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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ______________ to ______________
Commission file number 000-22747
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1542438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 S. Main Street, Culpeper, Virginia 22701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 825-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.50
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 1999 was
$63,294,622
The number of shares outstanding of the registrant's common stock as of
March 15, 1998 was 2,041,762.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders are incorporated by
reference into Parts I, II, and IV. Portions of the definitive Proxy
Statement dated March 18, 1999 to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held May 14, 1999
are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Virginia Commonwealth Financial Corporation ("VCFC" or "the Company"),
formerly Second National Financial Corporation, is a bank holding company
incorporated under the laws of the Commonwealth of Virginia on July 2, 1990.
VCFC owns all of the stock of two banking subsidiaries, Second Bank & Trust
(SB&T) which was chartered in 1900 and acquired by VCFC on July 2, 1990,
pursuant to the formation of the holding company; and Virginia Heartland Bank
(VHB), which affiliated with VCFC on October 8, 1998. The Company's primary
asset is its stock investment in the Banks, with cash and short-term investments
accounting for the remainder of assets. SB&T owns one subsidiary, Second Service
Company, which owns a 12% partnership interest in Bankers Title of
Fredericksburg, a title insurance company. VHB also owns a subsidiary, Virginia
Heartland Service Corporation, which owns a 5% partnership interest in Banker's
Title of Fredericksburg. In addition, SB&T and VHB each own a 50% interest in
VHB Mortgage LLC, a mortgage company serving the greater Fredericksburg,
Virginia area.
The Company is headquartered in Culpeper, Virginia, and, through its
subsidiary banks, offers a full array of banking and investment services through
nine retail offices serving the counties of Culpeper, Madison, Orange,
Rockingham, Spotsylvania and the City of Fredericksburg. The Banks' primary
business is the granting of residential real estate loans, commercial real
estate loans, and, to a lesser extent, commercial business and consumer loans,
funded through solicitation of deposits. Significant business lines include
trust services, investment services, and a mortgage division. The Bank's
consider themselves to be community-oriented institutions servicing the banking
needs of their respective markets.
For more information on the Company's business, see "Message to
Stockholders" on pages 3 through 5 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 6 of the Annual Report to
Stockholders incorporated by reference herein.
Competition
The banking business in Virginia, and in the Bank's market area
specifically, is highly competitive with respect to both loans and deposits. The
subsidiary banks principle competition in its market area consists of all the
major statewide and community banks. The Banks also compete with savings
associations, credit unions, brokerage
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houses and mortgage brokers.
Employees
At December 31, 1998, VCFC had no employees. The subsidiary banks employ
138 full-time employees. The Company's success is highly dependent on its
ability to attract and retain qualified employees. To date, the Company believes
it has been successful in its efforts to recruit qualified employees, but there
can be no assurance that it will continue to be as successful in the future.
None of the Company's employees are subject to collective bargaining agreements.
The Company believes relations with its employees are excellent.
Regulation, Supervision and Governmental Policy
VCFC is registered as a bank holding company under the Federal Bank Holding
Company Act of 1956, as amended, and is subject to supervision and regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") and State Corporation Commission ("SCC"). As a bank holding company,
VCFC is required to furnish to the Federal Reserve Board an annual report of its
operations at the end of each fiscal year and to furnish such additional
information as the Federal Reserve Board may require pursuant to the Bank
Holding Company Act. The Federal Reserve Board and SCC also may conduct
examinations of VCFC.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- possibly additional discretionary
- -- actions by regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 1998, that
the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the
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Company as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Company must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios. There are no conditions or events since that notification that
management believes have changed the institution's category. See Note 20 to the
consolidated financial statements on pages 37 and 38 of the 1998 Annual Report
to Stockholders incorporated by reference herein for further discussion.
New Accounting Pronouncements
See "New Accounting Pronouncements" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 18 of the Annual Report to Stockholders incorporated by reference herein
for discussion.
ITEM 2. PROPERTIES
The Company owns its headquarters consisting of approximately 35,000 square
feet located at its Main Office location in Culpeper, Virginia. The Company's
subsidiary banks own six branch locations and lease three other locations in
Virginia. Additional information regarding lease commitments can be found on
page 35 of the Annual Report to Stockholders incorporated by reference herein.
All of the Company's properties are in good operating condition and are
adequate for the Company's present needs.
ITEM 3. LEGAL PROCEEDINGS
Management currently is unaware of any material legal proceedings to which
VCFC or the Bank is a party or of which any of their properties is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company through a
solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the heading "Stockholder Information" on the front
inside cover of the 1998 Annual Report to Stockholders is incorporated by
reference herein.
ITEM 6. SELECTED FINANCIAL DATA
The information under the heading "Financial Highlights" on page 4 of the
1998 Annual Report to Stockholders is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 6 through 19 of the 1998
Annual Report to Stockholders are incorporated by reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "Interest Rate Sensitivity" under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on page 11 of the
1998 Annual Report to Stockholders incorporated by reference herein for further
discussion.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company, including
the related notes and the report of the independent auditors, are incorporated
herein by reference to pages 20 through 41 of the 1998 Annual Report to
Stockholders and is filed herewith as Exhibit 13.
1. Auditor's Report (page 42).
2. Consolidated Balance Sheets - December 31, 1998 and 1997 (page 20).
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3. Consolidated Statements of Income - Years Ended December 31, 1998,
1997, and 1996 (page 21).
4. Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1998, 1997, and 1996 (page 22).
5. Consolidated Statements of Cash Flows - Years Ended December 31, 1998,
1997, and 1996 (pages 23-24).
6. Notes to Consolidated Financial Statements (pages 25-41).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors is incorporated by reference
herein from pages 3 through 6 of the Company's 1999 Proxy Statement, which is
attached hereto as Exhibit 99, related to the "Election of Directors." The
executive officers of the Company as of February 28, 1999 are as follows:
Name Age Current Position
---- --- ----------------
William B. Young 61 Chairman and CEO of the Company since
October, 1998; Chairman and CEO of
Virginia Heartland Bank since 1988.
O. R. Barham, Jr. 48 President of the Company since 1996;
President and CEO of Second Bank & Trust
since 1996.
Edward V. Allison, Jr. 60 Senior Vice President and Secretary of
the Company since October, 1998;
President of Virginia Heartland Bank
since 1988.
Jeffrey W. Farrar 38 Senior Vice President and Chief
Financial Officer of the Company since
1996.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference herein from pages 6 through 11 of the Company's
1999 Proxy Statement, which
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is attached hereto as Exhibit 99 under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference herein from page 5 through 6 of the Company's
1999 Proxy Statement, which is attached hereto as Exhibit 99, regarding
beneficial ownership of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference herein from page 10 of the Company's 1999 Proxy
Statement, which is attached hereto as Exhibit 99 under the caption
"Transactions with Directors and Officers."
PART IV
ITEM 14. EXHIBITS AND REPORTS OF FORM 8-K
Item 14(a) Exhibits
The following exhibits either are filed as part of this Report or are
incorporated herein by reference:
Exhibit No. 2 Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
Plan of Reorganization incorporated by reference to
Agreement and Plan of Reorganization filed as
Exhibit A to Form S-4 filed on June 23, 1998. (File
No.333-57479)
Exhibit No. 3 Articles of Incorporation and Bylaws.
Exhibit No. 4 Instruments Defining Rights of Security Holders.
Rights Agreement dated September 10, 1998 is
incorporated by reference to Exhibits 1 and 2 to the
Form 8A Registration Statement filed on September 22,
1998 (File No. 000-22747)
Exhibit No. 10 Material Contracts.
Employment contracts of certain officers is
incorporated by reference to Exhibits 10.1-10.3 and
10.6 of the Company's Agreement and Plan of
Reorganization on Form S-4 filed on June 23, 1998.
(File No. 333-57479)
Exhibit No. 13 Virginia Commonwealth Financial Corporation 1998 Annual
Report to Stockholders.
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Exhibit No. 21 Subsidiaries of the Registrant.
Subsidiaries of the Registrant incorporated by
reference to page 25 of the 1998 Annual Report to
Stockholders.
Exhibit No. 27 Financial Data Schedule.
Exhibit No. 99 Additional Exhibits.
Virginia Commonwealth Financial Corporation 1999 Annual
Proxy Statement.
Item 14(b) Reports on Form 8-K
The Company filed a Form 8-K on October 8, 1998 announcing the consummation
of its affiliation with Virginia Heartland Bank, pursuant to the Agreement
and Plan of Reorganization among the parties.
Item 14(c) Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report on Form
10-K are incorporated herein by reference. Financial statement schedules
have been omitted since they are either not required, not applicable, or
the information is otherwise included.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION (Registrant)
By: /s/ O. R. Barham, Jr. 3/25/99
------------------------------------------------- -------
O. R. Barham, Jr. Date
President
Director
/s/ Jeffrey W. Farrar 3/25/99
------------------------------------------------- -------
Jeffrey W. Farrar, CPA Date
Senior Vice President/Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE AND TITLE
- ---- -------------------
3/25/99 /s/ O. R. Barham, Jr.
- ----------------- --------------------------------------------
O. R. Barham, Jr., President & Director
3/25/99 /s/ Gregory L. Fisher
- ----------------- --------------------------------------------
Gregory L. Fisher, Director
3/25/99 /s/ Marshall D. Gayheart, Jr.
- ----------------- --------------------------------------------
Marshall D. Gayheart, Jr., Director
3/25/99 /s/ Taylor E. Gore
- ----------------- --------------------------------------------
Taylor E. Gore, Chairman & Director
3/25/99 /s/ W. Robert Jebson, Jr.
- ----------------- --------------------------------------------
W. Robert Jebson, Jr., Director
3/25/99 /s H. Wayne Parrish
- ----------------- --------------------------------------------
H. Wayne Parrish, Director
3/25/99 /s/ Thomas F. Williams, Jr.
- ----------------- --------------------------------------------
Thomas F. Williams, Jr., Director
3/25/99 /s/ William B. Young
- ----------------- --------------------------------------------
William B. Young, Chairman & CEO, Director
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ARTICLES OF INCORPORATION
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
I. NAME
The name of the corporation is Virginia Commonwealth Financial
Corporation.
