 1.50% 15,913 3.00
Risk-Based Capital
(To risk weighted assets) 142,191 48.19 23,604 8.00 29,621 10.00
As of December 31, 1997
Core Capital
(To adjusted total assets) 76,518 16.34 14,109 3.00 23,515 5.00
Tangible Capital
(To adjusted 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
</TABLE>
NOTE 11 - OFF BALANCE SHEET RISKS
Financial instruments with off-balance sheet risk consist primarily of
commitments to extend credit made in the normal course of the Bank's business.
These commitments to extend credit are not shown in the accompanying financial
statements until such commitments are funded. The Bank uses the same credit
policies in making commitments as in funding other loans and may require
collateral to secure the loan. Collateral held varies, but generally includes
real estate, primarily single-family homes, and in some cases, income-producing
commercial properties. At December 31, 1998, the Bank had commitments to
originate loans of approximately $8,779 and approximately $10,563 at December
31, 1997. Of these commitments, $8,144 and $10,307 were fixed rate loan
commitments at December 31, 1998 and 1997, respectively. The fixed rate loan
commitments were at interest rates ranging from 6.50% to 9.75% for 1998 and
6.25% to 9.75% for 1997.
Standby letters of credit are conditional commitments issued by the Bank. At
December 31, 1998, the Bank was committed under standby letters of credit
aggregating approximately $784 and at December 31, 1997 approximately $1,077.
The amount of unfunded lines of credit for home equity loans was approximately
$2,931 at December 31, 1998 and $3,005 at December 31, 1997.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 11 - OFF BALANCE SHEET RISKS (CONCLUDED)
In the ordinary course of business, the Bank is subject to various contingent
liabilities and certain claims and legal actions. 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 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
Due to the demand nature of cash and cash equivalents, fair value is estimated
to be carrying amount.
INVESTMENT SECURITIES
For debt securities, estimated fair values are based on market prices or market
prices of similar instruments. Where market prices are not available, discounted
cash flow techniques are utilized. For equity securities, estimated fair value
is based on quoted market prices. Due to the restricted nature of FHLB stock, a
fair value estimate is not determinable.
MORTGAGE-BACKED SECURITIES
Fair value of mortgage-backed securities is estimated based on quoted market
prices or market prices of similar securities.
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. The fair value of loans is then estimated by discounting
scheduled cash flows through estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan
categories.
DEPOSITS
Due to their demand nature, fair value of passbook and money market accounts is
estimated to be carrying amount. The fair value of fixed maturity certificates
of deposit is estimated by discounting cash flows from expected maturities using
rates currently offered for deposits of similar maturities.
ADVANCES
Fair value of advances outstanding from the Federal Home Loan Bank is estimated
based on the rates currently available for advances of similar maturities.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
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.
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1997
------------------- -------------------
Carrying Est. Fair Carrying Est. Fair
Value Value Value Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $115,734 $115,734 $ 11,287 $ 11,287
Investment securities, available-for-sale 30,381 30,381 31,151 31,151
Mortgage-backed securities 990 1,003 1,291 1,335
Loans 411,791 416,100 413,032 416,508
Financial liabilities
Deposits 375,852 373,206 377,114 376,181
Advances 8,000 7,876 8,000 7,995
</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 December 31, 1998 and 1997
are summarized below:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 1,840 $ 2,116
Charitable contribution 3,223 -
Deferred compensation 2,315 2,082
Other 72 31
-------- --------
Total deferred tax assets 7,450 4,229
-------- --------
Deferred tax liabilities
FHLB stock dividends 480 480
Depreciation 185 250
Other 368 121
-------- --------
Total deferred tax liabilities 1,033 851
-------- --------
Net deferred tax asset $ 6,417 $ 3,378
======== ========
</TABLE>
The charitable contribution carryover is available to offset taxable income,
subject to annual limitations, for tax years through December 31, 2003.
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 13 - INCOME TAXES (CONCLUDED)
The Bank, in accordance with SFAS No. 109 has not recorded a deferred tax
liability at December 31, 1998 of $3,686 related to the cumulative special bad
debt deduction for savings and loan associations recognized for income tax
reporting prior to December 31, 1987, the Bank's base year.
