Conformed Copy
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-KSB/A-No. 1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
1995 [Fee Required]
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission File No. 33-33051-A
TYSONS FINANCIAL CORPORATION
(Name of small business issuer in its charter)
Virginia 54-1527945
(State or Other Juris- (I.R.S. Employer Identification No.)
diction of Incorporation)
8200 Greensboro Drive Suite 100
McLean, Virginia 22102
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (703) 556-0015
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days:
Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
Total revenues for the registrant's fiscal year ended December 31,
1995, were $4,799,680.
As of March 15, 1996, 668,619 shares of the registrant's common stock,
par value $5.00 per share, were outstanding. There is a very limited trading
market with respect to the common stock. Based on the most recent sale price
of $7.125 per share, the registrant believes that the aggregate market value
of voting stock held by non-affiliates was $3,233,453 on March 15, 1996.
Transitional Small Business Disclosure Format: Yes ____ No _X___
<PAGE>
Item 1 is hereby amended to read in its entirety as follows:
ITEM 1 - DESCRIPTION OF BUSINESS
General
Tysons Financial Corporation (the "Company") was incorporated in
Virginia on December 29, 1989 as a bank holding company to own and control all
of the capital stock of Tysons National Bank (the "Bank"), a national banking
corporation. The Bank commenced its operations on July 1, 1991. The
headquarters of the Company and the Bank are located in an area known as Tysons
Corner. Tysons Corner is approximately 13 miles due west of Washington, D.C. and
within 20 to 30 minutes from other locations such as Dulles International
Airport, Washington National Airport and suburban Maryland. The Bank also
operates a branch in Reston, Virginia. At December 31, 1995, the Company
had total assets of $70,611,000, total loans, net of unearned income, of
$44,359,000, total deposits of $65,493,000 and stockholders' equity of
$4,140,000.
On February 2, 1995, the Company entered into an agreement with
Suburban Bank of Virginia, N.A. ("Suburban Bank") to acquire certain assets and
assume certain liabilities of Suburban Bank. The Suburban Bank transaction was
completed on May 15, 1995. As a result, the Company's deposits increased by
approximately $20,000,000 and loans increased by approximately $13,000,000. The
Company paid a premium of approximately $1,200,000 for the deposits acquired.
This premium is being amortized over a 10 year period based upon management's
estimated life of acquired deposits. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The executive offices of the Company and the main office of the Bank
are located at 8200 Greensboro Drive, Suite 100, McLean, Virginia 22102,
telephone number (703) 556-0015.
Primary Market Area
The Bank draws most of its customer deposits and conducts most of its
lending transactions from and within a primary service area in the Tysons
Corner/Reston corridor in Fairfax County, Virginia.
The large cosmopolitan population that lives and works in this corridor
and in surrounding suburbs, as well as the area's accessibility, make retailing
a significant enterprise. High technology firms are also located within this
corridor. These firms include businesses engaged in operations research,
computer programming and information management. The Bank actively targets and
solicits relationships from the professional staff employed by these
enterprises. The corridor also attracts a significant amount of professional
firms, including accounting and law firms. The Bank actively solicits banking
relationships with these firms as well as their professional staff.
In conjunction with the Suburban Bank transaction, the Company acquired
an additional branch located in Reston, Virginia
<PAGE>
which is approximately nine miles west of the Company's existing location. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Reston area is experiencing increases in its large residential
community and growing commercial business sectors which are expected to
contribute to the overall growth of the Company.
Banking Services
The Bank engages in a general commercial banking business with
particular emphasis on the needs of professionals, entrepreneurs, and small to
medium-sized businesses located in its primary service area. The Bank
offers a comprehensive range of banking services that are generally offered
by other full service banks and savings and loan associations. Such services
include commercial and personal checking accounts, Automated Teller
Machine (ATM) card services for the MOST, Cirrus and Exchange ATM
networks, savings accounts, and other time deposits including individual
retirement accounts and certificates of deposit. The transaction accounts and
time deposits are tailored to the Bank's principal market area at rates
competitive to those offered in the area. The Bank solicits these accounts from
individuals, businesses, professional firms, and public and governmental
organizations. The Bank is not currently dependent upon a single depositor or
borrower the loss of which would have a material adverse effect on the Bank.
The Bank also provides loans to businesses, including both secured and
unsecured short-term loans for working capital purposes, term loans for fixed
assets and expansion needs such as real estate acquisition and improvements,
real estate construction loans, and other commercial loans suitable to the needs
of its business customers. Loans to individuals which are offered by the Bank
include short-term mortgage loans and installment loans for personal use such as
education and personal investments, or for the purchase of automobiles or other
consumer items. The Bank also acts as an issuing agent for U.S. savings bonds,
travelers' checks and cashier's checks. In addition, the Bank offers its
customers bank-by-mail and direct deposit services, safe deposit services, wire
transfer services and a courier service which picks up non-cash customer
deposits. There were no significant changes to the services the Bank offers as a
result of the Suburban Bank transaction.
LENDING ACTIVITIES
General. At December 31, 1995, the Bank's loan portfolio
totaled $43,775,000, representing approximately 62.0% of its total assets of
$70,611,000. The categories of loans in the Company's portfolio are commercial,
commercial and residential real estate, and consumer. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Composition of Loan Portfolio."
<PAGE>
Commercial Loans. The Bank originates secured and unsecured
loans for business purposes. Additionally, commercial business loans are made to
provide short-term working capital and acquisition capital to businesses in
the forms of lines of credit and term loans which may be secured by accounts
receivable, inventory, equipment or other assets. At December 31, 1995,
$14,352,000 or 32.2% of the Bank's total loan portfolio consisted of
commercial business loans. The financial condition and cash flow of commercial
borrowers are closely monitored by the submission of corporate financial
statements, personal financial statements, income tax returns and other
documents. The frequency of submissions of required information depends upon
the size and complexity of the credit and the collateral which secures the
loan. Financial statements are analyzed using a financial spreadsheet software
program. It is also the Bank's general policy to obtain personal guarantees from
the principals of its business borrowers.
Commercial Real Estate Loans. The Bank also originates commercial loans
secured by real estate. At December 31, 1995, $12,311,000 or 27.7% of the Bank's
total loan portfolio consisted of commercial real estate loans. Such loans are
primarily secured by owner-occupied office condominiums, retail buildings and
warehouses and general purpose business space. Although terms vary, the
Bank's commercial real estate loans generally have maturities of five years or
less.
Residential Real Estate Loans. The Bank originates adjustable and
fixed-rate residential mortgage loans, home equity loans and personal loans
secured by residential real estate in order to provide a full range of products
to its customers. Home equity loans are originated by the Bank for typically up
to 80% of the appraised value, less the amount of any existing prior liens on
the property. Home equity loans generally have maximum terms of 15 years and the
interest rate is generally adjustable. The Bank secures these loans with
mortgages on the borrowers' homes (generally a second morgage). At December 31,
1995, $9,225,000 or 20.7% of the Bank's total loan portfolio consisted of
loans secured by residential real estate.
Consumer Loans. The Bank offers a variety of consumer loans in order to
provide a full range of financial services to its customers. The consumer loans
offered by the Bank include loans that are secured by personal property,
including automobiles. At December 31, 1995, $6,639,000 or 14.9% of the Bank's
total loan portfolio consisted of consumer loans.
CREDIT ADMINISTRATION
The Bank employs extensive written policies and procedures to enhance
management of credit risk. The loan portfolio is managed under a specifically
defined credit process. This process includes formulation of a
portfolio management strategy, guidelines for underwriting standards and risk
assesment, procedures for on-going identification and management of credit
<PAGE>
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with the Bank's policies. The Bank's loan approval policies
provide for various levels of individual officer lending authority. In general,
lending authority currently granted by the Bank to any one individual is
$50,000. A combination of approvals from certain officers may lend up to an
aggregate of $200,000. The Board's Loan Committee is authorized to approve loans
up to the Bank's internal lending limit (currently $650,000), and the approval
of the full Board is required for loans which exceed the Bank's internal lending
limit up to the Bank's legal lending limit (currently $719,000).
A major element of credit risk management is the diversification of
risk. The Bank's objective is to maintain a diverse but well-balanced loan
portfolio to minimize the impact of any single event or set of circumstances.
Concentration parameters are based upon individual risk factors, industry
categories, policy constraints, economic conditions, collateral and products.
The Bank generally does not make loans outside its market area unless the
borrower has an established relationship with the Bank and conducts its
principal business operations within the Bank's market area. Consequently, the
Bank and its borrowers are directly affected by the economic conditions
prevailing in its market area. However, given the diversity and balance within
the Bank's loan portfolio, management does not believe that there is any
significant aggregation or concentration of loans related to any one industry,
client or sector which would adversely impact the overall performance of the
Bank's loan portfolio.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. These laws and regulations are generally intended for the
protection of depositors. The following is a brief summary of certain statutes,
rules and regulations affecting the Company and the Bank. To the extent that the
following summary describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statutory and regulatory
provisions.
Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous
additional regulatory requirements have been placed on the banking industry in
the past five years, and additional changes have been proposed. The operations
of the Company and the Bank may be affected by legislative changes and the
policies of various regulatory authorities. The Company is unable to predict the
nature or the extent of the effect on its business and earnings that fiscal or
monetary policies, economic control, or new
<PAGE>
federal or state legislation may have in the future.
The Company
The Company is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956, as amended (the "BHCA") and the Virginia
Banking Act (the "Virginia Act").
The BHCA. Under the BHCA, the Company is subject to periodic
examination by the Board of Governors of the Federal Reserve System (the
"Federal Reserve") and is required to file periodic reports of its operations
and such additional information as the Federal Reserve may require. The
Company's and the Bank's activities are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries, or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
With certain limited exceptions, the BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve before (i) acquiring
substantially all the assets of any bank, (ii) acquiring direct or indirect
ownership or control of any voting shares of any bank if after such acquisition
it would own or control more than 5% of the voting shares of such bank (unless
it already owns or controls the majority of such shares), or (iii) merging or
consolidating with another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the
Federal Change in Bank Control Act, together with regulations thereunder,
require Federal Reserve approval (or, depending on the circumstances, no notice
of disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to exist
if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. With respect to corporations with
securities registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), under Federal Reserve regulations control will be rebuttably
presumed to exist if a person acquires at least 10% of any class of voting
securities of the corporation. The regulations provide a procedure for challenge
of the rebuttable control presumption. The Company does not currently have a
class of securities registered under the Exchange Act, but would be required to
register its Common Stock under the Exchange Act once it has more than 500
shareholders of record.
Under the BHCA, the Company is generally prohibited from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, non-banking activities, unless the Federal Reserve, by
order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
<PAGE>
Some of the activities that the Federal Reserve has determined by regulation to
be proper incidents to the business of banking include making or servicing loans
and certain types of leases, engaging in certain insurance and discount
brokerage activities, performing certain data processing services, acting in
certain circumstances as a fiduciary or investment or financial advisor, owning
savings associations, and making investments in certain corporations or projects
designed primarily to promote community welfare.
In accordance with Federal Reserve policy, the Company is expected to
act as a source of financial strength and commit resources to support the Bank.
Under the BHCA, the Federal Reserve may require a bank holding company to
terminate any activity or relinquish control of a non-bank subsidiary (other
than a non-bank subsidiary of a bank) upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the
bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or non-bank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition. The Company currently does not
have any subsidiaries other than the Bank.
In the liquidation or other resolution by any receiver of a bank
insured by the FDIC, the claims of depositors have priority over the general
claims of other creditors. Hence, in the event of the liquidation or other
resolution of a banking subsidiary of the Company (such as the Bank), the
general claims of the Company as creditor of such banking subsidiary would be
subordinate to the claims of the depositors of such banking subsidiary, even if
the claims of the Company were not by their terms so subordinated.
The Virginia Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the "Virginia Commission") under
the Virginia Act. A registered bank holding company must provide the Virginia
Commission with information regarding the financial condition, operations,
management, and intercompany relationships of the holding company and its
subsidiaries. The Virginia Commission may also require additional information it
deems necessary to keep itself informed about whether the provisions of Virginia
law and the regulations and orders issued thereunder by the Virginia Commission
have been complied with, and may make examinations of any bank holding company
and its subsidiaries.
Under the Virginia Act, the prior approval of the Virginia Commission
must be obtained for any Virginia bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting securities of any
financial institution or other financial institution holding company located
within or without the State of Virginia. In addition, Virginia law allows
interstate banking in Virginia by permitting out-of-state banking
<PAGE>
organizations to acquire Virginia banking organizations if Virginia banking
organizations are allowed to acquire banking organizations in their states,
and the Virginia banking organization to be acquired has been in existence
and continuously operated as a bank for a period of two years. As a result
of this reciprocal banking provision, banking organizations in other states
have entered the Virginia market through acquisitions of Virginia
institutions. Under federal legislation effective September 29, 1995, bank
holding companies are generally permitted to acquire banks in any states.
The Bank
General. The Bank operates as a national banking association
incorporated under the laws of the United States and is subject to examination
by the Office of the Comptroller of the Currency (the "OCC"). Deposits in the
Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
a maximum amount (generally $100,000 per depositor, subject to aggregation
rules.) The OCC and the FDIC regulate or monitor all areas of the Bank's
operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rate risk
management, establishment of branches, corporate reorganizations, maintenance of
books and records, and adequacy of staff training to carry on safe lending and
deposit gathering practices. The OCC requires the Bank to maintain certain
capital ratios and imposes limitations on the Bank's aggregate investment in
real estate, bank premises, and furniture and fixtures. The Bank is currently
required by the OCC to prepare quarterly reports on the Bank's financial
condition and to conduct an annual audit of its financial affairs in compliance
with minimum standards and procedures prescribed by the OCC.
Under FDICIA, all insured institutions must undergo regular on-site
examination by their appropriate banking regulator. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency or agencies. FDICIA also directs the FDIC to
develop with other agencies a method for insured depository institutions to
provide supplemental disclosure of the estimated fair market value of assets and
liabilities, to the extent feasible and practicable, in any balance sheet,
financial
<PAGE>
statement, report of condition or any other report of any insured depository
institution. FDICIA also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating, among other things, to: (i)
internal controls, information systems, and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and
(v) asset quality.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which places limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates including the Company. In addition, limits are
placed on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. Most of these loans and certain other
transactions must be secured in prescribed amounts. The Bank is also subject to
the provisions of Section 23B of the Federal Reserve Act that, among other
things, prohibits an institution from engaging in transactions with certain
affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing
at the time for comparable transactions with non-affiliated companies. The Bank
is subject to restrictions on extensions of credit to executive officers,
directors, certain principal shareholders, and their related interests. Such
extensions of credit (i) must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features.
Branching. National banks are required by the National Bank Act to
adhere to branch banking laws applicable to state banks in the states in which
they are located. Under current Virginia law, the Bank may open branch offices
throughout Virginia with the prior approval of the OCC. In addition, with prior
approval of the OCC and any other agency as appropriate under the circumstances,
the Bank will be able to acquire existing banking operations in Virginia.