II. PURPOSE
The purpose for which the Corporation is organized is to act as a
bank holding company and to transact any and all lawful business, not required
to be specifically stated in the Articles of Incorporation, for which
corporations may be incorporated under the Virginia Stock Corporation Act.
III. SHARES
Section 1. The Corporation shall have authority to issue
3,000,000 shares of Common Stock, par value $2.50 per share, and 1,000,000
shares of Preferred Stock with no par value.
Section 2. Each share of Common Stock shall entitle the record
holder thereof to one vote.
Section 3. No holder of shares of any class of the Corporation
shall have any preemptive or preferential right to purchase or subscribe to (i)
any shares of any class of the Corporation, whether now or hereafter authorized;
(ii) any warrants, rights, or options to purchase such shares; (iii) or any
securities or obligations convertible into any such shares or into warrants,
rights or options to purchase any such shares.
Section 4. The Board of Directors may determine the preferences,
limitations and relative rights, to the extent permitted by the Virginia Stock
Corporation Act, of any class of shares of Preferred Stock before the issuance
of any shares of that class, or of one or more series within a class before the
issuance of any shares of that series. Each class or series of Preferred Stock
shall be appropriately designated by a distinguishing designation prior to the
issuance of any shares thereto. The Preferred Stock of all series shall have
preferences, limitations, and relative rights identical with those of other
shares of the same series and, except to the extent otherwise provided in the
description of the series, with those shares of other series of the same class.
Section 5. Series A Junior Participating Preferred Stock. The
first series of Preferred Stock shall be designated "Series A Junior
Participating Preferred Stock" ("Series A Preferred Stock"), and the number of
shares constituting such series shall be 100,000. The preferences, limitations
and relative rights of shares of Series A Preferred Stock shall be as follows:
<PAGE>
1. Dividends and Distributions.
(a) Subject to the prior and superior rights of the
holders of any shares of any series of Preferred Stock ranking prior and
superior to the shares of Series A Preferred Stock with respect to
dividends, the holders of shares of Series A Preferred Stock in
preference to the holders of Common Stock and of any other junior stock,
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available therefor, dividends payable
quarterly on the fifth day of each March, June, September and December
(each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series A
Preferred Stock, in an amount per share (rounded to the nearest cent),
subject to the provision for adjustment hereinafter set forth, equal to
1000 times the aggregate per share amount of all cash dividends, and
1000 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions other than a dividend payable
in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common
Stock since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred
Stock. In the event the Corporation shall at any time after September
10, 1998 (the "Rights Declaration Date"), (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the amount to
which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (y) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number
of shares of Common Stock that were outstanding immediately prior to
such event.
(b) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in paragraph
(a) above immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend equal to the amount of any regular
quarterly dividend on the Common Stock per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of
Series A Preferred Stock, unless the date of issue of share shares is
prior to the record date for the first Quarterly Dividend Payment Date,
in which case dividends on such shares shall begin to accrue from the
date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred
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Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding. The Board of Directors may fix
a record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than
30 days prior to the date fixed for the payment thereof.
2. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter
set forth, each share of Series A Preferred Stock shall entitle the
holder thereof to 1,000 votes on all matters submitted to a vote of the
shareholders of the Corporation. In the event the Corporation shall at
any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock
into a smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(b) Except as otherwise provided herein, in the Articles
of Incorporation or under applicable law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock shall
vote together as one voting group on all matters submitted to a vote of
shareholders of the Corporation.
(c) (i) If at any time dividends on any shares of Series A
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (a "default period") that shall extend until such
time when all accrued and unpaid dividends for all previous quarterly
dividend periods and for the current quarterly dividend period on all
shares of Series A Preferred Stock then outstanding shall have been
declared and paid or set apart for payment. During each default period,
all holders of the outstanding shares of Series A Preferred Stock
together with any other series of Preferred Stock then entitled to such
a vote under the terms of the Articles of Incorporation, voting as a
separate voting group, shall be entitled to elect two (2) members of the
Board of Directors of the Corporation.
(ii) During any default period, such voting right of the
holders of Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this paragraph 5 (2)(c)
or at any annual meeting of shareholders, and thereafter at annual
meetings of shareholders, provided that neither such voting right nor
the right of the holders of any other series of Preferred Stock, if any,
to increase, in
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certain cases, the authorized number of Directors shall be exercised
unless the holders of ten percent (10%) in number of shares of Preferred
Stock outstanding shall be present in person or by proxy. The absence of
a quorum of the holders of Common Stock shall not affect the exercise by
the holders of Preferred Stock of such voting right. At any meeting at
which the holders of Preferred Stock shall exercise such voting right
initially during an existing default period, they shall have the right,
voting as a separate voting group, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two
(2) Directors, or if such right is exercised at an annual meeting, to
elect two (2) Directors. If the number which may be so elected at any
special meeting does not amount to the required number, the holders of
the Preferred Stock shall have the right to make such increase in the
number of Directors as shall be necessary to permit the election by them
of the required number. After the holders of the Preferred Stock shall
have exercised their right to elect Directors in any default period and
during the continuance of such period, the number of Directors shall not
be increased or decreased except by vote of the holders of Preferred
Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Preferred
Stock.
(iii) Unless the holders of Preferred Stock shall, during
an existing default period, have previously exercised their right to
elect Directors, the Board of Directors may order, or any shareholder or
shareholders owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective
of series, may request, the calling of a special meeting of the holders
of Preferred Stock, which meeting shall thereupon be called by the
Chairman, President, a Vice-President or the Secretary of the
Corporation. Notice of such meeting and of any annual meeting at which
holders of Preferred Stock are entitled to vote pursuant to this
paragraph 5 (2)(c)(iii) shall be given to each holder of record of
Preferred Stock by mailing a copy of such notice to him at his last
address as the same appears on the books of the Corporation. Such
meeting shall be called for a time not earlier than 10 days and not
later than 60 days after such order or request. In the event such
meeting is not called within 60 days after such order or request, such
meeting may be called on similar notice by any shareholder or
shareholders owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this paragraph 5 (2)(c)(iii), no such
special meeting shall be called during the period within 60 days
immediately preceding the date fixed for the next annual meeting of the
shareholders.
(iv) In any default period, the holders of Common Stock,
and other classes of stock of the Corporation if applicable, shall
continue to be entitled to elect the whole number of Directors until the
holders of Preferred Stock shall have exercised their right to elect two
(2) Directors voting as a separate voting group, after the exercise of
which right (x) the Directors so elected by the holders of Preferred
Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period,
and (y) any vacancy in the Board of Directors may (except as provided in
paragraph 5 (2)(c)(ii)) be filled by vote of a majority of the remaining
Directors theretofore elected by the voting group which elected the
Director whose office shall have become vacant. References in this
paragraph 5 (2)(c)(iv) to Directors elected by a particular voting group
shall include Directors elected by such Directors to fill vacancies as
provided in clause (y) of the foregoing sentence.
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(v) Immediately upon the expiration of a default period,
(x) the right of the holders of Preferred Stock, as a separate voting
group, to elect Directors shall cease, (y) the term of any Directors
elected by the holders of Preferred Stock, as a separate voting group,
shall terminate, and (z) the number of Directors shall be such number as
may be provided for in, or pursuant to, the Articles of Incorporation or
bylaws irrespective of any increase made pursuant to the provisions of
paragraph 5 (2)(c)(ii) (such number being subject, however, to change
thereafter in any manner provided by law or in the Articles of
Incorporation or bylaws). Any vacancies in the Board of Directors
affected by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining Directors, even
though less than a quorum.
(d) Except as set forth herein or as otherwise provided in
the Articles of Incorporation, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
3. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 5 (1) are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares
of Series A Preferred Stock outstanding shall have been paid in full,
the Corporation shall not:
(i) declare or pay or set apart for payment any
dividends (other than dividends payable in shares of any class or
classes of stock of the Corporation ranking junior to the Series
A Preferred Stock) or make any other distributions on, any class
of stock of the Corporation ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock and shall not redeem, purchase or
otherwise acquire, directly or indirectly, whether voluntarily,
for a sinking fund, or otherwise any shares of any class of stock
of the Corporation ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that, notwithstanding the foregoing, the
Corporation may at any time redeem, purchase or other acquire
shares of stock of any such junior class in exchange for, or out
of the net cash proceeds from the concurrent sale of, other
shares of stock of any such junior class;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except dividends paid ratably
on the Series A Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as
to dividends or upon liquidation,
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dissolution or winding up) with the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for
shares of any stock of the Corporation ranking junior (either as
to dividends or upon dissolution, liquidation or winding up) to
the Series A Preferred Stock;
(iv) purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A Preferred
Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (a) of section 5 (3), purchase or otherwise acquire such
shares at such time and in such manner.
4. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock any may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
5. Liquidation, Dissolution or Winding Up.
(a) Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, no distribution shall be
made to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock unless, prior thereto, the holders of shares of Series
A Preferred Stock shall have received $1,000 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether
or not declared, to the date of such payment (the "Series A Liquidation
Preference"). Following the payment of the full amount of the Series A
Liquidation Preference, no additional distributions shall be made to the
holders of shares of Series A Preferred Stock unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per
share (the "Common Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as
appropriately adjusted to set forth in subparagraph (c) below to reflect
such events as stock splits, and recapitalizations with respect to the
Common Stock) (such number in clause (ii) being hereinafter referred to
as the "Adjustment Number"). Following the payment of the full amount of
the Series A Liquidation Preference and the Common Adjustment in respect
of all outstanding shares of Series A Preferred Stock and Common Stock,
respectively, holders of Series A Preferred Stock and holders of shares
of Common Stock shall receive their ratable and proportionate share of
the remaining assets to be distributed in the ratio of the Adjustment
Number to 1
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with respect to such Series A Preferred Stock and Common Stock, on a per
share basis, respectively.