The following is a reconciliation of the differences between the statutory
Federal income tax rate and the effective income tax rate for the years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at expected rates 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from
Tax exempt interest income (3.2) (2.0) (2.8)
State income tax, net of federal tax benefit 3.5 3.5 3.5
Other 7.6 2.6 4.8
---- ---- ----
41.9% 38.1% 39.5%
==== ==== ====
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current tax expense
U.S. Federal $ 3,623 $ 3,437 $ 2,568
State 557 553 375
-------- -------- --------
Total current 4,180 3,990 2,943
-------- -------- --------
Deferred tax expense
U.S. Federal (2,748) (36) (509)
State (429) (2) (33)
-------- -------- --------
Total deferred (3,177) (38) (542)
-------- -------- --------
Total expense $ 1,003 $ 3,952 $ 2,401
======== ======== ========
</TABLE>
NOTE 14 - OTHER NONINTEREST EXPENSE
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Legal $ 231 $ 433 $ 216
Other non-interest expense 1,544 1,798 1,496
-------- -------- --------
$ 1,775 $ 2,231 $ 1,712
======== ======== ========
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for interest $ 19,212 $ 19,418 $ 19,535
Cash paid during the year for taxes 4,232 3,591 3,623
</TABLE>
NOTE 16 -SUPPLEMENTAL NON-CASH INVESTING ACTIVITIES
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Loans transferred to real estate owned $ 707 $ 937 $ 3,512
Change in unrealized gain (loss) in
value of securities available-for-sale,
net of tax effect 240 352 12
</TABLE>
NOTE 17 - PARENT-ONLY FINANCIAL INFORMATION
The earnings of the Bank are recognized by Virginia Capital Bancshares, Inc.
using the equity method of accounting. Accordingly, undistributed earnings of
the Bank are recorded as increases in the Company's investment in the Bank. The
following are the condensed financial statements of the Company as of and for
the year ended December 31, 1998 (although the Company did not commence
operations until December 23, 1998, the full year results have been presented).
<TABLE>
<CAPTION>
Balance Sheet
- -------------
<S> <C>
Assets
Cash and cash equivalents $ 42,913
Receivable from subsidiary Bank 739
Investment in subsidiary 138,563
Deferred tax asset 3,220
Other 41
--------
Total assets $185,476
========
Accounts payable $ 270
Stockholders' equity 185,206
--------
Total liabilities and stockholders' equity $185,476
========
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 17 - PARENT-ONLY FINANCIAL INFORMATION (CONCLUDED)
<TABLE>
<CAPTION>
Condensed Statement of Income
- -----------------------------
<S> <C>
Interest income $ 167
Charitable contribution 8,448
Interest expense 78
--------
8,526
--------
Loss before income tax benefit and
undistributed earnings of subsidiary Bank (8,359)
Income tax benefit 3,523
--------
Loss before undistributed earnings of
subsidiary Bank (4,836)
Undistributed earnings of subsidiary Bank 6,232
--------
Net income $ 1,396
========
Condensed Statement of Cash Flows
- ---------------------------------
Operating activities
Net income $ 1,396
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings of subsidiary Bank (6,232)
Charitable contribution funded with Company stock 8,448
Tax benefit (3,523)
Other, net (41)
--------
Net cash provided by operating activities 48
--------
Investing activities
ESOP loan, net of payments (8,920)
Net investment in subsidiary Bank (51,948)
Intercompany account with subsidiary Bank 163)
--------
Net cash used in investing activities (61,031)
--------
Financing activities
Proceeds from common stock issuance 103,896
--------
Net cash provided by financing activities 103,896
--------
Net increase in cash and cash equivalents 42,913
Cash and cash equivalents, beginning of period -
--------
Cash and cash equivalents, end of period $ 42,913
========
Noncash financing activities
Retained earnings acquired from subsidiary Bank $ 86,419
========
Employee stock ownership plan fair value adjustment $ 71
========
Accrued costs of stock issuance $ 272
========
</TABLE>
<PAGE>
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 18 - YEAR 2000 (UNAUDITED)
Many existing computer systems and applications use only two digits to identify
a year in the date field, without considering the impact of the upcoming changes
of the century. As a result, such systems or applications could fail or create
erroneous results unless corrected so that they can process data related to the
year 2000. The Bank relies on its systems, applications and devices in
operating and monitoring substantially all aspects of its business. The Bank
also relies, directly and indirectly, on external systems of other companies
such as suppliers and third-party processors for the accurate exchange of data.
The bank conducted a comprehensive review of its computer systems to identify
applications that could be affected by the Year 2000 issue, and developed an
implementation plan to address the issue. The Bank's data processing is
performed under agreements with a nationwide financial service bureau, and
consequently identified this organization as its primary mission critical
service provider. This organization has informed the Bank that all Year 2000
reprogramming efforts have been completed.
The Bank estimates that its costs related to Year 2000 will be approximately
$210,000 and has currently incurred approximately $185,000 of costs. The Bank
does not expect these costs to have a significant impact on the Bank's financial
position or operating results. However, despite the Bank's preparations, there
can be no assurance that the Bank will not incur additional costs or operational
disruption due to Year 2000 matters resulting from internal or external system
impacts.