Under the federal legislation discussed above, effective June
1, 1997, banks may merge or consolidate across state lines, unless both of
the states involved either authorize such merger or consolidation at an earlier
date or either of the states involved elects to prohibit such merger or
consolidation prior to May 31, 1997. Under the federal legislation also,
states may authorize banks from other states to engage in branching across state
lines de novo and by acquisition of branches without acquiring a whole banking
institution. The Virginia General Assembly passed the "opt-in" law which
adopts the general legislation regarding interstate mergers before it
automatically takes effect on June 1, 1997. Virginia has also "opted-in" to
interstate branching subject to the limitations discussed above. The Virginia
"opt-in" law became effective on July 1, 1995.
Community Reinvestment Act. The Federal Community Reinvestment Act
requires that, in connection with examinations
<PAGE>
of financial institutions within their jurisdiction, the Federal Reserve, the
FDIC, the OCC, or the Office of Thrift Supervision (the "OTS") shall evaluate
the record of the financial institutions in meeting the credit needs of their
local communities, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Deposit Insurance
The deposits of the Bank are currently insured to a maximum of $100,000
per depositor, subject to certain aggregation rules. The FDIC has implemented a
risk-related assessment system for deposit insurance premiums. All depository
institutions have been assigned to one of nine risk assessment classifications
based upon certain capital and supervisory measures. Except to the extent
indicated below, the deposits of the Bank are subject to the rates of the Bank
Insurance Fund ("BIF") of the FDIC. On August 8, 1995, in view of the success in
recapitalizing the BIF, the FDIC reduced the lowest assessment rate for the BIF
from $0.23 per $100 of domestic deposits to $0.04, so that the revised schedule
of BIF assessment rates now ranges from $0.04 per $100 of domestic deposits to
$0.31 (the highest rate remaining unchanged). Based upon the Bank's current risk
classification,
<PAGE>
the Bank is now required to pay a BIF assessment of $0.10 per $100 of domestic
deposits. This reduction in the lowest BIF assessment rate is effective
retroactive to June 1, 1995 (the FDIC having determined that the BIF achieved
the statutory required reserve ratio of 1.25% on May 31, 1995).
Dividends
The principal source of the Company's cash revenues comes from
dividends received from the Bank. The amount of dividends that may be paid by
the Bank to the Company depends on the Bank's earnings and capital position and
is limited by federal law, regulations, and policies. In addition, the Federal
Reserve has stated that bank holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends under circumstances in which
the bank holding company fails to meet minimum capital requirements or in which
its earnings are impaired.
As a national bank, the Bank may not pay dividends from its
paid-in-capital. All dividends must be paid out of undivided profits then on
hand, after deducting expenses, including reserves for losses and bad debts. In
addition, a national bank is prohibited from declaring a dividend on its shares
of common stock until its surplus equals its stated capital, unless there has
been transferred to surplus no less than one-tenth of the bank's net profits of
the preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year exceeds the total of its net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus. Under FDICIA, the Bank may
not pay a dividend if, after paying the dividend, the Bank would be
undercapitalized. See "Capital Regulations" below.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums. The
current guidelines require all bank holding companies and federally-regulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier 1 capital. Tier 1 capital includes common shareholders'
equity, qualifying perpetual preferred stock, and
<PAGE>
minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles and excludes the allowance for loan and
lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate-term preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. FDICIA's capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank or
bank holding company must have a leverage ratio of no less than 5%, a Tier 1
risk-based ratio of no less than 6%, and a total risk-based capital ratio of no
less than 10%, and the bank must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific capital level.
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound
<PAGE>
practice. The degree of regulatory scrutiny of a financial institution will
increase, and the permissible activities of the institution will decrease, as it
moves downward through the capital categories. Institutions that fall into one
of the three undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
interest rates on deposits, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institution's performance under their capital restoration plans. As of December
31, 1995 and 1994, the Company and the Bank met regulatory minimum capital
requirements.
In August of 1995, the federal bank regulatory agencies revised their
capital adequacy guidelines to provide explicitly for consideration of interest
rate risk in the overall determination of a bank's minimum capital requirement.
The intended effect is to ensure that banking institutions effectively measure
and monitor their interest rate risk and that they maintain adequate capital for
the risk. A banking institution deemed to have excessive interest rate risk
exposure may be required to maintain additional capital. The Company does not
believe that this revision in the capital adequacy guidelines will have a
material adverse effect on the Company.
These capital guidelines can affect the Company in several ways. If the
Bank begins to grow at a rapid pace, a premature "squeeze" on capital could
occur, making a capital infusion necessary. The requirements could impact the
Company's ability to pay dividends. The Company's present capital levels are
adequate. When the Company received regulatory approval to acquire certain
assets and assume certain deposits and other liabilities of Suburban Bank, the
Company's leverage and risk-based capital ratios decreased due to the overall
increase in asset size. Although the Company anticipates that its current level
of capital will be adequate to absorb anticipated growth, this is based on
management's expectations and there can be no assurance that the level of
capital will remain adequate. In addition, rapid growth, poor loan portfolio
performance, or poor earnings performance or a combination of these factors
could change the Bank's capital position in a relatively short period of time.
The following table shows the leverage and risk-based regulatory
capital ratios at December 31, 1995, and December 31,
<PAGE>
1994, for the Bank.
<TABLE>
<CAPTION>
Analysis of Capital
(dollars in thousands)
Required Required Actual Actual Excess Excess
Amount % Amount % Amount %
------------- ------------- --------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Tier 1 risk-based capital
ratio $ 1,873 4.00% $ 3,436 7.34% $ 1,563 3.34%
Total risk-based capital
ratio $ 3,745 8.00% $ 4,021 8.59% $ 276 0.59%
Tier 1 leverage
ratio $ 1,887 3.00% $ 3,436 5.46% $ 1,549 2.46%
As of December 31, 1994
Tier 1 risk-based capital
ratio $ 1,029 4.00% $ 3,969 15.40% $ 2,940 11.40%
Total risk-based capital
ratio $ 2,057 8.00% $ 4,267 16.60% $ 2,210 8.60%
Tier 1 leverage
ratio $ 1,040 3.00% $ 3,969 11.40% $ 2,929 8.40%
</TABLE>
FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate risk,
concentration of credit risk, and the risks of non-traditional activities. It is
uncertain what effect these regulations, when implemented, would have on the
Company and the Bank.
Governmental Monetary Policies and Economic Controls
The Company is affected by monetary policies of regulatory agencies,
including the Federal Reserve, which regulates the national money supply in
order to mitigate recessionary and inflationary pressures. Among the techniques
available to the Federal Reserve are engaging in open market transactions in
United States Government securities, changing the discount rate on bank
borrowings, changing reserve requirements against bank deposits and limiting
interest rates that banks may pay on time and savings deposits. These techniques
are used in varying combinations to influence the overall growth of bank loans,
investments and deposits. Their use may also affect interest rates charged on
loans or paid on deposits. The effect of governmental policies on the earnings
of the Company cannot be predicted; however, modest short-term changes should
have little effect so long as the Company maintains its current interest
sensitivity gap position.
Recent Legislative Developments
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions, including
proposals to consolidate the federal bank regulatory agencies. Certain of these
proposals, if
<PAGE>
adopted, could significantly change the regulation of banks and the financial
services industry. The Company cannot predict whether any of these proposals
will be adopted or, if adopted, how these proposals would affect the Company.
Competition
The Bank encounters strong competition among financial institutions in
the northern Virginia and metropolitan Washington, D.C. area for both loans and
deposits. Competition also exists with savings and loan associations, credit
unions, mutual funds, and insurance companies. Principal competitors include
other community commercial banks in the northern Virginia area, and larger
financial institutions with branches in the Bank's primary service area. This
intense competition is expected to continue as bank mergers and
acquisitions of smaller banks into larger institutions in the Washington, D.C.
metropolitan area may be expected to continue for the foreseeable future.
The areas of business activities in which banking and non-bank
institutions may engage have been expanding in recent years. Consequently, to
the extent that other banks and financial institutions engage in such
activities, the competition for deposits and loans has increased and may be
expected to increase in the future.
Employees
The Company conducts its operations through its subsidiary, the Bank.
Consequently, the Company has no employees. At December 31, 1995, the Bank had
26 full-time employees and 2 part-time employees.
Item 6 is hereby amended to read in its entirety as follows:
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements and related notes and other statistical information included
elsewhere herein. Results reflect the operations of the Company and the Bank,
during the years ended December 31, 1995 and 1994.
The year ended December 31, 1995 represented the Company's most
successful year since the July 1, 1991 commencement of operations by the Bank.
Record earnings of $568,000 for the year were posted, and the Company recorded
net income for each of the fiscal quarters during the year ended December 31,
1995. Management expects this performance to continue in the first quarter of
1996.
<PAGE>
On a per share basis, earnings were $0.92 per share in 1995 as compared
to a $(0.22) loss in 1994 and $(0.57) loss in 1993. Return on average assets
was 1.07% in 1995 and (0.43)% in 1994 and (1.46)% in 1993. Return on average
equity was 15.45% in 1995 as compared to (3.68)% in 1994 and (8.15)% in 1993.
Equity to average assets was 7.77% in 1995 and 10.62% in 1994 and 15.86% in
1993.
The Company's total assets were $70,611,000 as of December 31, 1995 as
compared to $38,989,000 as of December 31, 1994 which represented an increase of
81.1%. The 1995 growth of $31,622,000 exceeded the growth of $8,056,000 from
December 31, 1993 to December 31, 1994 and was primarily due to the Suburban
Bank transaction. See Description of Business-General. The Bank's overall asset
size and customer base, both individual and business, increased significantly
during 1995.
Total loans, net of allowance for loan losses, at December 31, 1995
were $43,775,000 as compared to $23,750,000 at December 31, 1994, which
represented an increase of 84.3%. Of the 1995 growth of $20,025,000, $13,000,000
is attributable to the Suburban Bank transaction. The remaining $7,000,000
increase in loans is due to the Bank's continued focus on its core lending
activities such as commercial loans, real estate programs, home equity lines of
credit, and consumer loans. The Bank's focus on real estate programs including
home equity lines of credit primarily accounted for the net loan growth in 1994.
Average loans as a percentage of average total earning assets increased from
1994 to 1995, representing 71.4% of average total earning assets as of December
31, 1995, as compared to 64.0% as of December 31, 1994.
Federal funds sold and cash and due from banks at December 31, 1995
totaled $14,399,000 compared to $6,242,000 at December 31, 1994, representing an
increase of $8,157,000, or 131%. Cash and due from banks increased by
$3,300,000, or 150% and federal funds sold increased by $4,900,000, or 120%
during such period. The increase was attributable to the increase in overall
volume of the Bank's deposit base as a result of the Suburban Bank transaction,
the addition of Suburban Bank's Reston Branch and the Bank's internal growth
during 1995. In addition, the Bank experienced significant deposit
transactions in escrow accounts at year-end. From 1993 to 1994, federal
funds sold decreased by $1,300,000, or 24.5% and interest-bearing deposits
decreased by $500,000, or 62.5%. The decreases were the result of a shift
in funds from such lower yielding assets to higher yielding loans.
Total deposits were $65,493,000 at December 31, 1995, up from
$34,894,000 at December 31, 1994, representing an increase of 87.7%. The growth
of $30,599,000 was primarily the result of the acquisition of $20,100,000 of
deposits from Suburban Bank. The remaining increase was the result of an
increase in overall customer base related to the Bank's normal growth and
marketing efforts. Interest-bearing deposit accounts accounted for the largest
increase, up $24,530,000.
Results of Operations
The Company's net income for the year ended December 31, 1995, was
$568,000, a $706,000 increase from the $138,000 loss for the year ended December
31, 1994. The net income and loss represent a return on average assets of 1.07%
in 1995 as compared to (0.43)% in 1994. Return on average equity improved to
15.45% in 1995 from (3.67)% in 1994. The primary reason for the $706,000
increase in net income from 1994 to 1995 is the growth in assets and liabilities
during 1994 and 1995. Average assets rose from $31,871,000 in 1994 to
$53,313,000 in 1995. One significant source of the increase in assets and
liabilities during 1995 was the purchase of $13,000,000 in loans and acquisition
of $20,100,000 of deposits from Suburban Bank. The growth in assets and
liabilities contributed to a $1,400,000, or 92.4%, increase in net interest
income and a $200,000, or 147%, increase in non-interest income while management
was able to limit growth in non-interest expenses to $850,000, or 50%.
In addition, the Company recognized a net income tax benefit of
$250,000 in 1995, as compared to zero in 1994, related to a reduction in the
deferred tax asset valuation allowance. Based upon the Company's profitability
in 1995 and projected profitability for 1996, management decided that 100%
valuation allowance was no longer needed against the deferred tax asset. See
Note (5) to the Company's consolidated financial statements.
Net income per share in 1995 was $0.92, which is a significant
improvement from the $(0.22) net loss per share in 1994.
New Accounting Standards
For a discussion of changes in accounting principles and new accounting
standards, see Note (1) of the Notes to the Company's Consolidated Financial
Statements.
Net Interest Income/Margins
The primary source of revenue for the Company is net interest income,
which is the difference between income earned on interest-earning assets, such
as loans and investment securities, and interest incurred on interest-bearing
sources of funds, such as deposits and borrowings. The level of net interest
income is determined primarily by the average balances ("volume") of
interest-earning assets and the various rate spreads between the
interest-earning assets and the Company's funding sources. Table 1:
"Comparative Average Balances - Yields and Rates" below indicates the
Company's average volume of interest-earning assets and interest-bearing
liabilities for 1995 and 1994 and average yields and rates. Changes in net
interest income from period to period result from increases or
<PAGE>
decreases in the volume of interest-earning assets and interest-bearing
liabilities, increases or decreases in the average rates earned and paid on such
assets and liabilities, the ability to manage the earning-asset portfolio, and
the availability of particular sources of funds, such as non-interest bearing
deposits. Table 2: "Rate/Volume Variance" below indicates the changes in the
Company's net interest income as a result of changes in volume and rates from
1994 to 1995 and from 1993 to 1994.
Net interest income was $2,938,000 for 1995, a 92.4% increase from the
$1,527,000 earned in 1994. Earning assets averaged $49,200,000 in 1995, a 66.2%
increase as compared to $29,600,000 in 1994. The increase in net interest income
is due to the growth of the loan portfolio, an increase in the volume of
investment securities and increases in yields in the majority of earning asset
categories due to market rate increases, including the prime rate, throughout
1995. Average loans as a percentage of total average earning assets
increased to 71.4% in 1995 as compared with 64.0% in 1994. Total average
investment securities as a percentage of total average earning assets decreased
in 1995 representing 17.8% of total average earning assets as compared to 27.8%
of total average earning assets in 1994. Average federal funds sold increased
to 10.5% of total average earning assets in 1995 from 6.1% in 1994. The shift in
composition to higher yielding assets, as well as the overall increase in
average earning assets, improved net interest income, net interest spreads
and net interest margins for the Company in 1995.
Interest income on loans of $3,621,000 in 1995, increased $2,006,000,
or 124.2% from $1,615,000 in 1994, constituting the largest dollar increase in
interest income and reflecting an increase in the average balance of loans to
$35,127,000 in 1995 from $18,981,000 in 1994. The increase in net interest
income was also a result of an improvement in the net interest spread. The net
interest spread, which is the difference between the yield on earning assets and
the cost of interest-bearing liabilities, improved to 5.00% in 1995 from 4.19%
in 1994.