(b) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of
Preferred Stock, if any, that rank on a parity with the Series A
Preferred Stock, then such remaining assets shall be distributed ratably
to the holders of such parity shares in proportion to their respective
liquidation preferences. In the event, however, that there are not
sufficient assets available to permit payment in full of the Common
Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(c) In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such
Adjustment Number by a fraction, the numerator of which is the amount of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
6. Consolidation, Merger, Share Exchange, etc. In the case the
Corporation shall enter into any consolidation, merger, share exchange,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case the shares of Series A Preferred Stock shall at
the same time be similarly exchanged or changed in an amount per share (subject
to the provision for adjustment hereinafter set forth) equal to 1,000 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common Stock
is changed or exchanged. In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. Redemption. The outstanding shares of Series A Preferred Stock
may be redeemed at the option of the Board of Directors as a whole, but not in
part, at any time, or from time to time, at a cash price per share equal to (i)
100% of the product of the Adjustment Number times the Average Market Value (as
such term is hereinafter defined) of the Common Stock, plus (ii) all dividends
which on the redemption date have accrued on the shares to be redeemed and have
not been paid or declared and a sum sufficient for the payment thereof set
apart, without interest. The "Average Market Value" is the average of the
closing sale prices of a share of the Common Stock during the 30-day period
immediately preceding the date before the redemption date on the principal
United States securities exchange registered under the Securities Exchange
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Act of 1934, as amended, on which such stock is listed, or if such stock is not
listed on any such exchange, the average of the closing sale prices of a share
of Common Stock during the 30-day period immediately preceding the date before
the redemption date as quoted in the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, or if such stock is not so quoted,
the average of the closing bid quotations with respect to a share of Common
Stock during such 30-day period on the NASDAQ System or any system then in use,
or if no such quotations are available, the fair market value of a share of the
Common Stock as determined by the Board of Directors in good faith.
IV. DIRECTORS
Section 1. The Board of Directors shall consist of a minimum of
four and a maximum of twenty-five individuals, and the number of directors may
be fixed or changed from time to time within such range by the Board of
Directors.
Section 2. The Board of Directors shall be divided into three
classes, Class I, Class II, and Class III as nearly equal in number as possible.
At the 1990 annual meeting of shareholders, directors of the first class (Class
I) shall be elected to hold office for a term expiring at the 1991 annual
meeting of the shareholders; directors of the second class (Class II) shall be
elected for a term expiring at the 1992 annual meeting of the shareholders, and
directors of the third class (Class III) shall be elected to hold office for a
term expiring at the 1993 annual meeting of shareholders. The successors to the
class of directors whose terms expire shall be identified as being of the same
class as the directors they succeed and elected to hold office for a term
expiring at the third succeeding annual meeting of shareholders. When the number
of directors is changed, any newly created directorships or any decrease in
directorships shall be apportioned among the classes by the Board of Directors
as to make all classes as nearly equal as possible.
Section 3. Directors of the Corporation may be removed only for
cause and with the affirmative vote of at least two-thirds of the outstanding
shares entitled to vote.
Section 4. If the office of any director shall become vacant, the
directors at the time in office, whether or not a quorum, may, by majority vote
of the directors then in office, choose a successor who shall hold office until
the next annual meeting of stockholders. In such event, the successor elected by
the stockholders at that annual meeting shall hold office for a term that shall
coincide with the remaining term of the class of directors to which that person
has been elected. Vacancies resulting from the increase in the number of
directors shall be filled in the same manner.
V. APPROVAL OF FUNDAMENTAL ACTIONS
An amendment of the Corporation's Articles of Incorporation, a
plan of merger or exchange, a transaction involving the sale of all or
substantially all the Corporation's assets other than in the regular course of
business, and a plan of dissolution shall be approved by the vote of more than
two-thirds of all the votes entitled to be cast on such transactions by each
voting group entitled to vote on the transaction at a meeting at which a quorum
of the voting group is present,
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<PAGE>
provided that the transaction has been approved and recommended by at least
two-thirds of the directors in office at the time of such approval and
recommendation. If the transaction is not approved and recommended by at least
two-thirds of the directors then in office, then the transaction shall be
approved by the vote of more than eighty percent (80%) of all votes entitled to
be cast on such transactions by each voting group entitled to vote thereon.
VI. INDEMNIFICATION
Section 1. To the full extent that the Virginia Stock Corporation
Act, as it exists on the date hereof or may hereafter be amended, permits the
limitation or elimination of the liability of directors or officers, a director
or officer of the Corporation shall not be liable to the Corporation or its
shareholders for money damages.
Section 2. To the full extent permitted and in the manner
prescribed by the Virginia Stock Corporation Act, the Corporation shall
indemnify each director or officer of the Corporation against liabilities,
fines, penalties, and claims imposed upon or asserted against him (including
amounts paid in settlement) by reason of having been such director or officer,
whether or not then continuing so to be, and against all expenses (including
counsel fees) reasonably incurred by him in connection therewith, except in
relation to matters as to which he shall have been finally adjudged liable by
reason of his willful misconduct or a knowing violation of criminal law in the
performance of his duty as such director or officer. The Board of Directors is
hereby empowered, by majority vote of a quorum of disinterested directors, to
contract in advance to indemnify any director or officer.
Section 3. The Board of Directors is hereby empowered, by
majority vote in a quorum of disinterested directors, to cause the Corporation
to indemnify or contract in advance to indemnify any person not specified in
Section 2 of this Article against liabilities, fines, penalties and claims
imposed upon or asserted against him (including amounts paid in settlement) by
reason of having been an employee, agent or consultant of the Corporation,
whether or not then continuing so to be, and against all expenses (including
counsel fees) reasonably incurred by him in connection therewith, to the same
extent as if such person were specified as one to whom indemnification is
granted in Section 2.
Section 4. The Corporation may purchase and maintain insurance to
indemnify it against the whole or any portion of the liability assumed by it in
accordance with this Article and may also procure insurance, in such amounts as
the Board of Directors may determine, on behalf of any person who is or was a
director, officer, employee, agent or consultant of the Corporation against any
liability asserted against or incurred by any such person in any such capacity
or arising from his status as such, whether or not the Corporation would have
power to indemnify him against such liability under the provisions of this
Article.
Section 5. In the event there has been a change in the
composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification is claimed, any
determination as to indemnification and advancement of expenses with respect to
any claim for indemnification made pursuant to Sections 2 or 3 of this Article
VI shall be made by special legal counsel agreed upon by the Board of Directors
and the proposed indemnitee. If the Board of Directors and the proposed
indemnitee are unable to agree
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<PAGE>
upon such special legal counsel, the Board of Directors and the proposed
indemnitee each shall select a nominee, and the nominees shall select such
special legal counsel.
Section 6. No amendment, modification or repeal of this Article
shall diminish the rights provided hereby or diminish the right to
indemnification with respect to any claim, issue or matter in any then pending
or subsequent proceeding that is based in any material respect on any alleged
action or failure to act occurring before the adoption of such amendment,
modification or repeal.
Section 7. Every reference herein to director, officer, employee,
agent or consultant shall include (i) every director, officer, employee, agent,
or consultant of the Corporation or any corporation the majority of the voting
stock of which is owned directly or indirectly by the Corporation, (ii) every
former director, officer, employee, agent, or consultant of the Corporation,
(iii) every person who may have served at the request of or on behalf of the
Corporation as a director, officer, employee, agent, consultant or trustee of
another corporation, partnership, joint venture, trust or other entity, and (iv)
in all of such cases, his executors and administrators.
<PAGE>
BY LAWS
OF
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page
<S> <C> <C>
ARTICLE I - SHARES
Section 1. Certificates................................................ 1
Section 2. Signatures.................................................. 1
Section 3. Duplicate Certificates...................................... 1
Section 4. Transfer of Shares.......................................... 1
Section 5. Restrictions on Transfer.................................... 1
ARTICLE II - SHAREHOLDERS
Section 1. Holders of Shares........................................... 1
Section 2. Meetings Generally.......................................... 2
Section 3. Annual Meetings............................................. 2
Section 4. Special Meetings............................................ 2
Section 5. Notice...................................................... 2
Section 6. Waiver of Notice............................................ 2
Section 7. Action Without Meeting...................................... 2
Section 8. Determination of Shareholders of Record..................... 3
Section 9. Conduct of Meetings......................................... 3
Section 10. Proxies..................................................... 3
Section 11. Procedure at Meetings....................................... 3
Section 12. Quorum and Voting........................................... 3
Section 13. Adjournments................................................ 3
ARTICLE III - DIRECTORS
Section 1. General Powers.............................................. 4
Section 2. Number and Qualifications................................... 4
Section 3. Regular Meetings............................................ 4
Section 4. Special Meetings............................................ 4
Section 5. Notice...................................................... 4
Section 6. Waiver of Notice............................................ 4
Section 7. Action Without Meeting...................................... 4
Section 8. Conduct of Meetings......................................... 4
Section 9. Procedure at Meetings....................................... 4
Section 10. Participation by Conference Telephone....................... 5
Section 11. Quorum...................................................... 5
Section 12. Committees.................................................. 5
Section 13. Staggered Terms............................................. 5
Section 14. Removal..................................................... 5
Section 15. Vacancies................................................... 5
Section 16. Nominations of Director Candidates.......................... 5
Section 17. Resignation................................................. 6
Section 18. Conflicts of Interest....................................... 6
<PAGE>
ARTICLE IV - OFFICERS
Section 1. Generally................................................... 6
Section 2. Chairman of the Board of Directors.......................... 7
Section 3. President................................................... 7
Section 4. Vice Presidents............................................. 7
Section 5. Secretary................................................... 7
Section 6. Treasurer................................................... 7
Section 7. Delegation of Power......................................... 7
Section 8. Term of Office.............................................. 7
Section 9. Resignation................................................. 7
Section 10. Removal..................................................... 7
Section 11. Execution of Instruments.................................... 7
Section 12. Proxies..................................................... 8
ARTICLE V - LIMIT ON LIABILITY AND INDEMNIFICATION
Section 1. Limitation on Liability..................................... 8
Section 2. Indemnification of Directors and Officers................... 8
Section 3. Advance for Expenses........................................ 8
Section 4. Insurance................................................... 8
Section 5. Determination by Legal Counsel.............................. 9
Section 6. Amendment of Article........................................ 9
Section 7. References in Article....................................... 9
ARTICLE VI - SEAL .......................................................... 9
ARTICLE II - AMENDMENTS......................................................... 9
</TABLE>
<PAGE>
BYLAWS
OF
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
ARTICLE I
SHARES
Section 1. Certificates. All shares issued by the Corporation shall,
when fully paid, be represented by certificates in such form as may be required
by law and approved by the Board of Directors. Share certificates shall, subject
to the provisions of Section 2 of this Article, be signed by the Chairman of the
Board of Directors, the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary or any other
officer authorized by resolution of the Board of Directors. Each share
certificate may, but need not, be sealed with the seal of the Corporation or a
facsimile thereof.
Section 2. Signatures. The signatures of the officers upon a share
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the Corporation itself or an
employee of the Corporation. If any person who signed, either manually or by
facsimile, a share certificate no longer holds office when such certificate is
issued, the certificate is nevertheless valid.
Section 3. Duplicate Certificates. In case of the loss, mutilation or
destruction of a share certificate, a duplicate may be issued upon such terms,
and bearing such legend, if any, as the Board of Directors may lawfully
prescribe.
Section 4. Transfer of Shares. A transfer of shares shall be made on the
share transfer books of the Corporation only upon surrender of the certificates
representing the shares transferred, endorsed or accompanied by a written
assignment signed by the holder of record or by his duly authorized
attorney-in-fact. The Board of Directors may from time to time make such
reasonable regulations governing the transfer of shares as it may deem necessary
or proper.
Section 5. Restrictions on Transfer. A transfer of shares shall be made
only in accordance with any provision of the articles of incorporation or these
bylaws or an agreement among the shareholders or between the shareholders and
the Corporation that imposes restrictions on the transfer of shares.
ARTICLE II
SHAREHOLDERS
Section 1. Holders of Shares. Only shareholders of record on the share
transfer books of the Corporation shall be entitled to be treated by the
Corporation as the holders of the shares standing in their respective names,
and, except to the extent, if any, required by law, the Corporation shall not be
obligated to recognize any equitable or other claim to or interest in any share
on the part of any other person, whether or not it shall have express or other
notice hereof.
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Section 2. Meetings Generally. Meetings of shareholders shall be held at
the registered office or the principal office of the Corporation or at such
other place, within or without the Commonwealth of Virginia, as the Board of
Directors may designate from time to time. At least ten days before each
meeting, the officer or agent having charge of the share transfer books of the
Corporation shall prepare a complete list of the shareholders entitled to vote
at such meeting or any adjournment thereof, with the address and number of
shares held by each, arranged by voting group and within each voting group by
class or series of shares. For a period of ten days prior to the meeting the
list of shareholders kept on file at the registered office or the principal
office of the Corporation or at the office of its transfer agent or registrar
shall be subject to inspection by any shareholders at any time during usual
business hours. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any shareholder
during the whole time of the meeting for the purposes thereof.
Section 3. Annual Meetings. An annual meeting of the shareholders shall
be held on the third Tuesday in April of each year, or on such other date set by
the Board of Directors, for the purpose of electing directors and transacting
such other business as may properly come before the meeting.
Section 4. Special Meetings. A special meeting of the shareholders shall
be held on the call of the Chairman of the Board of Directors, the President or
the Board of Directors.
Section 5. Notice. Written notice of the date, time and place of the
meeting and, in the case of a special meeting (or if required by law, the
articles of incorporation or these bylaws), the purpose or purposes for which
the meeting is called shall be given to each shareholder entitled to vote at the
meeting. Such notice shall be given either by personal delivery or by mail, by
or at the direction of the officer or persons calling the meeting, not more than
60 days nor less than ten days before the date of the meeting (except that such
notice shall be given to each shareholder, whether or not entitled to vote, not
less than 25 days before a meeting called to act on an amendment to the articles
of incorporation, a plan of merger or share exchange, a proposed sale, lease,
exchange or other disposition of all, or substantially all, of the property of
the Corporation other than in the usual and regular course of business, or the
dissolution of the Corporation, which notice shall be accompanied by a copy of
the proposed amendment, plan of merger or share exchange, agreement of sale or
plan of dissolution, as the case may be). Notice to a shareholder shall be
deemed given when mailed postage prepaid, correctly addressed, to the
shareholder at his address as shown in the current record of shareholders of the
Corporation.
A shareholder's attendance at a meeting waives objection to: (i) lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he objects to holding the meeting or transacting business at the
meeting; and (ii) consideration of a particular matter at the meeting that is
not within the purpose or purposes described in the notice of the meeting,
unless he objects to considering the matter when it is presented.
Section 6. Waiver of Notice. Notice of any meeting may be waived before
or after the date and time of the meeting in a writing signed by the shareholder
entitled to notice and delivered to the Secretary for inclusion in the minutes
of the meeting or filing with the corporate records.
Section 7. Action Without Meeting. Any action required or permitted by
law to be taken at a shareholders' meeting may be taken without a meeting if the
action is taken by all of the shareholders entitled to vote on the action. The
action shall be evidenced by one or more written consents describing the action
taken, signed by all the shareholders entitled to vote thereon and delivered to
the Secretary for inclusion in the minutes or filing with the corporate records.
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<PAGE>
Section 8. Determination of Shareholders of Record. The share transfer
books may be closed by order of the Board of Directors for not more than 70 days
for the purpose of determining shareholders entitled to notice of or to vote at
any meeting of the shareholders or any adjournment thereof (or entitled to
receive any distribution or in order to make a determination of shareholders for
any other purpose). In lieu of closing such books, the Board of Directors may
fix in advance as the record date for any such determination a date not more
than 70 days before the date on which such meeting is to be held (or such
distribution made or other action requiring such determination is to be taken).
If the books are not thus closed or the record date is not thus fixed, the
record date shall be the close of business on the day before the effective date
of the notice to shareholders.
Section 9. Conduct of Meetings. The Chairman of the Board of Directors,
or in his absence the President, shall act as chairman of and preside over
meetings of the shareholders. If no such officer is present, the meeting shall
elect a chairman. The Secretary, or in his absence the Assistant Secretary,
shall act as the secretary of such meetings. If no such officer is present, the
chairman shall appoint a secretary of the meeting. The order of business at the
annual meeting of shareholders and as far as is practicable at any other
meetings of the shareholders shall be determined by the chairman.
Section 10. Proxies. A shareholder may appoint a proxy to vote or
otherwise act for him by signing and dating an appointment form, either
personally or by his attorney-in-fact. No appointment of proxy shall be valid
after the expiration of 11 months from the date of its execution, unless
otherwise provided therein. Every appointment of proxy shall be revocable by the
shareholder executing it, unless the appointment form conspicuously states that
it is irrevocable and that it is coupled with an interest in accordance with
law.
Section 11. Procedure at Meetings. The procedure at meetings of the
shareholders shall be determined by the chairman, and (subject to the provisions
of Section 9 of this Article) the vote on all questions before any meeting shall
be taken in such manner as the chairman prescribes. However, upon the demand of
the holders in the aggregate of at least twenty percent of all the votes
entitled to be cast on any issue proposed to be considered at the meeting, such
vote shall be by ballot.
Section 12. Quorum and Voting. A quorum at any meeting of shareholders
shall be a majority of the votes entitled to be cast, represented in person or
by proxy. If a quorum exists, action on a matter is approved by a majority of
the votes cast within the voting group, unless a greater vote is required by law
or the articles of incorporation (except that in elections of directors those
receiving the greatest number of votes shall be elected even though less than a
majority).
Section 13. Adjournments. A majority of the votes entitled to be cast at
any meeting, represented in person or by proxy, even though less than a quorum,
may adjourn the meeting to a fixed time and place. If a meeting of the
shareholders is adjourned to a date more than 120 days after the date fixed for
the original meeting, notice of the adjourned meeting shall be given as in the
case of the original meeting. If a meeting is adjourned for less than 120 days,
no notice of the date, time or place of the adjourned meeting or, in the case of
a special meeting, the purpose or purposes for which the meeting is called, need
be given other than by announcement at the meeting at which the adjournment is
taken, prior to such adjournment. If a quorum shall be present at any adjourned
meeting, any business may be transacted which might have been transacted if a
quorum had been present at the meeting as originally called.
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<PAGE>
ARTICLE III
DIRECTORS
Section 1. General Powers. Except as expressly provided in the articles
of incorporation or these bylaws, all corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation managed
under the direction of, the Board of Directors.
Section 2. Number and Qualifications. The Board of Directors shall
consist of a minimum of 5 and a maximum of 15 individuals. Directors need not be
residents of Virginia or shareholders of the Corporation. Directors shall be
elected at each annual meeting of the shareholders and may be elected at any
special meeting of the shareholders.
Section 3. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at the registered office or principal office of the
Corporation or at such other place, within or without the Commonwealth of
Virginia, as the Board of Directors may designate from time to time. A regular
meeting of the Board of Directors shall be held as soon as practicable after
each annual meeting of the shareholders for the purpose of appointing officers
and transacting such other business as may properly come before the meeting.
Section 4. Special Meetings. Special meetings of the Board of Directors
may be called at any time by the Chairman of the Board of Directors, the
President or any 2 of the directors.
Section 5. Notice. Written notice of the date, time and place of special
meetings shall be given to each director either by personal delivery or by mail,
by or at the direction of the officer or directors calling the meeting, to the
address of such director as it appears in the records of the Corporation not
less than ten days before the date of the meeting. Neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice or any waiver of notice of such meeting.
A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless he at the beginning of the meeting
or promptly upon his arrival objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to the action
taken at the meeting.
Section 6. Waiver of Notice. Notice of any meeting may be waived before
or after the date and time of the meeting in a writing signed by the director
entitled to notice and delivered to the Secretary of the Corporation for
inclusion in the minutes of the meeting or filing with the corporate records.
Section 7. Action Without Meeting. Any action required or permitted by
law to be taken at a meeting of the Board of Directors may be taken without a
meeting if the action is taken by all of the members of the Board of Directors.