The key performance measure for net interest income is the "net
interest margin," or net interest income divided by average earning assets. The
Company's net interest margin increased to 5.97% for 1995 from 5.15% for 1994
and 4.55% for 1993. The Company's net interest margin is affected by loan
pricing, credit administration, and deposit pricing. Both the 1995 and 1994
increases were the result of a combination of factors; including an upward trend
in non-interest bearing sources of deposits and an increase in
higher-yielding assets, primarily loans, as a component of average earning
assets.
[This space intentionally left blank.]
<PAGE>
Table 1: Comparative Average Balances - Yields and Rates
<TABLE>
<CAPTION>
1995 1994
------------------- ---------- --------------------------------------------
verage Income/ Yield/ Average Income/ Yield/
(dollars in thousands) alance Expense Rates Balance Expense Rates
------ ------- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (net of unearned
income)(1)(2) $35,127 $3,621 10.31% $18,981 $1,615 8.51%
Investment securities:
Available-for sale 3,727 239 6.41% 1,915 118 6.16%
Held-to-maturity 5,032 290 5.76% 6,315 270 4.28%
Federal funds sold 5,155 301 5.84% 1,809 75 4.15%
Interest bearing bank balances 155 9 5.81% 623 25 4.01%
-------- ------- ----- -------- -------- ----
Total earning assets (3) $49,196 $4,460 9.07% $29,643 $2,103 7.09%
------- ---- -------- ----
Allowance for loan losses (407) (236)
Other assets 4,524 2,464
-------- -------
Total assets $53,313 $31,871
-------- -------
Liabilities and stockholders'
equity:
Deposits:
Interest-bearing demand 5,371 125 2.33% 3,568 84 2.35%
Savings 3,860 119 3.08% 3,551 97 2.73%
Money market accounts 15,086 511 3.39% 8,808 232 2.63%
Time deposits 12,608 716 5.68% 3,603 136 3.77%
---------- ------------- ------------- -------------- -------------- -------------
Total interest-bearing
deposits $36,925 $1,471 3.98% $19,530 $ 549 2.81%
Federal funds purchased 34 2 5.88% 29 1 3.45%
Other borrowed funds 452 49 10.84% 286 26 9.09%
Total interest-bearing
liabilities $37,411 $1,522 4.07% $19,845 $ 576 2.90%
============= ============= ============== =============
Demand deposits 11,874 8,101
Other liabilities 354 164
Stockholders' equity 3,674 3,761
---------- --------------
Total liabilities and
stockholders' equity $53,313 $31,871
========== ==============
Interest spread
(Average rate earned less
average rate paid) 5.00% 4.19%
Net interest income
(Interest earned less interest
paid) $2,938 $1,527
Net interest margin
(Net interest income/total
earning assets) 5.97% 5.15%
</TABLE>
(1)Loans on non-accrual are included in the calculation of average balance.
(2)Interest income on loans includes loan fee amortization of $53,064 and
$59,393 for the period ended December 31, 1995 and 1994, respectively.
(3)From inception through December 31, 1995, the Company made no loans or
investments that qualify for tax-exempt treatment and, accordingly, has no
tax-exempt income.
<PAGE>
Table 2: Rate/Volume Analysis
Changes in interest income and interest expense can result from
variances in both volume and rates. The Company has an asset and liability
management policy designed to provide a proper balance between rate sensitive
assets and rate sensitive liabilities, to attempt to maximize interest margins
and to provide adequate liquidity for anticipated needs.
The following table presents the changes in the Company's net interest
income as a result of changes in volume and rate from 1994 to 1995 and from 1993
to 1994.
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
-------------------------------------------------- -------------------------------------------------
(variances in) (variances in)
Net Net
Average Average Increase/ Average Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
---------------- ------------- ------------------ ---------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $1,606,452 $399,119 $2,005,571 $405,936 $ (2,147) $403,789
Investment securities:
Available-for-sale 115,961 5,282 121,243 117,743 - 117,743
Held-to-maturity (62,051) 81,885 19,834 59,588 23,087 82,675
Federal funds sold 185,330 41,363 226,693 (89,050) 37,474 (51,576)
Interest bearing bank
balances (23,599) 7,309 (16,290) (8,487) 1,994 (6,493)
---------------- ------------- ------------------ ---------------- ---------------- -----------
Total interest
income $1,822,093 $534,958 $2,357,051 $485,730 $ 60,408 $546,138
Interest Expense:
Interest bearing
demand
accounts 42,044 (469) 41,575 15,502 (2,561) 12,941
Savings 8,881 12,691 21,572 (2,192) (4,378)
Money market 199,183 79,917 279,100 43,907 (223) 43,684
Time deposits 482,366 97,808 580,174 37,355 3,918 41,273
Federal funds
purchased 331 194 525 1,598 - 1,598
Other borrowed funds
17,180 5,870 23,050 25,914 - 25,914
---------------- ------------- ------------------ ---------------- ---------------- -----------
Total interest
expense $ 749,985 $196,011 $ 945,996 $122,084 $ (3,244) $118,840
---------------- ------------- ------------------ ---------------- ---------------- -----------
Change in net
interest income $1,072,108 $338,947 $1,411,055 $363,646 $ 63,652 $427,298
================ ============= ================== ================ ================ ===========
</TABLE>
Note: The change in interest income due to both rate and volume has been
allocated proportionally between volume and rate. Loan fees are included
in the interest income computation.
<PAGE>
Non-Interest Income
Non-interest income consists of revenues generated from service charges
on deposit accounts, as well as servicing fees on real estate mortgages, wire
transfer fees, official check fees, and collection fees. Non-interest income in
1995 was $339,000, an increase of $202,000, or 147%, from $137,000 in 1994. The
increase was primarily due to volume increases in the number of deposit accounts
which generated more check activity and increased fee income. A less significant
increase from 1993 to 1994 of $56,000 or 67.8%, was also due to overall volume
increases in the number of deposit accounts. Deposit service charges accounted
for 69.6% and 62.8% of total non-interest income for 1995 and 1994,
respectively.
Table 3: Non-Interest Income:
<TABLE>
<CAPTION>
1995 1994
----------------------------------- ---------------------------------
Amount % Change Amount % Change
------------------ ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Deposit service charges 236,000 174.4% 86,000 88.2%
Other operating income 103,000 98.1% 52,000 42.0%
Total non-interest
income 339,000 147.4% 137,000 67.8%
================== ================ ================ ===============
Non-interest income as a
percent of average total
assets 0.6% 0.4%
</TABLE>
Non-Interest Expense
Non-interest expense totaled $2,566,000 for 1995, as compared to
$1,713,000 for 1994, an increase of $853,000, or 49.8%. Although total
non-interest expense increased during 1995, non-interest expense as a percentage
of average total assets decreased to 4.8% in 1995 as compared to 5.4% in 1994.
As shown in Table 4 salaries and employee benefits continued to account
for the largest component of non-interest expense, comprising 49.7% of total
non-interest expenses for 1995 and 47.4% in 1994. Salaries and employee benefits
increased by $465,000, or 57.3%, from 1994 to 1995, and increased by $127,000,
or 18.6%, from 1993 to 1994. The increase in 1995 was mainly attributable to
increased staffing as a result of the addition of the Reston branch, while the
1994 increase was reflective of increases in staffing, wage increases, and
increases in employee health insurance. In addition, the 1995 and 1994 salaries
and employee benefits also increased due to payments on the leveraged ESOP which
was funded during June 1994.
Data processing expenses increased by $113,000, or 100.7%, from 1994 to
1995, as compared to an increase of $31,000, or 37.8%, from 1993 to 1994. The
increases in data processing expenses are primarily volume driven. The increase
during 1995
<PAGE>
was related to the addition of the Reston branch and the overall increase in the
Bank's transaction volume during 1995.
Occupancy and equipment expenses increased by $92,000, or 44.2%, from
1994 to 1995, as compared to a decrease of $38,000, or 15.3%, from 1993 to 1994.
The increase in 1995 was due to the addition of the Reston Branch. The decrease
from 1993 to 1994 was reflective of the double lease situation which existed
during the second quarter of 1993 when the Company occupied its current premises
in McLean, Virginia, while maintaining its previous lease in Vienna, Virginia,
creating a two month overlap of rental expenses which no longer existed during
1994.
Legal and professional expenses increased by $55,000, or 32.6%, from
1994 to 1995, as compared to an increase of $27,000, or 18.7%, from 1993 to
1994. The increase in 1995 was primarily due to an increase in audit fees paid
to the external auditors and regulators as a result of the increase in the
Bank's asset size. In addition, the 1995 increase was due to increased legal
fees related to increased collection efforts. The 1994 increase was a result of
legal fees incurred in the funding of the leveraged ESOP and an increase in the
regulatory audit fee.
Amortization of the premium paid on deposits acquired totaling $77,000
in 1995 resulted from the $1,200,000 premium recorded in the Suburban Bank
transaction. The premium amount is being amortized over a 10 year period based
upon the CompanyOs estimated life of the acquired deposit base.
Business development expenses increased $37,000, or 47.8% in 1995. The
increase was primarily attributable to an increase in advertising relating to
the opening of the Reston Branch and distribution of information packets to
customers relating to the Suburban Bank transaction. From 1993 to 1994, business
development expenses decreased by $43,000, or 36.0%. This decrease was
reflective of the Company's curtailment of its advertising campaign from 1993 to
1994 limiting marketing via the media.
[This space intentionally left blank.]
<PAGE>
The following table presents the principal components of non-interest
expense for the last two fiscal years.
Table 4: Non-Interest Expenses
<TABLE>
<CAPTION>
1995 1994
Amount % Change Amount % Change
------------------- ---------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Salaries and employee
benefits $1,276,468 57.3 % $ 811,389 18.6 %
Data processing 226,010 100.7 % 112,617 37.8 %
Occupancy and equipment 299,394 44.2 % 207,560 (15.3)%
Office and operations
expenses 287,041 3.1 % 87.5 %
Legal and professional 223,657 32.6 % 168,623 18.7 %
Amortization of premium paid for deposits 76,849 100.0 % - -
Deposit insurance 62,831 10.1 % 57,087 31.4 %
Business development 113,802 47.8 % 76,980 (36.0)%
------------------- ---------------- -------------------- -----------------
Total non-interest
expense $2,566,052 49.84 % $1,712,557 16.89 %
=================== ================ ==================== =================
Non-interest expense as a
percentage of average
total assets 4.8% 5.4%
</TABLE>
Income Tax Benefit
The Company recognized a net income tax benefit of $250,000 in 1995, as
compared to zero in 1994, related to a reduction in the deferred tax asset
valuation allowance. This accounted for $250,000 of the $706,000 change in net
income from 1994 to 1995. Subject to future profitability, the Company will
record additional tax benefits until the net operating losses are depleted. See
Note (5) to the Company's financial statement, Income Taxes, for additional
information.
Prior to December 31, 1995, management determined that a valuation
allowance was necessary for the entire amount of the deferred tax asset. This
decision was based on the lack of sufficient profitable operating history of the
Company. Based upon the profitability of the Company in 1995 and projected
profitability of the Company during 1996, management reassessed the need for a
valuation allowance and recorded a net $250,000 deferred tax asset, which is the
amount management considers is more likely than not to be realized.
[This space intentionally left blank.]
<PAGE>
Composition of Loan Portfolio
Because loans are expected to produce higher yields than investment
securities and other interest-earning assets, the absolute volume of loans and
the volume as a percentage of total earning assets is an important determinant
of net interest margin. During 1995, average loans were $35,127,000 and
constituted 71.4% of average earning assets and 65.9% of average total assets.
This represents increases of $16,146,000, or 85.1% over 1994 average loans of
$18,981,000 which represented 64.0% of average earning assets and 59.6% of
average total assets. At December 31, 1995, the Company's loan to deposit ratio
was 67.7% as compared to 68.9% at December 31, 1994. Loan growth during 1995 of
$20,000,000 was significantly less than total deposit growth of $31,000,000
which contributed to the decrease in the loan to deposit ratio.
The change in the BankOs loan portfolio composition as of December 31,
1995 was primarily due to the purchase of loans from Suburban Bank, specifically
the increases in residential real estate and consumer loans. Despite the changes
in loan mix, commercial loans still represent the largest category with 32.2% of
total loan portfolio. Residential real estate loans experienced the largest
volume increase of $6,260,000 raising the category to 20.7%, or $9,230,000 of
total loan portfolio as of December 31, 1995.
The following table sets forth the composition of the Company's loan
portfolio, and the related percentage composition of total loans, as of December
31, 1995 and 1994.
Table 5: Loan Portfolio Composition:
<TABLE>
<CAPTION>
December 31,
1995 1994
------------------------------------ ------------------------------------
% of % of
Type of Loans Amount Total Amount Total
--------------------- ------------- --------------------- --------------
<S> <C> <C> <C> <C>
Commercial $14,352,202 32.2% $8,988,648 37.2%
Real estate-construction 1,990,779 4.5% 1,570,020 6.5%
Residential real estate 9,225,299 20.7% 2,962,999 12.3%
Commercial real estate 12,311,371 27.7% 8,313,797 34.4%
Consumer 6,638,593 14.9% 2,303,388 9.6%
--------------------- ------------- --------------------- --------------
Total loans $44,518,244 100.0% $24,138,852 100.0%
Less:
Unearned income 158,906 91,013
--------------------- --------------------
Loans net of unearned
income $44,359,338 $24,047,839
Allowance for loan losses 584,528 297,749
--------------------- ---------------------
Net loans $43,774,810 $23,750,090
===================== =====================
</TABLE>
Approximately 88.4% of the Company's commercial and real
<PAGE>
estate loans have adjustable rates, the majority of which are tied to the prime
rate. This allows the Bank to adjust the interest rates on its loans to the
current interest rate environment, whereas fixed rates do not allow this
flexibility. If interest rates were to increase in the future, the interest
earned on loans would improve, and if rates were to fall, the interest earned
would decline, thus impacting the Company's income. (See also the discussion
under Liquidity and Interest Rate Sensitivity below.)
The following table sets forth the maturity distribution, classified
according to sensitivity to changes in interest rates, for commercial and real
estate components of the Company's loan portfolio at December 31, 1995. Some of
the loans may be renewed or repaid prior to maturity. Therefore, the following
table should not be used as a forecast of future cash collections.
Table 6: Maturity Schedule of Selected Loans
<TABLE>
<CAPTION>
As of December 31,
(dollars in thousands)
1995
------------------------------------------------------------------------------
<1 Year 1 to 5 Years 5+ Years Total
---------------- ---------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Commercial $13,053 $ 1,250 $ 49 $14,352
Real estate 19,539 3,313 675 23,527
Total $32,592 $ 4,563 $724 $37,879
================ ====================== =============== =================
Fixed interest rate $ 176 3,507 $ 724 $ 4,407
Variable interest
rate 32,416 1,056 - 33,472
Total $32,592 $ 4,563 $ 724 $37,879
================ ====================== =============== =================
1994
------------------------------------------------------------------------------
< 1 Year 1 to 5 Years 5+ Years Total
---------------- ---------------------- --------------- -----------------
Commercial $5,137 $ 3,617 $ 234 $ 8,988
Real estate 2,070 7,843 2,934 12,847
Total $7,207 $ 11,460 $3,168 $21,835
================ ====================== =============== =================
Fixed interest rate $ 417 $ 740 $ - $ 1,157
Variable interest
rate 6,790 10,720 3,168 20,678
Total $7,207 $ 11,460 $3,168 $21,835
================ ====================== =============== =================
</TABLE>
The scheduled repayments as shown above are reported in the maturity category in
which the payment is due.