The action shall be evidenced by one or more written consents stating the action
taken, signed by each director either before or after the action taken, and
included in the minutes or filed with the corporate records reflecting the
action taken.
Section 8. Conduct of Meetings. The Chairman of the Board of Directors,
or in his absence the President, shall act as chairman of and preside over
meetings of the Board of Directors. If no such officer is present, the meeting
shall elect a chairman. The Secretary, or in his absence the Assistant
Secretary, shall act as secretary of such meetings. If no such officer is
present, the chairman shall appoint a secretary of the meeting.
Section 9. Procedure at Meetings. The procedure at meetings of the Board
of Directors shall be determined by the chairman, and (subject to the provisions
of Section 17 of this Article)
4
<PAGE>
the vote on all matters before any meeting shall be taken in such manner as the
chairman may prescribe.
Section 10. Participation by Conference Telephone. The Board of
Directors may permit any or all directors to participate in a meeting of the
directors by, or conduct the meeting through the use of, conference telephone or
any other means of communication by which all directors participating may
simultaneously hear each other during the meeting. A director participating in a
meeting by such means shall be deemed to be present in person at the meeting.
Section 11. Quorum. A quorum at any meeting of the Board of Directors
shall be a majority of the number of directors fixed or prescribed by these
bylaws or, if no number is prescribed, the number of directors in .office
immediately before the meeting begins. The affirmative vote of the majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors.
Section 12. Committees. The Board of Directors may create one or more
committees and appoint two or more members of the board to serve on them at the
pleasure of the Board of Directors. Any such committee, to the extent specified
by the Board of Directors, may exercise the authority that may be exercised by
the Board of Directors except to the extent prohibited or restricted by law, the
articles of incorporation or these bylaws.
The provisions of Sections 3 through 11 of this Article, which provide
for, among other things, meetings, action without meetings, notice and waiver of
notice, quorum and voting requirements of the Board of Directors, shall apply to
committees and their members as well.
Section 13. Staggered Terms. The Board of Directors shall be divided
into three classes, Class I, Class II, and Class III as nearly equal in number
as possible. Directors of the first class (Class I) shall be elected to hold
office for a term expiring at the 1994 annual meeting of the shareholders;
directors of the second class (Class II) shall be elected for a term expiring at
the 1995 annual meeting of the shareholders, and directors of the third class
(Class III) shall be elected to hold office for a term expiring at the 1996
annual meeting of shareholders. The successors to the class of directors whose
terms expire shall be identified as being of the same class as the directors
they succeed and elected to hold office for a term expiring at the third
succeeding annual meeting of shareholders. When the number of directors is
changed, any newly created directorships or any decrease in directorships shall
be apportioned among the classes by the Board of Directors as to make all
classes as nearly equal in number as possible.
Section 14. Removal. Directors of the Corporation may be removed only
for cause and with the affirmative vote of at least two-thirds of the
outstanding shares entitled to vote.
Section 15. Vacancies. If the office of any director shall become
vacant, the directors at the time in office, whether or not a quorum, may, by
majority vote of the directors then in office, choose a successor who shall hold
office until the next annual meeting of shareholders. In such event, the
successor elected by the shareholders at that annual meeting shall hold office
for a term that shall coincide with the remaining term of the class of directors
to which that person has been elected. Vacancies resulting from the increase in
the number of directors shall be filled in the same manner.
Section 16. Nominations of Director Candidates. The Board of Directors
may nominate directors by resolution at any time prior to solicitation of
proxies for the annual shareholders' meeting. Any shareholder entitled to vote
in the election of directors generally may nominate one or more persons for
election as directors at a meeting, but only if written notice of such
shareholder's intent to make such nomination(s) has been given, either by
personal delivery or by United States mail, postage prepaid, to the Secretary of
the Corporation not less than thirty (30) days prior to the first anniversary
date of the initial notice given to shareholders of record on the
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record date for the previous annual meeting by or at the direction of the Board
of Directors, provided, however, that such notice shall not be required to be
given more than ninety (90) days prior to the annual meeting of shareholders.
Each such notice of a shareholder's intention to make nomination(s) shall set
forth: (a) the name and address of the shareholder who intends to make the
nomination of the person(s) and of the person(s) to be nominated; (b) a
representation that the shareholder is the owner of stock of the Corporation
entitled to vote at such meeting and intends to appear in person or by proxy at
the meeting to nominate the person(s) specified in the notice; (c) a description
of all arrangements or understandings between the shareholder and each nominee
for director and any other person(s) (naming such person(s)) pursuant to which
the nomination(s) are to be made by the shareholder; (d) such other information
regarding such nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors, including, but not limited to, the
amount and nature of his beneficial ownership of the Corporation's securities,
his principal occupation for the past five years and his age; and (e) the
written consent of each nominee to serve as a director of the Corporation if so
elected. The presiding officer at any meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing sentence.
Section 17. Resignation. A director may resign at any time by delivering
written notice to the Board of Directors, the Chairman of the Board of
Directors, the President or the Secretary. A resignation shall be effective when
delivered, unless the notice specifies a later effective date.
Section 18. Conflicts of Interest. No transaction with the Corporation
in which a director has a direct or indirect personal interest shall be void or
voidable solely because of the director's interest in the transaction if: (i)
the material facts of the transaction and the director's interest are disclosed
or known to the Board of Directors or a committee of the Board of Directors, and
the transaction was authorized, approved or ratified by the affirmative vote of
a majority of the directors on the Board of Directors, or on the committee, who
have no direct or indirect personal interest in the transaction; provided,
however, that a transaction shall not be authorized, approved or ratified by a
single director, or (ii) the material facts of the transaction and the
director's interest are disclosed to the shareholders entitled to vote, and the
transaction is authorized, approved or ratified by the vote of a majority of the
shares other than shares owned by or voted under the control of a director who
has a direct or indirect interest in the transaction; or (iii) the transaction
is fair to the Corporation.
ARTICLE IV
OFFICERS
Section 1. Generally. The officers of the Corporation shall be a
Chairman of the Board of Directors, a President, such Vice Presidents or
Assistant Vice Presidents as the Board of Directors may appoint, a Secretary and
a Treasurer, each of whom shall be appointed by the Board of Directors at a
regular meeting of the directors held as soon as may be practicable after each
annual meeting of the shareholders or, if a vacancy shall exist in any such
office, at a special meeting of the directors held as soon as may be practicable
after the resignation, death or removal of the officer theretofore holding the
same. The Board of Directors may from time to time, appoint other officers and
assistant officers and fill any vacancy that may exist in any such office as a
result of the resignation, death or removal of the officer theretofore holding
the same. Any officer may hold more than one office and may, but need not, be a
director. Each officer shall have the authority and perform the duties which
pertain to the office held by him, or as set forth in these bylaws or, to the
extent consistent with these bylaws, such duties as may be prescribed by the
Board of Directors, the Chairman of the Board of Directors or the President.
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Section 2. Chairman of the Board of Directors. The Chairman of the Board
of Directors shall act as chairman of and preside over meetings of the
shareholders and directors and shall perform such duties as may be lawfully
required of, or conferred upon, him by the Board of Directors.
Section 3. President. The President shall be the chief executive officer
of the Corporation. The President shall have general supervision over,
responsibility for and control of the other officers, agents and employees of
the Corporation. The President shall, during the absence, disqualification or
inability to act of the Chairman of the Board of Directors, exercise all the
functions and perform all the duties of the Chairman of the Board of Directors
and shall perform, to the extent consistent with these bylaws, such duties as
may be conferred upon him by the Board of Directors.
Section 4. Vice Presidents. Each Vice President shall perform, to the
extent consistent with these bylaws, such duties as may be prescribed by the
Board of Directors or the President. In the event of and during the absence,
disqualification or inability to act of the President, the Vice Presidents, in
the order designated by the Board of Directors, shall have the authority and
perform the duties of the President.
Section 5. Secretary. The Secretary shall have the responsibility for
preparing and maintaining custody of minutes of meetings of the shareholders and
directors in a book or books kept for that purpose and the responsibility for
authenticating records of the Corporation. The Secretary shall maintain a record
of shareholders of the Corporation, giving the names and addresses of all
shareholders and the numbers, classes and series of the shares held by each and,
unless otherwise prescribed by the Board of Directors, shall maintain the share
transfer books of the Corporation.
Section 6. Treasurer. The Treasurer shall be the chief financial officer
of the Corporation. The Treasurer shall have the custody of all moneys and
securities of the Corporation and shall deposit the same in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors and, unless otherwise prescribed by the Board of Directors or the
President, shall maintain the books of account and financial records.
Section 7. Delegation of Power. In the event of and during the absence,
disqualification or inability to act of any officer other than the President,
such other officers or employees as may be designated by the Board of Directors
or by the President shall have the authority and perform the duties of such
officer.
Section 8. Term of Office. Each officer shall be appointed to hold
office until the first regular meeting of the Board of Directors held after each
annual meeting of the shareholders, or for such longer or shorter term as the
Board of Directors may specify, and until his successor shall have been
appointed or such earlier time as he shall resign, die or be removed.
Section 9. Resignation. An officer may resign at any time by delivering
written notice to the Board of Directors, the President or the Secretary. A
resignation shall be effective when delivered unless the notice specifies a
later effective date.
Section 10. Removal. Any officer may be removed, with or without cause,
at any time by the Board of Directors and any officer or assistant officer, if
appointed by another officer, may likewise be removed by such officer.
Section 11. Execution of Instruments. Checks, drafts, notes and orders
for the payment of money shall be signed by such officer or officers or such
other individual or individuals as the
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Board of Directors may from time to time authorize, and any endorsement of such
paper in the ordinary course of business shall be similarly made, except that
any officer or assistant officer of the Corporation may endorse checks, drafts
or notes for collection or deposit to the credits of the Corporation. The
signature of any such officer or other individual may be a facsimile when
authorized by the Board of Directors.
Section 12. Proxies. Unless otherwise prescribed by the Board of
Directors, the Chairman of the Board of Directors or the President may from time
to time himself, by such proxy or proxies, attorney or attorneys, agent or
agents of the Corporation as he shall designate in the name and on behalf of the
Corporation, cast the votes to which the Corporation may be entitled as a
shareholder or otherwise in any other corporation, at meetings, or consent in
writing to any action by any such other corporation; and he may instruct the
individual or individuals so appointed as to the manner of casting such votes or
giving such consent, and execute or cause to be executed on behalf of the
Corporation such written proxies, consents, waivers or other instruments as he
may deem necessary or desirable.
ARTICLE V
LIMIT ON LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. To the full extent that the Virginia
Stock Corporation Act, as it exists on the date hereof or may hereafter be
amended, permits the limitation or elimination of the liability of directors or
officers, a director or officer of the Corporation shall not be liable to the
Corporation or its shareholders for monetary damages.
Section 2. Indemnification of Directors and Officers. To the full extent
permitted and in the manner prescribed by the Virginia Stock Corporation Act,
the Corporation shall indemnify each director or officer of the Corporation
against liabilities, fines, penalties and claims imposed upon or asserted
against him (including amounts paid in settlement) by reason of having been such
director or officer, whether or not then continuing so to be, and against all
expenses (including counsel fees) reasonably incurred by him in connection
therewith, except in relation to matters as to which he shall have been finally
adjudged liable by reason of his willful misconduct or a knowing violation of
criminal law in the performance of his duty as such director or officer. The
Board of Directors is hereby empowered, by majority vote of a quorum of
disinterested directors, to contract in advance to indemnify any director or
officer.
Section 3. Advance for Expenses. The Board of Directors is hereby
empowered, by majority vote of a quorum of disinterested directors, to cause the
Corporation to indemnify or contract in advance to indemnify any person not
specified in Section 2 of this Article against liabilities, fines, penalties and
claims imposed upon or asserted against him (including amounts paid in
settlement) by reason of having been an employee, agent or consultant of the
Corporation, whether or not then continuing so to be, and against all expenses
(including counsel fees) reasonably incurred by him in connection therewith, to
the same extent as if such person were specified as one to whom indemnification
is granted in Section 2.
Section 4. Insurance. The Corporation may purchase and maintain
insurance to indemnify it against the whole or any portion of the liability
assumed by it in accordance with this Article and may also procure insurance, in
such amounts as the Board of Directors may determine, on behalf of any person
who is or was a director, officer, employee, agent or consultant of the
Corporation against any liability asserted against or incurred by any such
person in any such capacity or arising from his status as such, whether or not
the Corporation would have power to indemnify him against such liability under
the provisions of this Article.
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Section 5. Determination by Legal Counsel. In the event there has been a
change in the composition of a majority of the Board of Directors after the date
of the alleged act or omission with respect to which indemnification is claimed,
any determination as to indemnification and advancement of expenses with respect
to any claim for indemnification made pursuant to Sections 2 or 3 of this
Article shall be made by special legal counsel agreed upon by the Board of
Directors and the proposed indemnitee. If the Board of Directors and the
proposed indemnitee are unable to agree upon such special legal counsel, the
Board of Directors and the proposed indemnitee each shall select a nominee, and
the nominees shall select such special legal counsel.
Section 6. Amendment of Article. No amendment, modification or repeal of
this Article shall diminish the rights provided hereby or diminish the right to
indemnification with respect to any claim, issue or matter in any then pending
or subsequent proceeding that is based in any material respect on any alleged
action or failure to act occurring before the adoption of such amendment,
modification or repeal.
Section 7. References in Article. Every reference herein to director,
officer, employee, agent or consultant shall include (i) every director,
officer, employee, agent, or consultant of the Corporation or any corporation
the majority of the voting stock of which is owned directly or indirectly by the
Corporation, (ii) every former director, officer, employee, agent, or consultant
of the Corporation, (iii) every person who may have served at the request of or
on behalf of the Corporation as a director, officer, employee, agent, consultant
or trustee of another corporation, partnership, joint venture, trust or other
entity, and (iv) in all of such cases, his executors and administrators.
ARTICLE VI
SEAL
The seal of the Corporation shall be a flat-face circular die containing
the name of the Corporation, of which there may be any number of counterparts or
facsimiles, in such form as the Board of Directors shall from time to time
adopt.
ARTICLE VII
AMENDMENTS
These bylaws may be amended or repealed by the Board of Directors except
to the extent that (i) this power is reserved exclusively to the shareholders by
law or the articles of incorporation or (ii) the shareholders in adopting or
amending particular bylaws provide expressly that the Board of Directors may not
amend or repeal the same. These bylaws may be amended or repealed by the
shareholders even though the same also may be amended or repealed by the Board
of Directors.
[LOGO] Virginia
Commonwealth
Financial
Corporation
TABLE OF CONTENTS
Financial Highlights 2
Message to Stockholders 3
Management's Discussion and Analysis 6
Consolidated Financial Statements 20
Notes to Consolidated Financial Statements 25
Independent Auditor's Report 42
Directors and Officers 44
Branch Locations 44
Virginia Commonwealth Financial Corporation 1 1998 Annual Report
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FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
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Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total Interest Income
and Fees on Loans $ 25,405 $ 23,350 $ 21,673 $ 19,851 $ 17,669
Total Interest Expense 11,446 10,510 10,223 9,395 7,781
Net Interest Income 13,959 12,840 11,451 10,457 9,888
Provision for Loan Losses 831 491 490 341 225
Total Other Income 2,684 1,792 1,453 1,353 1,156
Total Other Expense 9,871 8,230 7,255 6,667 6,444
Net Income 4,191 4,150 3,710 3,386 3,128
PERFORMANCE RATIOS:
Return on Average Assets 1.26% 1.38% 1.30% 1.27% 1.22%
Return on Average Equity 10.60% 11.50% 11.06% 11.14% 10.99%
Net Interest Margin 4.65% 4.68% 4.39% 4.21% 4.09%
Efficiency Ratio (1) 55.61% 54.67% 54.52% 54.60% 56.27%
Equity to Assets Ratio 11.62% 11.97% 11.80% 11.94% 10.99%
PER SHARE DATA:
Net Income $ 2.06 $ 2.05 $ 1.82 $ 1.69 $ 1.57
Cash Dividends .78 .77 .69 .52 .51
Book Value 20.08 18.57 17.14 16.09 14.55
Market Price Per Share 33.50 33.00 20.00 19.00 19.00
Cash Dividend Payout Ratio 47.16% 43.95% 43.31% 42.09% 43.43%
BALANCE SHEET DATA:
Assets $ 352,813 $ 315,707 $294,654 $274,417 $259,782
Deposits 306,515 268,480 253,233 234,347 220,242
Loans 217,682 189,377 164,341 147,191 126,778
Stockholders' Equity 40,995 37,784 34,768 32,768 28,557
ASSET QUALITY RATIOS:
Total allowance for loan losses to
total loans outstanding 1.04% 1.05% 1.13% 1.32% 1.51%
Non-performing assets to year-end
loans and other property owned 0.65% 0.61% 0.72% 0.93% 1.49%
</TABLE>
1) Efficiency ratio is computed by dividing non-interest expense, net of
nonrecurring merger costs, by the sum of net interest income on a tax-equivalent
basis and non-interest income, net of securities gains and losses.
Note: The amounts previously reported for the periods have been retroactively
restated to reflect the merger of Second National Financial Corporation and
Virginia Heartland Bank to form Virginia Commonwealth Financial Corporation.
Virginia Commonwealth Financial Corporation 2 1998 Annual Report
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MESSAGE TO STOCKHOLDERS
Dear Stockholder,
It is with great pleasure that Virginia Commonwealth Financial Corporation
shares with you our first annual report for the year ended December 31, 1998.
What a difference a year can make! In October, 1998 the affiliation with Second
Bank & Trust of Culpeper and Virginia Heartland Bank of Fredericksburg was
completed. This affiliation, through the common ownership of VCFC, brought
together two locally owned community banks with a history of being good
financial service providers to their respective communities, while consistently
providing solid returns to their stockholders. The combined entity, with nine
retail offices serving the counties of Culpeper, Orange, Madison, Rockingham,
Spotsylvania and the City of Fredericksburg, ended the year with assets of
$352.8 million. We have great anticipation for the revenue generation, cost
savings and synergies that we believe this affiliation will provide to the
organization, with our primary goals to enhance customer service and maximize
stockholder value.
[graph] [graph]
NET INCOME EARNINGS PER SHARE
(in thousands)
1994 $3,128 1994 $1.57
1995 $3,386 1995 $1.69
1996 $3,710 1996 $1.82
1997 $4,150 1997 $2.05
1998 $4,191 1998 $2.06
[photograph]
William B. Young, Chairman of the Board and O. R. Barham, Jr., President.
From a financial perspective, we are pleased to report that VCFC achieved
record earnings for the year on a combined basis, with earnings of $4.191
million, or $2.06 per share, compared to $4.150 million or $2.05 per share in
1997. Adjusting for after tax nonrecurring charges of $443 thousand associated
with the affiliation, net income was $4.634 million or $2.27 per share,
representing an 11.7% increase over $4.150 million or $2.05 per share for 1997.
Premerger earnings for the year ended December 31, 1998 produced a return on
average assets of 1.39% and return on average equity of 11.71%, compared to
prior year ratios of 1.38% and 11.50%, respectively.
The improvement in net income in 1998 was the result of improvements in
both net interest income and noninterest income. Net interest income, on a tax
equivalent basis, increased $1.3 million or 9.9% to $14.511 million for the year
ended December 31, 1998. Mortgage, trust and investment services all were major
contributors to a 49.8% increase in noninterest income to $2.684 million for the
year ended December 31, 1998 compared to $1.792 million in 1997.
Virginia community banking made a statement in 1998, with numerous de novo
institutions raising significant capital and many community banks improving
marketshare. No doubt the consummation of merger activities of the larger,
regional banks was a contributing
Virginia Commonwealth Financial Corporation 3 1998 Annual Report
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factor. VCFC's two member banks experienced exceptional balance sheet growth in
1998, ending the year with overall asset growth of 11.7%, loan growth of 13.9%
and deposit growth of 14.1%. Our relatively new retail offices at Chancellor,
Fredericksburg, Harrisonburg and Lake of the Woods were significant contributors
to such growth.