<PAGE>
Loan Quality
The Bank attempts to manage the risk characteristics of its loan
portfolio through various control processes, such as credit evaluation of
borrowers, establishment of lending limits and application of lending
procedures, including the holding of adequate collateral and the maintenance of
compensating balances. However, the Bank seeks to rely primarily on the cash
flow of its borrowers as the principal source of repayment. Although credit
policies are designed to minimize risk, management recognizes that loan losses
will occur and that the amount of these losses will fluctuate depending on the
risk characteristics of the loan portfolio as well as general and regional
economic conditions.
The allowance for loan losses represents a reserve for potential losses
in the loan portfolio. The adequacy of the allowance for loan losses is
evaluated periodically based on a review of all significant loans, with a
particular emphasis on non-accruing, past due and other loans that management
believes require special attention. As of December 31, 1995, the Company had one
loan for $266,000 in non-accrual loans as compared to zero as of December 31,
1994.
For significant problem loans, management's review consists of
evaluation of the financial strengths of the borrower and the guarantor, the
related collateral, and the effects of economic conditions. Specific reserves
against the remaining loan portfolio are based on analysis of historical loan
loss ratios, loan charge-offs, delinquency trends, and previous collection
experience, along with an assessment of the effects of external economic
conditions. Table 8: "Allowance for Loan Loss Allocation," which is set forth
below, indicates the specific reserves allocated by loan type and also the
general reserves included in the year-end 1995 allowance for loan losses.
The provision for loan losses is a charge to earnings in the current
period to replenish the allowance and to maintain it at a level management has
determined to be adequate. The Company's provision for loan losses for 1995 was
$394,000, as compared to $90,000 in 1994. The BankOs total loan balance
increased to $44,359,000 as of December 31, 1995 as compared to $24,048,000 as
of December 31, 1994. The increase in provision for loan losses during 1995 was
related primarily to the growth in the loan portfolio.
The Bank charged off $107,000 in 1995 as compared to no charge-offs in
1994. The charge-offs resulted from three commercial loans and two consumer
loans. There were no recoveries on loans previously charged off during 1995, as
compared to recoveries of $934 during 1994. The following Table 7: "Allowance
for Loan Losses" summarized the allowance activities for the years ended
December 31, 1995 and 1994.
Table 7: Allowance for Loan Losses:
<TABLE>
<CAPTION>
1995 1994
--------------------------- ------------------------
<S> <C> <C>
Allowance for loan losses, January 1 $ 297,749 $ 206,515
Loans charged off:
Commercial (102,036) -
Real estate - -
Consumer (4,765) -
--------------------------- ------------------------
Total loans charged off (106,801) -
Recoveries - 934
--------------------------- ------------------------
Net (charge-offs) recoveries (106,801) 934
Provision for loan losses 393,580 90,300
Allowance for loan losses, December 31 $ 584,528 $ 297,749
=========================== ========================
Loans (net of discount):
Year-end balance $44,359,338 $24,047,839
Average balance during the year $35,126,817 $18,981,218
Allowance as a percent of year-end
loan balance 1.32% 1.24%
Percent of average loans:
Provision for loan losses 1.12% 0.48%
Net charge-offs 0.30% 0.00%
</TABLE>
As of December 31, 1995, the allowance for loan losses was 1.32% of
outstanding loans, which was an increase from December 31, 1994 percentage of
1.24%. Management's judgment as to the level of future losses on existing loans
is based on managementOs internal review of the loan portfolio, including an
analysis of the borrowersO current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers, an evaluation of the existing relationships among loans,
potential loan losses, and the present level of the loan loss allowance; and
results of examinations by independent consultants. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. However, management's determination of the appropriate
allowance level is based upon a number of assumptions about future events, which
are believed to be reasonable, but which may or may not prove valid. Thus, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for loan loss or that additional increases in the loan loss allowance
will not be required. The following Table 8: "Allowance for Loan Loss
Allocation:" summarizes the allocation of allowance by loan type.
[This space intentionally left blank.]
<PAGE>
Table 8: Allowance for Loan Loss Allocation:
<TABLE>
<CAPTION>
------------------------------------------------------------
As of December 31, 1995: Amount % of Total
---------------------------------- ------------------------
<S> <C> <C>
Commercial $ 87,442 14.96%
Real estate 105,024 17.97%
Consumer 42,840 7.33%
Unallocated 349,222 59.74%
---------------------------------- ------------------------
Total $584,528 100.00%
================================== ========================
As of December 31, 1994: Amount % of Total
---------------------------------- ------------------------
Commercial $109,894 36.91%
Real estate 90,512 30.40%
Consumer 12,422 4.17%
Unallocated 84,921 28.52%
---------------------------------- ------------------------
Total $297,749 100.00%
================================== ========================
</TABLE>
Non-performing loans are defined as non-accrual and renegotiated loans.
When real estate acquired by foreclosure and held for sale is included with
non-performing loans, such category is reported as non-performing assets. There
was $266,000 comprised of one loan in non-performing assets as of December 31,
1995. The non-performing loans as of December 31, 1995, were classified for
regulatory purposes as substandard, and as such, management had allocated a
portion of its allowance for possible loan losses for future potential loss.
There were no non-performing loans as of December 31, 1994. Table 9:
"Non-Performing Assets" presents information on these assets for the past two
years.
The Company adopted the provisions of Statements of Financial
Accounting Standards No. 114 (SFAS 114),"Accounting by Creditors for Impairment
of Loan," as amended by Statements of Financial Accounting Standards No. 118
(SFAS 118), "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosure," effective January 1, 1995. SFAS 114 and 118 require that
impaired loans, which consist of all modified loans and other loans for which
collection of all contractual principal and interest is not probable, be
measured based on the present value of expected cash flows discounted at the
loanOs effective interest rate or the fair value of the collateral.
There is one impaired loan with an unpaid principal balance of $266,000
at December 31, 1995. This loan is on nonaccrual, but has no related impairment
reserve. The average balance of impaired loans during 1995 was $334,000, which
had an average impairment reserve of $26,000. No income was recognized on
impaired loans during 1995.
<PAGE>
As a result of management's ongoing review of the loan portfolio, loans
are classified as non-accrual when collection of full principal and interest
under the original terms is not expected. These loans are classified as
non-accrual, even though the presence of collateral or the borrower's financial
strength may be sufficient to provide for ultimate repayment. Interest on
non-accrual loans is recognized only when received. Table 10: "Foregone
Interest" indicates the amount of interest that would have been recorded had all
loans classified as non-accrual been current in accordance with their original
terms and the amount of interest actually accrued.
Table 9: Non-Performing Assets
<TABLE>
<CAPTION>
As of December 31,
1995 1994
-------------- -------------
(dollars in thousands)
<S> <C> <C>
Loans on non-accrual basis $266 $-
Renegotiated or restructured loans - -
Real estate acquired by foreclosure - -
-------------- -------------
Total non-performing assets $266 $-
============== =============
</TABLE>
Table 10: Foregone Interest
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995 1994
--------------------------- ---------------------
<S> <C> <C>
Interest income that would have
been accrued at original terms $ 13,465 $ -
Interest recognized $ - $ -
</TABLE>
Capital Resources
Stockholders' equity was $4,140,000 as of December 31, 1995, as
compared to $3,386,000 as of December 31, 1994. The $754,000 increase, or 22.3%,
was the result of net income of $568,000 and an unrealized gain on investment
securities available for sale of $137,000. The remaining increase in
stockholdersO equity was due to a payment on the long-term liability relating to
the Employee Stock Ownership Plan. No dividends have been declared by the
Company since its inception (See also the discussion under Business -
Supervision and Regulation in Item I above). In addition, no stock warrants have
been exercised and no options under the Stock Option Plan have been exercised.
To date, the Company has provided its capital requirements through the
funds received from its initial stock offering which was completed in 1991. In
the future, the Company may consider raising capital through an offering of
Common Stock or other securities. However, there can be no assurance that the
Company will be able to consummate such an offering or that such an offering
could be consummated on terms acceptable to the Company. Under the Federal
Reserve's capital regulations, for as long as
<PAGE>
the Company's assets are under $150 million, the Company's capital ratios are
reviewed on a bank-only basis. The Bank exceeded its capital adequacy
requirements as of December 31, 1995 and 1994 (See also the capital regulations
discussion and capital analysis table under Business - Supervision and
Regulation in Item I above). The Company continually monitors its capital
adequacy ratios to assure that the Bank remains within the guidelines.
Liquidity and Interest Rate Sensitivity
The primary objective of asset/liability management is to ensure the
steady growth of the Company's primary earnings component, net interest income.
Net interest income can fluctuate with significant interest rate movements. To
lessen the impact of these rate swings, management endeavors to structure the
balance sheet so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.
The measurement of the Company's interest rate sensitivity, or "gap,"
is one of the principal techniques used in asset/liability management.
Interest-sensitive gap is the dollar difference between assets and liabilities
which are subject to interest-rate repricing within a given time period,
including both floating rate or adjustable rate instruments and instruments
which are approaching maturity.
In theory, interest rate risk can be diminished by maintaining a
nominal level of interest rate sensitivity. In practice, this is made difficult
by a number of factors, including cyclical variations in loan demand, different
impacts on interest-sensitive assets and liabilities when interest rates change,
and the availability of funding sources. Accordingly, the Company undertakes to
manage the interest-rate sensitivity gap by adjusting the maturity of and
establishing rate prices on the earning asset portfolio and certain
interest-bearing liabilities to keep it in line with management's expectations
relative to market interest rates. Management generally attempts to maintain a
balance between rate-sensitive assets and liabilities as the exposure period is
lengthened to minimize the overall interest rate risk to the Company.
The Bank's Executive Committee which oversees the asset/liability
management function meets periodically to monitor and manage the structure of
the balance sheet, control interest rate exposure, and evaluate pricing
strategies for the Company. The asset mix of the balance sheet is continually
evaluated in terms of several variables: yield, credit quality, appropriate
funding sources and liquidity. Management of the liability mix of the balance
sheet focuses on expanding the various funding sources.
<PAGE>
The interest rate sensitivity position at year-end 1995 is presented in
Table 11 - "Rate Sensitivity Analysis." The difference between rate-sensitive
assets and rate-sensitive liabilities, or the interest rate sensitivity gap, is
shown at the bottom of the table. The Company would benefit from increasing
market rates of interest when it is asset sensitive and would benefit from
decreasing market rates of interest when it is liability sensitive. At year-end
1995, the Company had an asset sensitive gap (more assets than liabilities
subject to repricing within the stated timeframe) of $7,300,000 which represents
19.0% of earning assets over a 30 day period. This suggests that if interest
rates were to increase over this period, the net interest margin would improve,
and if interest rates were to decrease, the net interest margin would decline.
Since all interest rates and yields do not adjust at the same velocity, the gap
is only a general indicator of interest rate sensitivity. The analysis presents
only a static view of the timing of maturities and repricing opportunities,
without taking into consideration that changes in interest rates do not affect
all assets and liabilities equally. Net interest income may be impacted by other
significant factors in a given interest rate environment, including changes in
the volume and mix of earning assets and interest-bearing liabilities.
[This space intentionally left blank.]
<PAGE>
Table 11: Rate Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1995
(dollars in thousands) Total
30 Days 31-90 91-180 181 Days- One Year 1 Yr.+ or
or Less Days Days One Year or Less Non-Sensitive Total
------------- ----------- ------------ -------------- ------------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Fed funds sold $ 8,910 $ - $ - $ - $ 8,910 $ - $ 8,910
Interest bearing
deposits - - 100 - 100 - 100
Investment securities:
Available-for-sale - 249 250 540 1,039 3,927 4,966
Held-to-maturity - 679 473 651 1,803 3,471 5,274
Loans:
Variable rate 29,319 698 1,631 1,183 32,831 1,247 34,078
Fixed rate 67 9 18 218 312 9,703 10,015
------------- ----------- ------------ -------------- ------------- ------------------ ---------
Total earning $38,296 $1,635 $2,472 $ 2,592 $44,995 $ 18,348 $63,343
assets
Source of Funds:
Savings $ 3,215 $ - $ - $ - $ 3,215 $ - $ 3,215
NOW accounts 6,457 - - - 6,457 - 6,457
Money market accounts 20,488 - - - 20,488 - 20,488
CDs 421 1,069 1,374 4,598 7,462 5,549 13,011
CDs 100,000 & over 0 613 0 704 1,317 1,821 3,138
IRAs 30 141 307 432 910 655 1,565
------------- ----------- ------------ -------------- ------------- ------------------ ---------
Total rate-
sensitive deposits $30,611 $1,823 $1,681 $ 5,734 $39,849 $ 8,025 $47,874
Long-term borrowings 425 - - - 4 - 425
------------- ----------- ------------ -------------- ------------- ------------------ --------
Total rate-sensitive
liabilities $31,036 $1,823 $1,681 $ 5,734 $40,274 $ 8,025 $48,299
Noninterest-bearing
liabilities $ - $ - $ - $ - $ - 11,550 $11,550
Interest rate
sensitivity gap $ 7,260 $ (188) $ 791 $(3,142) $ 4,721
Ratio of rate
sensitive assets to
rate sensitive
liabilities 123.39% 89.69% 147.06% 45.20% 111.72%
</TABLE>
<PAGE>
Liquidity represents the ability to provide steady sources of funds for
loan commitments and investment activities, as well as to provide sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to cash or by
attracting new deposits. Cash flows from financing activities, which included
funds received from new and existing depositors, provided a large source of
liquidity in 1995 and 1994 as increases in deposits totaled $30,600,000 and
$8,200,000, respectively. The Bank seeks to rely primarily on core deposits from
customers to provide stable and cost-effective sources of funding to support
asset growth. The Bank also seeks to augment such deposits with higher yielding
certificates of deposit. Certificates of deposit of $100,000 or more are
summarized by maturity in Table 12 - "Maturity of Time Deposits $100,000 or
More." Other sources of funds available to the Bank include short-term
borrowings, primarily in the form of federal funds purchased.
Table 12: Maturity of Time Deposits $100,000 or More
<TABLE>
<CAPTION>
December 31,
1995 1994
------------------ ------------------
(dollars in thousands)
<S> <C> <C>
Under 3 months $ 613 $ 100
3 to 6 months - -
6 to 12 months 704 552
Over 12 months 1,821 203
------------------ ------------------
Total $ 3,138 $ 855
================== ==================
</TABLE>
In the normal course of business, the Bank enters into various off
balance sheet credit facilities with its customers, including commitments to
extend credit at a future date and letters of credit. Details of the commitments
of this nature may be found in Note 12 of the accompanying Notes to Consolidated
Financial Statements. Since many of the commitments can be expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Average liquid assets (cash and amounts due from banks,
interest-bearing deposits in other banks, federal funds sold, investment
securities and other short-term investments) were 35.4% of average deposits for
1995, as compared to 45.8% for 1994. Liquidity levels declined during 1995 as
funds were shifted into less liquid, higher yielding loans. Average loans were
72.0% of average deposits for 1995, as compared to 68.7% for 1994. Average
deposits were 99.2% of average earning assets for 1995 as opposed to 93.3% for
1994. As noted in Table 6 - "Maturity Schedule of Selected Loans," approximately
$37,879,000, or 85.1%, of the loan portfolio consisted of commercial loans and
real estate loans. Of this amount, $32,592,000, or 86.0%, matures within one
year.