Community banking will continue to thrive if the focus on personal customer
relationships, local decision making and community support are maintained. These
are the community bank's competitive advantage. The organizational structure we
have selected maintains the name and reputations of our member banks. We firmly
believe that local bank autonomy is important in maintaining this competitive
advantage. The real challenge will be to continue to attract good employees, and
ensure that products and services meet the customer's needs in the new
millennium. With over $40.9 million in capital base, VCFC is well positioned to
improve its competitive advantage in a growing marketplace. We will continue
[graph] [graph]
ASSETS RETURN ON ASSETS
(in millions)
1994 $260 1994 1.22%
1995 $274 1995 1.27%
1996 $295 1996 1.30%
1997 $316 1997 1.38%
1998 $353 1998 1.26%
[photograph]
Virginia Commonwealth Financial Corporation Directors. Seated: William B. Young,
Chairman of the Board and O. R. Barham, Jr., President. Standing: Marshall D.
Gayheart, Jr., H. Wayne Parrish, W. Robert Jebson, Jr., Thomas F. Willliams,
Jr., and Taylor E. Gore. Not shown: Gregory L. Fisher.
to seek affiliations, which are economically feasible, with strong community
banks that wish to provide a higher level of banking services to their
communities while maintaining a sense of independence and local autonomy. In
addition, we will continue to add to our branch network, by de novo branching,
where we feel an underserved banking opportunity exists. This is the case with
our Orange branch scheduled to open in April of 1999.
1998 brought the introduction of our Capital Manager Investment Account.
This account enables certain of our customers to automatically invest excess
cash overnight in one of several money market mutual funds sponsored by Goldman
Sachs Money Market Trust. This sweep product works directly with our customer's
checking account, providing competitive yields on excess funds overnight with an
integrated easy-to-read statement, which summarizes fund activity at month end.
To date, customer interest and acceptance has been good. We anticipate the
request for this product to grow during 1999.
While significant capital was invested in technology projects in 1998, much
of our technology resources were allocated to addressing Year 2000. Our Year
2000 Committee has devoted significant man-hours to the development of a
comprehensive plan establishing action plans for identifying risks, testing
systems and equipment
Virginia Commonwealth Financial Corporation 4 1998 Annual Report
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used by the Corporation, informing customers of the issues and risks,
implementing changes necessary to achieve Year 2000 and establishing a
contingency plan for operating if Year 2000 readiness issues cause important
systems to fail. Management has designed its plan to comply with the
requirements for Year 2000 efforts established by the Federal Reserve, the
Corporation's primary regulator. Management feels confident that VCFC will be
able to accomplish its Year 2000 goals and continue providing financial services
to the communities we serve into the new millennium.
We want to thank each of our stockholders for your patience as we worked
through the many mailings and actions during 1998 in order for us to consummate
the affiliation. We also want to thank the boards of directors of each member
bank for their loyalty, dedication and vision throughout the year, and our
senior officers and employees for their hard work and dedication during the
merger process. We are excited by the initial chemistry
[graph] [graph]
EFFICIENCY RATIO RETURN ON AVERAGE EQUITY
1994 56.27% 1994 10.99%
1995 54.60% 1995 11.14%
1996 54.52% 1996 11.06%
1997 54.67% 1997 11.50%
1998 55.61% 1998 10.60%
[photograph]
Second Bank & Trust Directors. Seated: Alan W. Myers, Taylor E. Gore, Chairman
of the Board; Harlean Smoot, and Joseph A. Troilo, Jr. Standing: Lewis P.
Armstrong, Robert Y. Button, Jr., O. R. Barham, Jr., President and CEO; Charles
K. Gyory, and Christopher J. Honenberger.
of this group, and look forward with anticipation to the many challenges ahead.
Finally, we appreciate your continuing patronage, support and confidence. 1999
promises to be a year of many challenges and opportunities.
Cordially,
/s/ William B. Young
- -----------------------------
William B. Young
Chairman and Chief Executive Officer
/s/ O.R. Barham, Jr.
- -----------------------------
O.R. Barham, Jr.
President
[photograph]
Virginia Heartland Bank Directors. Seated: Christopher M. Hallberg, H. Wayne
Parrish, and Thomas F. Williams, Jr. Standing: Edward V. Allison, Jr.,
President; Mark S. Gardner, and William B. Young, Chairman of the Board. Not
shown: Jerry W. Leonard.
Virginia Commonwealth Financial Corporation 5 1998 Annual Report
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of
the results of operations, financial condition, liquidity and capital resources
of Virginia Commonwealth Financial Corporation (VCFC). This discussion and
analysis should be read in conjunction with "Selected Financial Data" and the
Consolidated Financial Statements and notes thereon presented elsewhere in this
report. Operating results include both of VCFC's banking subsidiaries, Second
Bank & Trust and Virginia Heartland Bank, combined for all periods presented.
In addition to historical information, statements contained in this report
that are not historical facts may be construed as forward looking statements.
The forward-looking statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from historical results,
or those anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date thereof.
Overview
In October, 1998 VCFC completed its affiliation with Virginia Heartland
Bank of Fredericksburg, Virginia, bringing together two locally owned community
banks. The combined entity, with nine retail offices serving the counties of
Culpeper, Orange, Madison, Rockingham, Spotsylvania and the City of
Fredericksburg, ended the year with assets of $352.8 million. In spite of
resources and costs associated with the affiliation, VCFC achieved record
earnings for the year on a combined basis with earnings of $4.191 million, or
$2.06 per share, compared to $4.150 million or $2.05 per share. Earnings before
after tax nonrecurring charges of $443 thousand associated with the affiliation
were $4.634 million or $2.27 per share, representing an 11.7% increase over
$4.150 million or $2.05 per share for 1997.
The affiliation resulted in a stockholder base of roughly two million
shares outstanding. The affiliation was a tax free exchange of stock, and was
accounted for as a pooling of interests, resulting in the combination of
operating results for all periods presented herein.
The Board of Directors and management of the resultant organization are of
the belief that the larger enterprise will be more diversified, better
positioned and more competitive. The potential for revenue enhancement via an
expanded array and cross-selling of financial services is as significant as the
opportunity to develop operational efficiencies, some of which will be initiated
in 1999. While significant resources were allocated to the completion of the
merger, VCFC benefited from improved performance in noninterest income divisions
and loan growth in the fourth quarter. Noninterest income grew 49.8% to $2.684
million for the year ended December 31, 1998 compared to $1.792 million for the
same period in 1997. Balance sheet growth was exceptional, with gross loans
receivable increasing $26.3 million or 13.9%, and deposits increasing $38
million or 14.2% for the year.
Results of Operations
In spite of resources and costs associated with the merger, VCFC achieved
record earnings for the year, with earnings of $4.191 million, or $2.06 per
share, compared to $4.150 million or $2.05 per share. Earnings for the year
ended December 31, 1998 produced a return on average assets of 1.26% and return
on average equity of 10.60%, compared to prior year ratios of 1.38% and 11.50%,
respectively.
Adjusting for after tax nonrecurring charges of $443 thousand associated
with the affiliation, net income was $4.634 million or $2.27 per share,
representing an 11.7% increase over $4.150 million or $2.05 per share for 1997.
Premerger earnings for the year ended December 31, 1998 produced a return on
average assets of 1.39% and return on average equity of 11.71%, compared to
prior year ratios of 1.38% and 11.50%, respectively.
The improvement in net income in 1998 was the result of improvements in
both net interest income and noninterest income. Net interest income, on a
taxable equivalent basis, increased $1.317 million or 9.9% to $14.511 million
for the year ended December 31, 1998. Tax equivalent net interest income for
1997 was $13.194 million, an increase of $1.327 million or 11.2% from $11.867
million for 1996. Noninterest income increased 49.8% to $2.684 million for the
year ended December 31, 1998 compared to $1.792 million in 1997 and $1.453
million (23.3%) in 1996.
Balance sheet growth was strong for the combined organization in 1998, with
total assets of $352.813 million at December 31, 1998, an increase of 11.8%,
total loans outstanding of $214.763 million, an increase of 13.9% and total
deposits of $306.515 million, an increase of 14.2%. An expanding economy, a
broader branch network, and significant consolidation of regional Virginia state
banks were contributing factors to this growth. New offices in Harrisonburg,
Lake of the Woods, Chancellor and the City of Fredericksburg were significant
contributors to the growth.
Virginia Commonwealth Financial Corporation 6 1998 Annual Report
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
VCFC's efficiency ratio, a measure of the organization's ability to control
its operating (noninterest) expenses, increased to 55.61% in 1998, compared to
54.67% in 1997 and 54.52% in 1996. Expenses of the merger are excluded from the
computation of this ratio due to their nonrecurring nature. The increase in 1998
was primarily attributable to start-up costs associated with the aforementioned
new retail offices. It is anticipated that the Corporation will begin to see
some efficiencies in noninterest expenses as a result of the affiliation in 1999
in such areas as insurance, professional fees, back office related expenses and
taxes. However, no significant elimination of duplicate systems is anticipated
until the year 2000.