<PAGE>
Table 13 - "Maturity Distribution and Yields of Investment Securities"
indicates that $1,303,000, or 24.7%, of held-to-maturity investment securities
and $403,000, or 8.1%, of available-for-sale investment securities mature within
one year or less. Securities maintained in the available- for-sale portfolio may
be sold prior to maturity in order to provide the Company and the Bank with
increased liquidity. Available-for-sale investment securities totaled $4,966,000
and $3,455,000 as of December 31, 1995 and 1994, respectively.
Table 13: Maturity Distribution and Yields of Investment Securities
<TABLE>
<CAPTION>
December 31, 1995
Available-for-sale Held-to-maturity
--------------------------------- ----------------------------------
Book Value Yield Book Value Yield
-------------------- ---------- -------------------- ------------
<S> <C> <C> <C>
U.S. Treasury:
One year or less $ - - $ 475,196 5.60%
Over one through five years - - 997,252 5.81%
Over five through ten years - - - -
Over ten years - - - -
-------------------- --------------------
Total U.S. Treasury $ - - $1,472,448 5.74%
U.S. Government-Sponsored
Agencies:
One year or less 248,357 4.90% 297,634 6.57%
Over one through five years 747,562 6.24% 2,250,265 6.01%
Over five through ten years 1,328,017 6.96% - -
Over ten years - - - -
-------------------- --------------------
Total U.S. government-
sponsored agencies $2,323,936 6.51% $2,547,899 6.08%
Other Securities:
One year or less 154,200 6.00% 530,257 4.74%
Over one through five years 668,938 6.84% 224,958 5.02%
Over five through ten years 562,564 7.04% 289,000 4.98%
Over ten years 1,256,135 6.71% 209,288 4.70%
-------------------- --------------------
Total other securities $2,641,837 6.77% $1,253,503 4.84%
-------------------- --------------------
Total investment securities $4,965,773 6.65% $5,273,850 5.66%
==================== ====================
</TABLE>
Item 7 is hereby amended to read in its entirety as follows:
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
TYSONS FINANCIAL CORPORATION:
We have audited the accompanying consolidated statements of financial
condition of Tysons Financial Corporation and subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tysons
Financial Corporation and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Washington, D.C.
January 19, 1996
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks (note 6)............................................................. $ 5,489,076 2,191,640
Federal funds sold (note 13)................................................................. 8,910,000 4,050,000
Interest-bearing deposits in other banks..................................................... 100,000 300,000
Investment securities available-for-sale, at fair value (note 3)............................. 4,965,773 3,454,654
Investment securities held-to-maturity, at cost, fair value of $5,300,167 in 1995
and $4,599,020 in 1994 (note 3)........................................................... 5,273,850 4,754,520
Loans, net (note 4).......................................................................... 43,774,810 23,750,090
Property and equipment, net.................................................................. 319,845 248,064
Premium paid for deposits acquired (note 2).................................................. 1,108,471 --
Accrued interest receivable and other assets................................................. 669,474 240,223
Total assets......................................................................... $70,611,299 38,989,191
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits:
Noninterest-bearing demand................................................................ $17,618,859 11,550,392
NOW and money market accounts............................................................. 26,945,735 15,427,139
Savings................................................................................... 3,215,240 3,432,596
Certificates of deposit, $100,000 and over................................................ 3,137,699 854,582
Certificates of deposit, under $100,000................................................... 14,575,624 3,629,763
Total deposits............................................................................ 65,493,157 34,894,472
Accrued interest payable and other liabilities............................................... 552,673 234,027
Long-term debt (notes 8 and 11).............................................................. 425,000 475,000
Total liabilities.................................................................... 66,470,830 35,603,499
STOCKHOLDERS' EQUITY:
Common stock, par value $5; 10,000,000 shares authorized;
668,619 shares issued and outstanding (notes 9 and 10).................................... 3,343,095 3,343,095
Additional paid-in capital................................................................... 3,071,860 3,071,860
ESOP Trust, 48,595 shares (note 11).......................................................... (425,000) (475,000)
Accumulated deficit.......................................................................... (1,864,784) (2,432,382)
Unrealized gain (loss) on investment securities available-for-sale........................... 15,298 (121,881)
Total stockholders' equity........................................................... 4,140,469 3,385,692
Commitments and contingencies (notes 7 and 12)
Total liabilities and stockholders' equity........................................... $70,611,299 38,989,191
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME:
Loans........................................................................................... $3,620,751 1,615,180
Investment securities:
Available-for-sale........................................................................... 238,986 117,743
Held-to-maturity............................................................................. 290,491 270,657
Federal funds sold.............................................................................. 301,564 74,871
Deposits in other banks......................................................................... 8,662 24,952
Total interest income............................................................................. 4,460,454 2,103,403
INTEREST EXPENSE:
Interest on deposits:
NOW and money market accounts................................................................ 636,423 315,748
Savings accounts............................................................................. 118,976 97,404
Certificates of deposit, under $100,000...................................................... 579,103 105,329
Certificates of deposit, $100,000 and over................................................... 136,861 30,461
Interest on federal funds purchased and other short-term borrowings............................. 2,123 1,598
Interest on long-term debt (note 8)............................................................. 48,964 25,914
Total interest expense............................................................................ 1,522,450 576,454
Net interest income............................................................................... 2,938,004 1,526,949
Provision for loan losses (note 4)................................................................ 393,580 90,300
Net interest income after provision for loan losses............................................... 2,544,424 1,436,649
Service charge income............................................................................. 235,626 85,975
Other income...................................................................................... 103,600 51,514
Other operating expenses (note 14)................................................................ 2,566,052 1,712,557
Income (loss) before income taxes................................................................. 317,598 (138,419)
Income tax benefit................................................................................ (250,000) --
NET INCOME (LOSS)................................................................................. $ 567,598 (138,419)
NET INCOME (LOSS) PER SHARE....................................................................... $ 0.92 (0.22)
Weighted average shares outstanding............................................................... 616,926 638,247
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN
ADDITIONAL (LOSS) ON
COMMON PAID-IN ESOP ACCUMULATED INVESTMENT
SHARES STOCK CAPITAL TRUST DEFICIT SECURITIES TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.......... 668,619 $3,343,095 3,071,860 -- (2,293,963 ) -- 4,120,992
ESOP Trust (note 11)................ -- -- -- (475,000) -- -- (475,000)
Net loss............................ -- -- -- -- (138,419 ) -- (138,419)
Unrealized loss on investment
securities available-for-sale..... -- -- -- -- -- (121,881) (121,881)
BALANCE, DECEMBER 31, 1994.......... 668,619 3,343,095 3,071,860 (475,000) (2,432,382 ) (121,881) 3,385,692
ESOP Trust (note 11)................ -- -- -- 50,000 -- -- 50,000
Net income.......................... -- -- -- -- 567,598 -- 567,598
Unrealized gain on investment
securities available-for-sale..... -- -- -- -- -- 137,179 137,179
BALANCE, DECEMBER 31, 1995.......... 668,619 $3,343,095 3,071,860 (425,000) (1,864,784 ) 15,298 4,140,469
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................................ $ 567,598 (138,419)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization............................................................. 167,471 47,928
Provision for loan losses................................................................. 393,580 90,300
Income tax benefit........................................................................ (250,000) --
Compensation expense for ESOP Trust....................................................... 50,000 25,000
Increase in accrued interest receivable and other assets.................................. (409,423) (66,466)
Increase in accrued interest payable and other liabilities................................ 291,997 106,296
Net cash provided by operating activities................................................. 811,223 64,639
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities................................................... (1,891,809) (3,656,728)
Purchases of held-to-maturity securities..................................................... (2,960,241) (2,089,000)
Proceeds from maturities and principal payments of available-for-sale securities............. 514,396 80,193
Proceeds from maturities and principal payments of held-to-maturity securities............... 2,464,166 4,216,752
Net decrease in interest-bearing deposits in banks........................................... 200,000 500,000
Acquisition of deposits net of assets and cash acquired...................................... 5,846,618 --
Purchase of property and equipment........................................................... (101,821) (98,340)
Net increase in loan portfolio............................................................... (7,172,268) (7,912,886)
Net cash used in investing activities..................................................... (3,100,959) (8,960,009)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits..................................................................... 10,497,172 8,210,049
Proceeds from long-term debt issuance........................................................ -- 500,000
Repayments of long-term debt................................................................. (50,000) (25,000)
Funding of ESOP Trust........................................................................ -- (500,000)
Net cash provided by financing activities................................................. 10,447,172 8,185,049
Net increase (decrease) in cash and cash equivalents........................................... 8,157,436 (710,321)
CASH AND CASH EQUIVALENTS, beginning of year................................................... 6,241,640 6,951,961
CASH AND CASH EQUIVALENTS, end of year......................................................... $14,399,076 6,241,640
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid................................................................................ $ 1,451,528 565,455
Income taxes paid............................................................................ -- --
</TABLE>
The Company acquired loans of $13,032,431, equipment of $43,965, other
assets of $19,828, and assumed deposits of $20,101,513 and liabilities of
$26,649. The Company paid a premium of $1,185,320 for deposits acquired.
See accompanying notes to consolidated financial statements.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Tysons Financial Corporation (the "Company") was incorporated December 29,
1989 under the laws of the Commonwealth of Virginia as a holding company whose
activities consist of investment in its wholly owned subsidiary, Tysons National
Bank (the "Bank"). In connection with the formation of the Company, 10,000,000
shares of $5 par value stock were authorized and 668,619 shares were originally
issued. The Bank commenced regular operations on July 1, 1991 as a national
banking association primarily supervised by the Office of the Comptroller of the
Currency. The Bank is a member of the Federal Reserve System and the Federal
Deposit Insurance Corporation.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared on the accrual basis and in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company has defined cash and cash
equivalents as those amounts included in cash and due from banks and federal
funds sold.
INVESTMENT SECURITIES
The Company classifies its debt and marketable equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities for which the
Company has the ability and intent to hold until maturity. All other securities
not classified as trading or held-to-maturity are classified as
available-for-sale. The Company does not engage in trading activities and,
accordingly, has no trading portfolio.
Available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders' equity until
realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings,
resulting in the establishment of a new cost basis for the security.
Held-to-maturity securities are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Premiums and discounts are
amortized or accreted over the life of the related security as an adjustment to
yield using the effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for determining the cost of securities
sold.
Prepayment of the mortgages securing the collateralized mortgage
obligations may affect the maturity date and yield to maturity. The Company uses
actual principal prepayment experience and estimates of future principal
prepayments in calculating the yield necessary to apply the effective interest
method.
INCOME RECOGNITION ON LOANS
Interest on loans is credited to income as earned on the principal amount
outstanding. When, in management's judgment, the full collectibility of
principal or interest on a loan becomes uncertain, that loan is placed on
nonaccrual. Any accrued but uncollected interest on nonaccrual loans is charged
against current income. Interest income is then recognized as cash is received.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Interest accruals are resumed on such loans only when they are brought
fully current with respect to principal and interest and when, in the judgment
of the management, the loans have demonstrated a new period of performance and
are estimated to be fully collectible as to both principal and interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance available for losses
incurred on loans. It is established through charges to earnings in the form of
provisions for loan losses. Loan losses are charged to the allowance for loan
losses when a determination is made that collection is unlikely to occur.
Recoveries are credited to the allowance at the time of recovery.
Prior to the beginning of each year, and quarterly during the year,
management estimates whether the allowance for loan losses is adequate to absorb
losses that can be anticipated in the existing portfolio. Based on these
estimates, an amount is charged to the provision for loan losses to adjust the
allowance to a level determined to be adequate to absorb currently anticipated
losses.
Management's judgment as to the level of future losses on existing loans is
based on management's internal review of the loan portfolio, including an
analysis of the borrowers' current financial position, the consideration of
current and anticipated economic conditions and their potential effects on
specific borrowers, an evaluation of the existing relationships among loans,
potential loan losses, and the present level of the loan loss allowance; and
results of examinations by independent consultants. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. 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 recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
LOAN FEES
Loan origination fees and direct loan origination costs are deferred and
amortized as an adjustment to yield over the life of the loan.
PROPERTY AND EQUIPMENT
Property, leasehold improvements, and equipment are stated at cost, less
accumulated depreciation and amortization. Amortization of leasehold
improvements is computed using the straight-line method over the estimated
useful lives of the improvements or the lease term, whichever is shorter.
Depreciation of property and equipment is computed using the straight-line
method over their estimated useful lives ranging from 3 to 25 years.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are recognized subject to management's
judgment that realization of the asset is more likely than not.
INCOME PER COMMON SHARE
Income per common share is computed by dividing net income by the weighted
average number of common and common equivalent shares (using the treasury stock
method) outstanding during the year. Shares held by the ESOP Trust are included
in the income per common share calculation as they become committed to be
released. Common equivalent shares include stock options and warrants and have
no material dilutive effect at December 31, 1995.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
NEW ACCOUNTING STANDARDS
On January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN -- INCOME RECOGNITION AND DISCLOSURES. These new standards
require that impaired loans, within the scope of the statement, be measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate, or the fair value of the collateral if the loan
is collateral dependent. Implementation of these new standards did not have a
material impact on the Company's results of operations or financial position.
On December 31, 1995, the Company implemented SFAS No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The statement requires the disclosure
of the fair value of financial instruments held or used by the Company.
On December 31, 1995 the Company implemented SFAS No. 119, DISCLOSURE ABOUT
DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS. The
statement requires disclosures about the amounts, nature and terms of derivative
financial instruments. It also requires that a distinction be made between
financial instruments held or issued for trading purposes and for purposes other
than trading.
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, which is effective beginning in 1996. SFAS No. 121
requires that assets to be held and used be evaluated for impairment whenever
events or circumstances indicate that the carrying value may not be recoverable.
SFAS No. 121 also requires that assets to be disposed of be reported at the
lower of cost or fair value less selling costs. Implementation of SFAS No. 121
will not have a material impact on the Company's results of operations or
financial position.
In May 1995, the FASB issued SFAS No. 122, ACCOUNTING FOR MORTGAGE
SERVICING RIGHTS, which is effective beginning in 1996. SFAS No. 122 provides
accounting for mortgage servicers that sell or securitize loans and retain
servicing rights. The Company does not sell or securitize mortgage loans and
therefore implementation of SFAS No. 122 will not have a material impact.
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which is effective beginning in 1996. SFAS No. 123 encourages
companies to record an expense for all stock compensation awards based on fair
value at grant date; however, companies may elect to continue to follow the
accounting standards existing prior to SFAS No. 123 with the additional
requirement that they disclose pro forma net income and earnings per share as if
they had adopted the expense recognition provisions of SFAS No. 123. The Company
plans to follow the existing accounting standards for these plans.
RECLASSIFICATIONS
Certain amounts for 1994 have been reclassified to conform to the
presentation for 1995.
(2) ACQUISITION
On May 12, 1995, the Company acquired certain assets and deposits from
Suburban Bank of Virginia, N.A., including its Reston, Virginia branch,
comprising approximately $13 million of loans and $20.1 million of deposits. All
assets acquired and liabilities assumed were recorded at fair value at the date
of acquisition.
The Company paid a premium of approximately $1.2 million for the deposits
acquired. This premium is being amortized on a straight-line basis over 10 years
based on management's estimate of the life of deposits acquired. The Company
reviews the unamortized balance of the premium on a quarterly basis for possible
impairment when events or changed circumstances may affect the underlying basis
of the liabilities assumed. Amortization of the premium was $76,849 in 1995.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) INVESTMENT SECURITIES
The carrying value and fair value of investment securities held-to-maturity
at December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities................................................. $1,472,448 1,481,736 725,510 711,156
Obligations of U.S. government sponsored agencies........................ 2,547,899 2,558,408 2,553,192 2,455,281
Mortgage-backed securities of federal agencies........................... 755,215 763,305 936,051 925,570
Collateralized mortgage obligations...................................... 498,288 496,718 539,767 507,013
$5,273,850 5,300,167 4,754,520 4,599,020
</TABLE>
The carrying value and fair value of held to maturity investment securities
at December 31, 1995 and 1994, by contractual maturity are shown in the
following table. Expected maturities may differ from contractual maturities
because many issuers have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
1995 1994
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Maturing within 1 year................................................... $1,303,087 1,308,130 999,615 984,922
After 1 but within 5 years............................................... 3,472,475 3,495,319 3,215,138 3,107,085
After 5 but within 10 years.............................................. 289,000 289,000 -- --
After 10 years........................................................... 209,288 207,718 539,767 507,013
$5,273,850 5,300,167 4,754,520 4,599,020
</TABLE>
Gross unrealized losses in investment securities held to maturity at
December 31, 1995 and 1994 were $5,569 and $156,288, respectively. Gross
unrealized gains were $31,886 and $788 at December 31, 1995 and 1994,
respectively. There were no sales or transfers of held-to-maturity securities
during the years ended December 31, 1995 and 1994.
The carrying value and amortized cost of available-for-sale securities at
December 31, 1995 and 1994, are shown below. Because available-for-sale
securities are marked-to market, the carrying value is equal to fair value.
<TABLE>
<CAPTION>
1995 1994
CARRYING AMORTIZED CARRYING AMORTIZED
VALUE COST VALUE COST
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies.................................. $1,328,017 1,315,409 -- --
Obligations of U.S. government-sponsored agencies........................ 995,919 1,000,000 944,375 1,000,000
Collateralized mortgage obligations...................................... 2,487,637 2,480,866 2,333,979 2,400,235
Marketable equity securities............................................. 154,200 154,200 176,300 176,300
Total............................................................... $4,965,773 4,950,475 3,454,654 3,576,535
</TABLE>
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) INVESTMENT SECURITIES -- Continued
The carrying value and amortized cost of available-for-sale investment
securities by contractual maturity at December 31, 1995 and 1994, are shown
below. Expected maturities may differ from contractual maturities because many
issuers have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1995 1994
CARRYING AMORTIZED CARRYING AMORTIZED
VALUE COST VALUE COST
<S> <C> <C> <C> <C>
Maturing within 1 year................................................... $ 248,357 250,000 -- --
After 1 but within 5 years............................................... 1,416,500 1,407,050 1,766,227 1,835,129
After 5 but within 10 years.............................................. 1,890,581 1,886,909 250,625 257,943
After 10 years........................................................... 1,256,135 1,252,316 1,261,502 1,307,163
Marketable equity securities............................................. 154,200 154,200 176,300 176,300
Total.................................................................... $4,965,773 4,950,475 3,454,654 3,576,535
</TABLE>
Gross unrealized losses in the available for sale securities at December
31, 1995 and 1994 were $14,712 and $121,881, respectively. Gross unrealized
gains were $30,010 at December 31, 1995 and there were no gross unrealized gains
at December 31, 1994.
There were no sales or transfers of available-for-sale securities during
the years ended December 31, 1995 and 1994.
Securities with carrying values of $661,371 and $365,957 at December 31,
1995 and 1994, respectively, were pledged to secure Treasury tax and loan
payments and for other purposes as required by law.
As a member of the Federal Reserve System, the Bank is required to hold
stock in the Federal Reserve Bank of Richmond. This stock is carried at cost
since no active trading markets exist.
(4) LOANS RECEIVABLE
The loan portfolio at December 31, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Commercial....................................................................................... $14,352,202 8,988,648
Real estate -- construction...................................................................... 1,990,779 1,570,020
Real estate -- residential....................................................................... 9,225,299 2,962,999
Real estate -- commercial........................................................................ 12,311,371 8,313,797
Consumer......................................................................................... 6,638,593 2,303,388
44,518,244 24,138,852
Unearned income.................................................................................. (158,906) (91,013)
44,359,338 24,047,839
Allowance for loan losses........................................................................ (584,528) (297,749)
Loans, net....................................................................................... $43,774,810 23,750,090
</TABLE>
Analysis of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance, beginning of year............................................................................ $ 297,749 206,515
Provision for loan losses............................................................................. 393,580 90,300
Loans charged off..................................................................................... (106,801) --
Recoveries............................................................................................ -- 934
Balance, end of year.................................................................................. $ 584,528 297,749
</TABLE>
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) LOANS RECEIVABLE -- Continued
Loans on which the accrual of interest has been discontinued or reduced
amounted to $265,661 at December 31, 1995. Interest lost on these nonaccrual
loans was approximately $13,465 for 1995. There were no nonaccrual loans at
December 31, 1994.
The Company adopted SFAS 114 and 118 on January 1, 1995, which require that
impaired loans, which consist of all modified loans and other loans for which
collection of all contractual principal and interest is not probable, be
measured based on the present value of expected cash flows discounted at the
loan's effective interest rate or the fair value of the collateral. Prior
periods have not been restated. All loans receivable have been evaluated for
collectibility under the provisions of these statements.
At December 31, 1995, the Company had one impaired loan with an unpaid
principal balance of $265,661. The loan is on nonaccrual but has no related
impairment reserve. The average balance of impaired loans during 1995 was
$334,000, which had an average impairment reserve of $26,000.
All of the Bank's loans, commitments and standby letters of credit have
been granted to customers located in the Washington, D.C. metropolitan area. The
concentrations of credit by type of loan are set forth above. The Bank, as a
matter of policy, does not extend credit, net of participated amounts, to any
single borrower or group of related borrowers in excess of $550,000.
(5) INCOME TAXES
Deferred income tax assets and liabilities are recognized for differences
between financial statement and tax bases of assets and liabilities that will
result in future tax consequences. A valuation allowance is required to reduce
deferred tax assets to an amount more likely than not realizable. Prior to
December 31, 1995 management determined that a valuation allowance was
appropriate for the entire amount of the deferred tax asset. This decision was
based on the lack of sufficient profitable operating history of the Company.
Based upon the profitability of the Company in 1995 and projected
profitability of the Company in 1996, management reassessed the need for a
valuation allowance. Based upon the change in circumstances, management recorded
a net tax deferred asset of $250,000, which represents management's estimate of
the amount of deferred tax asset which is more likely than not to be realized.
In making this determination, management reviewed the Company's recent earnings
trend, projected 1996 pretax income and the estimated amount of deferred tax
asset which will be realized during 1996. On a quarterly basis, management will
reassess the required valuation allowance considering all factors which
influence the realizability of the deferred tax asset including current pretax
income, projected pretax income and the accuracy of previous estimates of
taxable income.
The provision for income tax for the years ended December 31, 1995 and 1994
consists of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current income tax expense....................................................................... $ -- --
Deferred income tax benefit...................................................................... (250,000) --
Income tax benefit............................................................................... $(250,000) --
</TABLE>
A reconciliation of tax at the statutory federal tax rate to the income tax
provision is presented below for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Tax applicable to total income at statutory rate................................................. $ 107,983 (47,062)
Adjustments due to:
Nondeductible expenses......................................................................... 5,416 3,882
Change in valuation allowance.................................................................. (363,399) 34,682
Other.......................................................................................... -- 8,498
Income tax benefit............................................................................... $(250,000) --
</TABLE>
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(5) INCOME TAXES -- Continued
Deferred tax assets and liabilities consist of the following at December
31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Premium paid for deposits acquired................................................................... $ 9,337 --
Bad debt expense..................................................................................... 148,092 78,991
Amortization......................................................................................... 27,668 83,006
Contributions carryforward........................................................................... -- 877
Net operating loss carryforward...................................................................... 509,661 640,183
Gross deferred tax assets............................................................................ 694,758 803,057
Less -- valuation allowance.......................................................................... (407,790) (771,189)
Gross deferred tax liability-depreciation............................................................ 36,968 31,868
Net deferred tax assets.............................................................................. $ 250,000 --
</TABLE>
At December 31, 1995, the Company has a net operating loss carryforward of
approximately $1.5 million that may be offset against future taxable income, of
which $0.1 million, $0.7 million, $0.5 million and $0.2 million expires in 2006,
2007, 2008 and 2009, respectively.
(6) REGULATORY MATTERS
The Bank, as a national bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings (as defined) plus
the retained earnings (as defined) from the prior two years. At December 31,
1995 and 1994, there were no earnings against which dividends could be charged.
The Bank is required to maintain a minimum average reserve balance with the
Federal Reserve Bank. The average amount of the required reserve was $1,046,000
and $695,000 for 1995 and 1994, respectively.
As a member of the Federal Reserve Bank system, the Bank is required to
subscribe to shares of $100 par value Federal Reserve Bank stock equal to 6
percent of the Bank's capital and surplus. The Bank is required to pay for
one-half of the subscription. The remaining amount is subject to call when
deemed necessary by the Board of Governors of the Federal Reserve.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the regulators to stratify institutions into five quality
tiers based upon their relative capital strengths and to increase progressively
the degree of regulation over the weaker institutions, limits the pass through
deposit insurance treatment of certain types of accounts, adopts a "truth in
savings" program, calls for the adoption of risk-based premiums on deposit
insurance and requires the Bank to observe insider credit underwriting products
no less strict than those applied to comparable noninsider transactions.
At December 31, 1995 and 1994, the Company and its subsidiary bank met all
regulatory capital requirements. The key measures of capital are: (1) Tier I
capital (stockholders' equity less certain deductions) as a percent of total
risk adjusted assets; (2) Tier I capital as a percent of total assets, and (3)
total capital (Tier I capital plus the allowance for loan losses up to certain
limitations) as a percent of total risk adjusted assets.
(7) COMMITMENTS AND CONTINGENCIES
The Bank entered into a lease for office space at its current location for
a term of ten years beginning May 1993. This lease is subject to 3 percent
annual increases, as well as allocations of real estate taxes and certain
operating expenses. In addition, the Company assumed certain liabilities
associated with the Suburban Bank transaction, including the lease on the Reston
location beginning May 15, 1995, which expires March 31, 1997. The Reston lease
is also subject to annual increases as well as allocations of real estate taxes
and operating expenses.
Minimum future rental payments under the noncancelable operating leases, as
of December 31, 1995 for each of the next five years and in the aggregate, are
as follows:
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(7) COMMITMENTS AND CONTINGENCIES -- Continued
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1996........................................................................ $ 212,438
1997........................................................................ 150,805
1998........................................................................ 132,237
1999........................................................................ 135,177
2000........................................................................ 138,010
Thereafter.................................................................. 333,175
$1,101,842
</TABLE>
The total rent expense was $162,286 and $121,353 in 1995 and 1994,
respectively.
(8) RELATED-PARTY TRANSACTIONS
Officers, directors, employees and their related business interests are
loan customers in the ordinary course of business. In management's opinion,
these loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable loans with other
persons and do not involve more than normal risk of collectibility or present
other unfavorable features.
Analysis of activity for loans to related parties is as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance, beginning of year.................................................. $ 557,900 151,200
New loans................................................................... 659,100 424,900
Loans paid off or paid down................................................. (135,700) (18,200)
Balance, end of year........................................................ $1,081,300 557,900
</TABLE>
Effective January 1, 1993, the Company established an Employee Stock
Ownership Plan (ESOP), as further described in Note 11. During June 1994, the
Company purchased 32,949 and 22,722 shares of its common stock from several of
the Company's current and former directors, respectively, at $8.75 per share,
for the ESOP.
The loan used to fund the ESOP was provided by a director of the Company in
the original amount of $500,000. As of December 31, 1995 the outstanding balance
of the loan was $425,000. In management's opinion, the loan is at market terms.
The loan requires quarterly principal payments of $12,500, quarterly interest
payments at prime plus 2 percent, and a balloon payment for the remaining
principal balance on June 1, 1998.
(9) STOCK WARRANTS
Associated with the Company's initial public offering, the organizers were
granted one warrant for each share of common stock purchased for cash in the
offering. The stock purchase warrants entitle the holder of the warrants to
purchase Company stock at $10 per share, at any time during the term of the
warrant. The warrants expire on July 1, 2001.
In the event of a capital call upon the Bank, the Office of the Comptroller
of the Currency will require the Company stock warrants to be exercised at a
price no less than current book value or the warrants will be forfeited. The
Company had 228,250 stock warrants issued and outstanding at December 31, 1995.
No warrants have been exercised.
(10) STOCK OPTION PLAN
In 1992, the stockholders approved a stock option plan that provides for
incentive stock options, non-qualified stock options, and restricted stock. A
designated committee of the Board of Directors is authorized to grant options to
employees, officers, directors and advisory board members. At December 31, 1995,
160,058 shares of common stock have been reserved for this plan. On April 5,
1994, the Board of Directors granted to the President of the Company options to
purchase 6,000 shares of common stock. On January 25, 1995, the Company granted
the President of the Company options to purchase 3,000
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) STOCK OPTION PLAN -- Continued
shares of common stock and also granted additional stock options to acquire an
aggregate of 3,500 shares of common stock to various other officers of the
Company pursuant to the plan. The options were immediately exercisable and
expire 10 years from the grant date. All options are exercisable at $8.75 per
share, which was the fair market value of the stock on both option grant dates.
(11) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established the Employee Stock Ownership Plan and Trust
(ESOP) which became effective on January 1, 1993, for employees of the Bank who
have at least one year of credited service and have attained the age of
twenty-one (21). The ESOP is to be funded by the Bank's annual contributions
made in cash or common stock. Contributions to the plan are made at the
discretion of the Board of Directors. Shares purchased by the ESOP are held in a
suspense account for allocation among the participants as the loan is repaid. As
described in note 8, during 1994 the ESOP purchased 57,171 shares of company
stock using $500,000 of funds borrowed from a director of the Company.
Compensation expense relating to the ESOP for 1995 and 1994 was $50,000 and
$25,000, respectively. No dividends have been declared on the Company's stock;
therefore dividends had no effect on the compensation expense relating to the
ESOP. As of December 31, 1995, 8,576 shares have been allocated to participants.
The fair value of unearned shares at December 31, 1995 is approximately
$425,000. For purposes of calculating earnings per share (EPS) the number of
shares of common stock outstanding is reduced by the number of shares held by
the ESOP Trust. Shares are included in EPS calculations as they become committed
to be released.
Contributions to the ESOP and shares released from the suspense account are
allocated among the participants on the basis of salary in the year of
allocation. Benefits become 20 percent vested after the third year of credited
service, with an additional 20 percent vesting each year thereafter until 100
percent vesting after seven years. For any year in which the aggregate of
benefits to key employees exceeds 60 percent of the aggregate benefits accrued
to non-key employees, benefits allocated to participants in that year will
become 20 percent vested after two years, increasing to 100 percent after 6
years. Forfeitures will be reallocated annually among remaining participating
employees. Benefits may be payable upon retirement, separation from service,
disability or death.
(12) FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Commitments to extend credit are
agreements to lend to a customer so long as there is no violation of any
condition established in the contract. Commitments usually have fixed expiration
dates up to one year or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of the contractual obligations by a customer to a
third party. The majority of these guarantees extend until satisfactory
completion of the customer's contractual obligations. All standby letters of
credit outstanding at December 31, 1995, are collateralized.
Those instruments represent obligations of the Company to extend credit or
guarantee borrowings, therefore, they are not recorded on the consolidated
statements of financial condition. The rates and terms of these instruments are
competitive with others in the market in which the Company operates. Almost all
of these instruments as of December 31, 1995 have floating rates, therefore
significantly mitigating the market risk.
Those instruments may involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. Credit risk is defined as the possibility of
sustaining a loss because the other parties to a financial instrument fail to
perform in accordance with the terms of the contract. The Company's maximum
exposure to credit loss under standby letters of credit and commitments to
extend credit is represented by the contractual amounts of those instruments.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK -- Continued
<TABLE>
<CAPTION>
CONTRACTUAL
AMOUNT
<S> <C>
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit...................................................... $13,021,100
Standby letters of credit......................................................... 237,900
</TABLE>
At December 31, 1995, the Company did not have any financial instruments
whose contractual amounts exceed the amount of credit risk.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The Company
evaluates each customer's creditworthiness on a case-by-case basis and requires
collateral to support financial instruments when deemed necessary. The amount of
collateral obtained upon extension of credit is based on management's evaluation
of the counterparty. Collateral held varies but may include deposits held by the
Company; marketable securities; accounts receivable; inventory; property, plant
and equipment; and income-producing commercial properties.
(13) SIGNIFICANT CONCENTRATIONS OF CREDIT
At December 31, 1995, the Company had federal funds sold to five
correspondent banks totaling approximately $8,910,000, each of which had a
balance of $910,000 or more. These are overnight investments and are rolled-over
on a daily basis. The Company does not normally require collateral for this type
of investment.
(14) OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Salaries and employee benefits.................................................................... $1,276,468 811,389
Occupancy and equipment........................................................................... 299,394 207,560
Office and operations expenses.................................................................... 287,041 278,301
Data processing................................................................................... 226,010 112,617
Legal and professional fees....................................................................... 223,657 168,623
Business development.............................................................................. 113,802 76,980
Amortization of premium paid for deposits......................................................... 76,849 --
Deposit insurance................................................................................. 62,831 57,087
$2,566,052 1,712,557
</TABLE>
(15) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The assumptions used and the estimates disclosed represent management's
best judgment of appropriate valuation methods. These estimates are based on
pertinent information available to management as of December 31, 1995. In
certain cases, fair values are not subject to precise quantification or
verification and may change as economic and market factors, and management's
evaluation of those factors change.
Although management uses its best judgment in estimating the fair value of
these financial instruments, there are inherent limitations in any estimation
technique. Therefore, these fair value estimates are not necessarily indicative
of the amounts that the Company would realize in a market transaction. Because
of the wide range of valuation techniques and the numerous estimates which must
be made, it may be difficult to make reasonable comparisons of the Company's
fair value information to that of other financial institutions. It is important
that the many uncertainties discussed above be considered when using the
estimated fair value disclosures and to realize that because of these
uncertainties, the aggregate fair value amount should in no way be construed as
representative of the underlying value of the Company.
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(15) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the significant methodologies and assumptions used
in estimating the fair values presented in the accompanying table.
CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents was used as a
reasonable estimate of fair value.
INVESTMENTS
Fair values of the Company's investment portfolio were based on actual
quoted prices or prices quoted for similar financial instruments.
LOANS
In order to determine the fair market value for loans, the loan
portfolio was segmented based on loan type, credit quality and maturities.
For certain variable rate loans with no significant credit concerns and
frequent repricings, estimated fair values are based on current carrying
values. The fair values of other loans are estimated using discounted cash
flow analysis, using interest rates that were offered as of December 31,
1995 for loans with similar terms to borrowers of similar credit quality.
DEPOSITS
The fair value of deposits with no stated maturity is equal to the
amount payable on demand. The fair value of certificates of deposit are
estimated using discounted cash flow analysis using interest rates that
were offered as of December 31, 1995.
LONG-TERM DEBT
As described in Note 8, the long-term debt is variable rate at market
terms; therefore, the carrying amount was used as a reasonable estimate of
fair value.
COMMITMENTS
The fair value of these financial instruments is based on the credit
quality and relationship, fees, interest rates, probability of funding,
compensating balance and other convenants or requirements. These
commitments generally have fixed expiration dates expiring within one year.
Many commitments are expected to, and typically do, expire without being
drawn upon. The rates and terms of these instruments are competitive with
others in the market in which the Company operates. The carrying amounts
are reasonable estimates of the fair value of these financial instruments.
The carrying amounts of these instruments are zero at December 31, 1995.
Fair Value of Financial Instruments as of December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
CARRYING ESTIMATED
AMOUNT FAIR VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Financial assets:
Cash and cash equivalents............................................................................ $ 14,499 14,499
Investments.......................................................................................... 10,240 10,266
Loans................................................................................................ 43,775 43,910
Financial liabilities:
Noninterest-bearing demand deposits.................................................................. 17,619 17,619
NOW and money market accounts........................................................................ 26,945 26,945
Savings.............................................................................................. 3,215 3,215
Certificates of deposit.............................................................................. 17,713 17,963
Long-term debt....................................................................................... 425 425
Commitments.......................................................................................... -- --
</TABLE>
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(16) HOLDING COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994:
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1995 1994
ASSETS:
Cash.......................................................................................... $ 11,373 20,396
Investment in subsidiary bank................................................................. 4,560,187 3,847,096
TOTAL ASSETS.................................................................................... $ 4,571,560 3,867,492
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Long term debt................................................................................ $ 425,000 475,000
Other liabilities............................................................................. 6,091 6,800
TOTAL LIABILITIES............................................................................... 431,091 481,800
STOCKHOLDERS' EQUITY
Common stock.................................................................................. 3,343,095 3,343,095
Additional paid-in capital.................................................................... 3,071,860 3,071,860
Employee stock ownership plan trust........................................................... (425,000) (475,000)
Retained earnings............................................................................. (1,849,486) (2,554,263)
TOTAL STOCKHOLDERS' EQUITY...................................................................... 4,140,469 3,385,692
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................................... $ 4,571,560 3,867,492
</TABLE>
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
INCOME:
Equity in undistributed earnings of subsidiary................................................ $ 575,911 (122,038)
Other income.................................................................................. -- 458
Total income.................................................................................... 575,911 (121,580)
Expenses........................................................................................ 8,313 16,839
NET INCOME (LOSS)............................................................................... $ 567,598 $ (138,419)
</TABLE>
<PAGE>
TYSONS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(16) HOLDING COMPANY ONLY FINANCIAL STATEMENTS -- Continued STATEMENTS OF CASH
FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................................................. $ 567,598 (138,419)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in undistributed net income (loss) of subsidiary........................................ (575,911) 122,038
Compensation expense for ESOP trust............................................................ 50,000 25,000
Other.......................................................................................... (710) 1,036
Net cash provided by operating activities......................................................... 40,977 9,655
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on ESOP trust debt....................................................................... (50,000) (25,000)
Net cash used by financing activities............................................................. (50,000) (25,000)
INCREASE (DECREASE) IN CASH......................................................................... (9,023) (15,345)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................................................ 20,396 35,741
CASH AND CASH EQUIVALENTS, END OF YEAR.............................................................. $ 11,373 20,396
</TABLE>
<PAGE>
Item 9 is hereby amended to read in its entirety as follows:
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information with respect to the
directors, and executive officers of the Company and the Bank. The Company's
articles of incorporation and by-laws provide for staggered terms for the Board
of Directors. The Board of Directors has been divided into three classes so
that, after their initial terms, approximately one-third of the directors are
elected to a three-year term at each annual shareholders meeting. Members of the
Bank's Board of Directors will serve one-year terms until the next annual
meeting of the Bank's shareholders, and thereafter until their successors are
elected and qualified. Executive officers of the Company are elected by the
Company's Board of Directors, and executive officers of the Bank are elected by
the Bank's Board of Directors, in each case for one-year terms and to serve
until their successors are elected and qualified. Except as otherwise indicated,
each person has been or was engaged in his present or last principal occupation,
in the same or a similar position, for more than five years.
Name Age Position Held and Principal Occupations
Joel M. Birken 48 Mr. Birken has been a Class I director
of the Company and a director of the
Bank since April 1995. Mr. Birken is a
founding shareholder of the law firm of
Rees, Broome & Diaz, P.C., and has
practiced law with that firm in Vienna,
Virginia since 1974.
John P. Carroll 44 Mr. Carroll has been Senior Vice
President and Chief Lending Officer of
the Bank since March 1993. From 1990 to
1993, he was Senior Vice President at
Citizens Bank of Washington. Prior to
1990, Mr. Carroll spent 20 years at
Maryland National Bank in various
lending and management positions. Mr.
Carroll has resigned from the Bank
effective March 25, 1996. Management is
currently seeking a replacement for Mr.
Carroll.
Michael Farnum 50 Mr. Farnum has been a Class II director
of the Company and a director of the
Bank since 1991. He has been, since
1991, self-employed with the Farnum
Company and concentrates on the sales
and leasing of commercial and
industrial real estate. From 1973 to
1991, he was vice president and sales
manager of two regional real estate
firms, including Weaver Bros., Inc.
Alben G. Goldstein, M.D. 50 Dr. Goldstein has been a Class I
director of the
<PAGE>
Company since 1989 and a director of
the Bank since 1991. He has been the
owner and senior physician of the
Arthritis Associates of Northern
Virginia, P.C. for more than the past
five years.
Zachary A. Kaye, M.D. 48 Dr. Kaye has been a Class I director of
the Company since 1989 and a director
of the Bank since 1991. He is currently
a physician in sole practice in
Woodbridge, Virginia. He has been an
individual practitioner for more than
the past fifteen years.
Beth W. Newburger(1) 58 Ms. Newburger has been a Class II
director of the Company and a director
of the Bank since 1991. She has been
President of Corabi International
Telemetrics, Inc., a biomedical
instrumentation company, for more than
the past five years. She was appointed
Chief of Staff, White House Office of
Women's Initiatives and Outreach in
October 1995 and will assume the
position of Deputy Administrator,
General Services Administration on
April 15, 1996.
J. Patrick Rowland 58 Mr. Rowland has been a Class III
director and Vice Chairman of the Board
of Directors of the Company since 1989,
and a director and Chairman of the
Board of the Bank since 1991. Since
January 1995, he has been a business
consultant with offices in Washington,
D.C. Prior to this, Mr. Rowland was
director of government relations for
the Borg-Warner Security Corporation
from September of 1993 to December of
1994. For five years prior to that, he
was the Chairman of Rowland & Sellery,
a Washington, D.C. business consulting
firm.
Richard Schwartz(2) 66 Mr. Schwartz has been a Class III
director and Chairman of the Board of
the Company, and director and Vice
Chairman of the Bank, since 1991. He is
the founder, and for more than the past
five years, President of Boat Owners
Association of The United States
("BOAT/U.S."). He is also the Chairman
of the Board and CEO, of Boat America
Corporation, a service company. Mr.
Schwartz is an attorney and is admitted
to the New York, Florida, and District
of Columbia Bars, and the Supreme Court
of the United States.
William C. Sellery, Jr. 48 Mr. Sellery has been a Class II
director of the Company since 1989 and
director of the Bank since 1991. He has
been President of Sellery
- -----------
1 Ms. Newburger is married to Mr. Schwartz.
2 Mr. Schwartz in married to Ms. Newburger.
<PAGE>
Associates, Inc., since September 1993.
Prior to this, he was president of
Rowland & Sellery, Inc., a Washington
D.C. business consulting firm, from
1988 to 1993.
Samuel E. Smith, Jr. 40 Mr. Smith joined the Bank in June 1994
as its Vice President of Credit
Administration and Operations. Mr.
Smith previously was Assistant Vice
President at Citizens Bank of
Washington from 1991 to 1994. From 1986
to 1991, Mr. Smith served as Assistant
Vice President of Citizens Bank of
Virginia.
Terrie G. Spiro 40 Ms. Spiro, who is the founding
President, has been President/CEO and a
Class III director of the Company since
1989, and President/CEO and director of
the Bank since 1991. Ms. Spiro has over
sixteen years of commercial banking
experience. Prior to the founding of
the Company, Ms. Spiro was
President/CEO of Sports 2000, Inc.,
which she founded in 1986.
St. Clair J. Tweedie 58 Mr. Tweedie has been a Class II
director of the Company and a director
of the Bank since 1991. He is currently
a management consultant. Prior to this,
he was the Director of Government
Relations for American Cyanamid Company
for more than the past five years.
Janet A. Valentine 43 Ms. Valentine has served as Senior
Vice President and Chief Financial
Officer of the Bank since February
1996. From 1991 to 1996, she was
Vice President and Controller at
Patriot National Bank of Virginia. Ms.
Valentine has over 18 years of
experience in bank financial
reporting, budgeting and management.
Stephen A. Wannall 48 Mr. Wannall was elected to serve as a
Class I director of the Company and a
director of the Bank in December 1995.
He is the Managing Shareholder of
Brown, Dakes & Wannall, P.C., an
accounting firm located in Northern
Virginia. Mr. Wannall is a Certified
Public Account and has over twenty
years of experience in public
accounting.
<PAGE>
Item 10 is hereby amended to read in its entirety as follows:
ITEM 10 - EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth for the fiscal years ended December 31,
1993, 1994 and 1995, the cash compensation paid or accrued by the Company and
the Bank, as well as certain other compensation paid or accrued for those years,
for services in all capacities to the chief executive officer of the Company and
the Bank, Terrie G. Spiro (the "Named Executive Officer"). No executive
officer of the Company or the Bank, other than Ms. Spiro, earned total annual
compensation, including salary and bonus, for the fiscal year ended December
31, 1995, in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation(1)(2) Compensation
Name and Securities
Principal Underlying All Other
Position Year Salary($) Bonus Options(#) Compensation($)
<S> <C> <C> <C> <C> <C>
Terrie G.
Spiro - 1995 105,663 40,000 3,000 18,609(3)
President &
Chief 1994 102,731 0 6,000 14,383
Executive
Officer 1993 97,700 5,000 0 13,519
</TABLE>
(1) See "Option Grants," "Option Exercises and Year-End Values" and "Stock
Option Plan" for disclosure regarding outstanding stock options.
(2) In accordance with SEC rules, perquisites constituting less than the
lesser of $50,000 or 10% of total salary and bonuses are not reported.
(3) Comprises employer contributions of term life insurance premium of $184,
disability insurance premium of $2,401, health insurance premium of
$2,304, car lease payments of $6,316, fuel and parking allowance of
$3,600, and club dues of $3,804.
<PAGE>
OPTION GRANTS
Options granted to the Named Executive Officer during 1995 are set
forth in the following table. For disclosure regarding the terms of stock
options see "Stock Option Plan."
Options Grants in Last Fiscal Year - Individual Grants
<TABLE>
<CAPTION>
Percent
of Potential Realizable
Total Value at Assumed
Shares Number of Annual Rates of
Under- Options Stock Price
lying Granted Exercise Appreciation
Options Employees Price for Option Term(2)
Name Granted in 1995 ($/share)(1) Date 5% ($) 10% ($)
- --------- --------- ---------- ------------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Terrie
G. Spiro 3,000 46.15% $8.75 Jan. 2006 $16,508 $41,836
</TABLE>
(1) The exercise price of each option was the fair market value of the
underlying Common Stock on the date of the grant, as determined by the
Board of Directors of the Company.
(2) Future value of current-year grants assuming the indicated percentage
rates per year over the applicable option term. The actual value realized
may be greater than or less than the potential realizable values set forth
in the table.
OPTION EXERCISES AND YEAR-END VALUES
No stock options were exercised by the Named Executive Officer during
1995. There were no stock appreciation rights outstanding during 1995. The
following table sets forth certain information regarding unexercised options
held by the Named Executive Officer as of December 31, 1995:
<TABLE>
<CAPTION>
Aggregated Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-End (#) Fiscal Year-End ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Terrie G. Spiro 9,000(2) 0 N/A N/A
</TABLE>
(1) Value determined by the Board of Directors of the Company.
(2) The exercise price of these options is $8.75 per share.
Compensation of Directors
Directors of the Company receive no compensation for their services as
directors. Directors of the Bank, except for Ms.
<PAGE>
Spiro, who is the President and CEO of the Company and Bank, receive $150
for every meeting attended, paid quarterly in arrears.
Employment Contracts and Termination of Employment Agreements
In February 1990, Terrie G. Spiro and the Company executed an
employment agreement. An amendment to the employment agreement was signed in
April 1992. The following is a summary of the material terms of the employment
agreement and the amendment. The term of employment was deemed to have
commenced July 1, 1991, and continues for a period of five years unless
terminated. After completion of the initial five years, the agreement will
automatically be extended for an additional year, and shall thereafter be
extended on a year-to-year basis unless either party gives notice of intention
to terminate. In March of 1996 the Company and Ms. Spiro agreed to extend the
employment agreement until June 30, 1997. According to the terms of the
employment agreement, Ms. Spiro receives a base salary of $90,000 and benefits
including, but not limited to, individual contributory health insurance,
term life insurance policy, the cost of annual dues to the Army Navy Country
Club, and initiation fee and dues for membership in the Tower Club. Ms. Spiro's
employment agreement entitles her to receive incentive stock options equal to
one-half of one percent, per year for six years, of the initial stock issue,
and such options are to be awarded based on the Bank achieving certain
performance objectives. The first year was based on achieving the pro forma
financial results contained in the application to charter the Bank filed
with the OCC. Years two through six are based on attaining the Bank's
annual budget and return on assets standards. The maximum amount of stock
options to which Ms. Spiro will be entitled will be three percent of the
initial stock issue. The employment agreement and amendment also provide for
incentive bonus compensation if, during each calendar year, the Bank meets
certain performance objectives, including but not limited to: (i) asset
quality; (ii) asset growth; and (iii) return on assets. In the event of a
hostile takeover or a change in control of the Company or the Bank, the Company
will continue to pay Ms. Spiro's salary and bonuses for the longer of 12
months from the date of such takeover or change of control or until June 30,
1997. The Company maintains a key-person insurance policy on the life of Ms.
Spiro. Upon Ms. Spiro's death, proceeds of $200,000 under the policy are
payable to the Company.
Stock Option Plan
During 1992, the Board of Directors of the Company adopted, and the
shareholders approved, the Tysons Financial Corporation Stock Option Plan (the
"Plan"). The Plan provides that restricted stock and stock options may be
granted for the purchase of up to 160,058 shares of Common Stock, subject to
adjustment upon changes in capitalization. The Company has granted stock
options to acquire an aggregate of 12,400 shares of Common Stock to Terrie
G. Spiro pursuant to the Plan. Options to purchase 6,000 shares were granted to
Ms. Spiro on April 5, 1994; options to purchase 3,000 shares were granted on
January 25, 1995 and options to purchase 3,400 shares were granted on February
21, 1996. In addition, On January 25,
<PAGE>
1995, and January 23, 1996 the Company granted stock options to acquire an
aggregate of 5,500 shares of Common Stock to various other officers of the
Company pursuant to the Plan. With the exception of the option granted in 1996,
which will have an exercise price per share of the offering price in the
Company's planned public offering, all options granted to date have an exercise
price of $8.75. The options were immediately exercisable and expire 10 years
from the grant date. No other stock options or restricted stock has been
granted pursuant to the Plan. The Plan is intended as an incentive for and as
a means of encouraging share ownership by persons who are employees or
directors of the Company or the Bank. Options may be granted to employees or
directors of the Company or the Bank or any subsidiary of the Company or the
Bank and may be granted either as incentive stock options (which qualify for
certain favorable tax consequences), or as non-qualified stock options.
Incentive stock options may not be transferred except by will or by the laws
of descent and distribution, and during an optionee's lifetime may be
exercised only by the optionee (or by his or her guardian or legal
representative, should one be appointed). The transferability of non-qualified
stock options will be determined in each case by the stock option committee
described below.
The Plan is administered by a committee consisting of at least two
members of the Board of Directors. Insofar as discretionary options or shares of
restricted stock are granted to persons who are subject to Section 16 of the
Exchange Act, the committee will consist of at least two directors who within
the preceding year have not received discretionary grants under the Plan. The
committee determines the employees and directors who will receive options or
restricted stock and, based on each such person's position and current and
potential contribution to the Company or the Bank, the amount of restricted
stock or the number of shares that will be covered by their options. The
committee also determines the periods of time (not exceeding ten years from the
date of grant in the case of an incentive stock option) during which options
will be exercisable and determines whether termination of an optionee's
employment under various circumstances would terminate options granted under the
Plan to that person. In addition, the committee determines the restriction
period and vesting conditions, the consequences of any termination of
employment, and the other terms of any grant of restricted stock. The option
price per share is an amount determined by the Board of Directors but will
not be less than 100% of the fair market value per share on the date of grant
for incentive stock options. The option price is payable in full upon
exercise. The Company and the Bank receive no consideration upon the granting
of an option.
The Board of Directors has the right at any time to terminate or amend
the Plan, but no such action may terminate options already granted or otherwise
affect the rights of any optionee under any outstanding option without the
optionee's consent. Without shareholder approval, the Board of Directors may not
adopt any amendment of the Plan that would (i) increase
<PAGE>
the total number of shares issuable pursuant to incentive stock options under
the Plan or materially increase the total number of shares of Common Stock
subject to options, (ii) change or modify the class of employees eligible to
receive incentive stock options that may participate in the Plan or materially
change or modify the class of persons that may participate, or (iii) otherwise
materially increase the benefits accruing to participants thereunder.
Employee Stock Ownership Plan
Effective January 1, 1993, the Company established the Tysons Financial
Corporation Employee Stock Ownership Plan (the "ESOP") for all eligible
employees. The ESOP covers all salaried employees of the Company or its
subsidiaries, 21 years of age or older, who work a minimum of 1,000 hours per
year and who have completed at least one year of service with the Company.
Contributions are at the discretion of, and determined annually by, the Board of
Directors based on the Company's performance. Contributions are not to exceed
the maximum amount deductible under the applicable section of the Internal
Revenue Code of 1986 (the "Code"). Contributions under the ESOP will be used to
purchase Common Stock which is allocated to participants on the basis of the
participant's compensation for the year compared to total compensation of all
eligible employees. An employee's interest in the amount contributed becomes 20%
vested after three years of service and increases incrementally to become 100%
vested after seven years of service.
During the second quarter of 1994, the ESOP purchased shares of the
Company's Common Stock using $500,000 of funds borrowed from a director of the
Company. The long-term borrowing of $500,000 requires quarterly principal
payments of $12,500 and quarterly interest payments of prime plus 2% with a lump
sum payment in June 1998. As of December 31, 1995, the outstanding balance of
the loan was $425,000.
Item 11 is hereby amended to read in its entirety as follows:
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the Company's Common
Stock as of March 15, 1996, by each director, by directors and executive
officers as a group, and by each person known to the Company to own beneficially
more than 5% of such Common Stock.
<TABLE>
<CAPTION>
Number of Percent
Name of Beneficial Owner Shares Owned (1) of Class (2)
- ------------------------ ---------------- ------------
<S> <C> <C>
Joel M. Birken 3,050 0.45%
8133 Leesburg Pike, Suite 900
Vienna, VA 22182
<PAGE>
James L. Bowman 40,000 (3) 5.81%
P.O. Box 6
Stephens City, VA 22655
Michael Farnum 15,731 (4) 2.34%
1138 Swinks Mill Road
McLean, VA 22102
Glaize Developments 45,000 (5) 6.53%
Fred L. Glaize III
P.O. Box 2598
Winchester, VA 22601
Alben G. Goldstein, M.D. 16,637 (6) 2.47%
6305 Castle Place
Falls Church, VA 22044
Zachary A. Kaye, M.D. 8,686 (7) 1.29%
14904 Jeff Davis Highway
Woodbridge, VA 22191
Beth W. Newburger 13,054 (8) 1.94%
880 South Pickett Street
Alexandria, VA 22304
Estate of G. Richard Pfitzner 40,696 (9) 5.91%
4510 Asdee Lane
Woodbridge, VA 22192
John Patrick Rowland 52,940 (10) 7.75%
1023 15th St. NW 7th Floor
Washington, D.C. 20005
Richard Schwartz 36,167 (11) 5.32%
880 South Pickett Street
Alexandria, VA 22304
William C. Sellery, Jr. 47,518 (12) 6.95%
1023 15th St. NW 7th Floor
Washington, D.C. 20005
Terrie G. Spiro 26,621 (13) 3.87%
8200 Greensboro Drive, Suite 100
McLean, VA 22102
St. Clair J. Tweedie 36,720 (14) 5.37%
5827 Columbia Pike, Suite 550
Falls Church, VA 22041
Tysons Financial ESOP Trust 57,051 8.53%
8200 Greensboro Drive, Suite 100
McLean, VA 22102
Nicholas Van Nelson 38,979 (15) 5.75%
10901 Chimney Ln.
<PAGE>
Fairfax, VA 22039
Yari V. Vondrich 34,743 (16) 5.08%
1501 Moran Road
Sterling, VA 22170
Stephen A. Wannall 250 0.03%
3025 Hamaker Ct.
Fairfax, VA 22031
Steven A. Zecola 34,743 (17) 5.08%
6502 Heather Brook Ct.
McLean, VA 22101
Officers and directors as a group 316,925 (18) 41.55
</TABLE>
- ---------------------
(1) Information relating to beneficial ownership of Common Stock is based upon
"beneficial ownership" concepts set forth in rules of the SEC under
Section 13(d) of the Securities Exchange Act of 1934. Under these rules, a
person is deemed to be a "beneficial owner" of a security if that person
has or shares "voting power," which includes the power to vote or direct
the voting of such security, or "investment power," which includes the
power to dispose or to direct the disposition of such security. A person
is also deemed to be a beneficial owner of any security of which that
person has the right to acquire beneficial ownership within sixty days.
Under the rules, more than one person may be deemed to be a beneficial
owner of the same securities, and a person may be deemed to be a
beneficial owner of securities as to which he has no beneficial interest.
For instance, beneficial ownership includes spouses, minor children and
other relatives residing in the same household, and trusts, partnerships,
corporations or deferred compensation plans which are affiliated with the
principal. Included in the amount of shares beneficially owned are shares
issuable upon the exercise of stock purchase warrants that were issued to
the organizers of the Bank and the Company. The stock purchase warrants
entitle the holder of the warrants to purchase Common Stock at $10.00 per
share at any time during the term of the warrant. The warrants became
exercisable on January 2, 1992, and have a term of ten years from July 1,
1991, the date the Bank opened for business. In the event of a capital
call upon the Bank, the OCC will require the warrants to be exercised at a
price no less than current book value or be forfeited.
(2) Percent is calculated by treating shares subject to options or warrants
held by the named individual for whom the percentage is calculated which
are exercisable within the next 60 days as if outstanding, but treating
shares subject to warrants or options held by others as not outstanding.
(3) Includes warrants to purchase 20,000 shares.
<PAGE>
(4) Includes warrants to purchase 4,054 shares.
(5) Includes warrants to purchase 20,000 shares.
(6) Includes warrants to purchase 5,160 shares.
(7) Includes warrants to purchase 3,686 shares.
(8) Includes warrants to purchase 4,054 shares.
(9) Includes warrants to purchase 20,000 shares.
(10) Includes warrants to purchase 14,743 shares.
(11) Includes warrants to purchase 10,688 shares.
(12) Includes warrants to purchase 14,743 shares.
(13) Includes warrants to purchase 7,371 shares and stock options to purchase
12,400 shares.
(14) Includes warrants to purchase 14,743 shares.
(15) Includes warrants to purchase 9,214 shares.
(16) Includes warrants to purchase 14,743 shares.
(17) Includes warrants to purchase 14,743 shares.
(18) Includes total warrants of 79,242 and stock options of 14,900 of which all
are outstanding.
Item 12 is hereby amended to read in its entirety as follows:
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no agreements in existence or anticipated between any
Director or officer of the Bank or the Company relating to the premises,
furnishings, equipment, fixtures or any other property or service of the Bank or
the Company. During 1995 certain directors and executive officers were indebted
to the Bank. This indebtedness resulted from loans made in the ordinary course
of business on substantially the same terms (including interest rates and
collateral) as those prevailing at the time for comparable transactions with
unrelated parties and did not involve more than the normal risk of
collectibility or present other unfavorable features. As of December 31, 1995,
loans to directors and executive officers of the Company, and their affiliates,
including loans guaranteed by such persons and unfunded commitments made,
aggregated $1,149,000, or approximately 27.7% of stockholders' equity of the
Company.
In June 1994, the Company funded its ESOP with a loan provided by
Richard Schwartz, a director of the Company. The original amount of the loan
totaled $500,000 and terms of the loan include quarterly principal payments of
$12,500 and quarterly interest payments at prime plus 2% with a final payment on
June 1, 1998. In management's opinion, the loan is at market
<PAGE>
terms. The outstanding balance at December 31, 1995, was $425,000.
Joel M. Birken, a Director of the Company, is a shareholder in the
law firm of Rees, Broome & Diaz, P.C., which regularly acts as counsel to
the Company and the Bank. During the fiscal years ended 1994 and 1995, Rees,
Broome & Diaz, P.C. performed legal services for the Bank and was paid
$28,855 and $99,490, respectively.
[This space intentionally left blank.]
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-KSB/A-No. 1 to
be signed on its behalf by the undersigned, thereunto duly authorized.
TYSONS FINANCIAL CORPORATION
(Registrant)
BY: \s\ Terrie G. Spiro ,
Terrie G. Spiro, President,
Principal Executive Officer,
and Director
Dated May 14, 1996.
<PAGE>