The following table presents a quarterly summary of earnings components for
the last two years. In 1998, quarterly income declined in the third and fourth
quarters, primarily due to increased expenses associated with the merger. The
fourth quarter also reflects an increase in loan loss provisions and gains on
sale of securities available for sale. In 1997, stable earnings growth in each
quarter was attributed to improvement in net interest income and noninterest
income divisions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended 1998 Three Months Ended 1997
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 6,575 $ 6,475 $ 6,267 $ 6,088 $ 6,145 $ 5,932 $ 5,765 $ 5,508
Interest expense 2,942 2,946 2,810 2,748 2,720 2,675 2,589 2,526
- ------------------------------------------------------------------------------------------------------------------
Net interest income 3,633 3,529 3,457 3,340 3,425 3,257 3,176 2,982
Provision for loan losses 351 170 175 135 194 114 94 89
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,282 3,359 3,282 3,205 3,231 3,143 3,082 2,893
Other income 797 670 677 540 570 549 287 385
Other expense 2,742 2,532 2,362 2,235 2,202 2,142 1,961 1,925
- ------------------------------------------------------------------------------------------------------------------
Income before
income taxes 1,337 1,497 1,597 1,510 1,599 1,550 1,408 1,353
Applicable income taxes 395 426 498 431 461 439 466 394
- ------------------------------------------------------------------------------------------------------------------
Net income $ 942 $ 1,071 $ 1,099 $1,079 $ 1,138 $1,111 $ 942 $ 959
- ------------------------------------------------------------------------------------------------------------------
Net income per share,
basic and diluted $ 0.46 $ 0.53 $ 0.54 $ 0.53 $ 0.56 $ 0.55 $ 0.47 $ 0.47
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Interest Income and Net Interest Margin
Net interest income, on a taxable equivalent basis, increased $1.317
million or 9.9% to $14.511 million for the year ended December 31, 1998. Tax
equivalent net interest income for 1997 was $13.194 million, an increase of
$1.327 million or 11.2% from $11.867 million for 1996. This improvement can be
attributed to balance sheet growth and a stable net interest margin. Average
earning assets increased $30.455 million to $312.308 million at December 31,
1998, an increase of 11% over $281.853 million in 1997. Average earning assets
in 1997 increased 4.3% from $270.267 million in 1996.
The increase in average earning assets can be attributed to loan and
securities growth funded with retail deposit growth. An expanding economy, a
broader branch network, and significant consolidation of regional Virginia state
banks were contributing factors to this growth. Average loans increased $20.993
million (11.8%) to $198.426 million in 1998 from $177.433 million in 1997, and
increased $20.246 million (12.9%) in 1997 from $157.187 million in 1996. Average
investment securities increased $3.779 million (3.9%) to $101.073 million in
1998 from $97.294 million in 1997, and decreased $4.701 million (4.61%) in 1997
from $102.005 million in 1996. Average deposits increased $21.475 million (9.5%)
to $248.177 million in 1998 from $226.702 million in 1997, and increased $8.367
million (3.8%) in 1997 from $218.335 million in 1996.
The net interest margin is calculated as tax equivalent net interest income
divided by average earning assets, and represents the Corporation's net yield on
its earning assets. While significant reductions in the prime lending rate and
U.S. treasury rate curve during 1998 placed considerable pressure on VCFC's net
interest margin, improvement in the mix of earning assets offset much of this
impact. The net interest margin for year ended December 31, 1998 was 4.65%,
compared to 4.68% in 1997 and 4.39% in 1996. The following table sets forth
interest income on average earning assets, and related average yields, as well
as interest expense on average interest bearing liabilities and average rates
paid for the periods indicated.
Virginia Commonwealth Financial Corporation 7 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 Year ended December 31, 1997
------------------------------ ------------------------------
Average Interest Average Average Interest Average
Dollars in thousands Balance Inc/Exp Rates Balance Inc/Exp Rates
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans receivable, net $ 198,426 $ 18,748 9.45% $ 177,433 $ 17,008 9.59%
Investment securities
Taxable 82,182 5,068 6.17% 83,851 5,226 6.23%
Tax exempt 18,891 1,449 7.67% 13,443 1,074 7.99%
- --------------------------------------------------------------------------------------------------------------
Total Investments 101,073 6,517 6.45% 97,294 6,300 6.47%
Interest - bearing deposits
in other banks -- -- -- -- -- --
Federal funds sold 12,809 691 5.39% 7,116 396 5.56%
- --------------------------------------------------------------------------------------------------------------
Total Earning Assets 312,308 25,956 8.31% Tax Eql. 281,843 23,704 8.41% Tax Eql.
Allowance for loan losses (2,143) (1,927)
Cash and due from banks 8,190 7,945
Bank premises and equipment 8,333 7,540
Other assets 7,357 5,272
- --------------------------------------------------------------------------------------------------------------
Total Assets $ 334,045 $ 300,673
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Time and savings deposits
Interest-bearing transaction
accounts $ 33,366 $ 745 2.23% $ 30,724 $ 741 2.41%
Money market deposit accounts 36,564 1,270 3.47% 33,981 1,227 3.61%
Passbook savings accounts 28,978 886 3.06% 28,143 818 2.91%
Certificates of deposit
(> $100,000) 28,598 1,642 5.74% 23,363 1,338 5.73%
Other certificates of deposit 120,671 6,697 5.55% 110,491 6,153 5.57%
- --------------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 248,177 11,240 4.53% 226,702 10,277 4.53%
Federal funds purchased and
securities under agreement
to repurchase 1,359 73 5.37% 1,867 106 5.68%
Note payable 34 2 5.88%
Other borrowings 416 21 5.05% 558 25 4.00%
Master notes 2,798 109 3.90% 2,764 102 3.69%
- --------------------------------------------------------------------------------------------------------------
Total Interest- Bearing Liabilities 252,784 11,445 4.53% 231,891 10,510 4.53%
Demand deposits 39,158 30,522
Other liabilities 2,546 2,157
- --------------------------------------------------------------------------------------------------------------
Total Liabilities 294,488 264,570
Stockholders' equity 39,557 36,103
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 334,045 $ 300,673
- --------------------------------------------------------------------------------------------------------------
Net interest income
(tax equivalent) $ 14,511 $ 13,194
Average interest rate spread 3.78% 3.88%
Interest expense as percentage of
average earning assets 3.66% 3.73%
Net interest margin 4.65% 4.68%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
1) Income and yields are computed on a tax-equivalent basis using statutory
federal income tax rates, exclusive of the nondeductible interest expense. The
tax equivalent adjustment was $551,000, $422,000 and $417,000 in 1998, 1997 and
1996, respectively.
Virginia Commonwealth Financial Corporation 8 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year ended December 31, 1996
---------------------------------
Average Interest Average
Dollars in thousands Balance Inc/Exp Rates
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Loans receivable, net $ 157,187 $ 15,313 9.74%
Investment securities
Taxable 89,464 5,134 5.74%
Tax exempt 12,541 1,037 8.27%
- ---------------------------------------------------------------------------------
Total Investments 102,005 6,171 6.05%
Interest - bearing deposits
in other banks 1,277 55 4.31%
Federal funds sold 9,798 553 5.64%
- ---------------------------------------------------------------------------------
Total Earning Assets 270,267 22,092 8.17% Tax Eql.
Allowance for loan losses (1,912)
Cash and due from banks 7,041
Bank premises and equipment 6,440
Other assets 4,069
- ---------------------------------------------------------------------------------
Total Assets $ 285,905
- ---------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Time and savings deposits
Interest-bearing transaction
accounts $ 29,163 $ 657 2.25%
Money market deposit accounts 32,828 1,178 3.59%
Passbook savings accounts 29,611 823 2.78%
Certificates of deposit
(> $100,000) 21,043 1,226 5.83%
Other certificates of deposit 105,690 6,049 5.72%
- ---------------------------------------------------------------------------------
Total Time and Savings Deposits 218,335 9,933 4.55%
Federal funds purchased and
securities under agreement
to repurchase 1,199 61 5.09%
Note payable 1,289 122 9.46%
Other borrowings 547 24 4.39%
Master notes 2,412 85 3.52%
- ---------------------------------------------------------------------------------
Total Interest- Bearing Liabilities 223,782 10,225 4.57%
Demand deposits 26,758
Other liabilities 1,809
- ---------------------------------------------------------------------------------
Total Liabilities 252,349
Stockholders' equity 33,556
- ---------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 285,905
- --------------------------------------------------------------------------------
Net interest income
(tax equivalent) $ 11,867
Average interest rate spread 3.60%
Interest expense as percentage of
average earning assets 3.78%
Net interest margin 4.39%
- ---------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 9 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average Balances, Income and Expense, Yield and Rates
Net interest is affected by both (1) changes in the interest rate spread
(the difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities) and (2) changes
in volume (average balances of interest-earning assets and interest-bearing
liabilities).
The following table sets forth certain information regarding changes in
interest income and interest expense of the Corporation for the years indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided regarding changes attributable to (1) changes in volume
of balances outstanding (changes in volume multiplied by prior period interest
rate) (2) changes in the interest earned or paid on the balances (changes in
rate multiplied by prior period volume) and (3) a combination of changes in
volume and rate allocated pro rata.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Years ended December 31
- ----------------------------------------------------------------------------------------------------
1998 vs 1997 1997 vs 1996
Increase (Decrease) Increase (Decrease)
Dollars in thousands Due to changes in: Due to changes in:
- ----------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $ 1,949 $ (207) $ 1,742 $ 1,894 $ (191) $ 1,703
Securities:
Taxable (107) (119) (226) 42 118
160
Tax-exempt 272 (26) 246 55 (30) 25
- -----------------------------------------------------------------------------------------------------
Total securities 165 (145) 20 97 88 185
Interest-bearing deposits
in other banks -- -- -- (55) -- (55)
Federal funds sold 307 (14) 293 (147) (10) (157)
- -----------------------------------------------------------------------------------------------------
Total earning assets $ 2,421 $ (366) $ 2,055 $ 1,789 $ (113) $ 1,676
- -----------------------------------------------------------------------------------------------------
Interest-bearing Liabilities:
Time and savings deposits:
Interest-bearing deposits $ 125 $ (120) $ 5 $ 37 $ 47 $ 84
Money market deposits 113 (70) 43 42 7 49
Savings deposits 28 40 68 (49) 44 (5)
Certificates of deposit:
Certificates of $100,000
or more 298 6 304 135 (23) 112
Certificates of less
than $100,000 562 (18) 544 263 (159) 104
- -----------------------------------------------------------------------------------------------------
Total time and savings deposits $ 1,126 $ (162) $ 964 $ 428 $ (84) $ 344
Federal funds purchased & under
agreements to repurchase (28) (5) (33) 37 9 46
Notes payable 2 -- 2 (122) -- (122)
Other short term borrowings (4) 7 3 14 5 19
- -----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,096 $ (160) $ 936 $ 357 $ (70) $ 287
- -----------------------------------------------------------------------------------------------------
Change in net interest income $ 1,325 $ (206) $ 1,119 $ 1,432 $ (43) $ 1,389
- -----------------------------------------------------------------------------------------------------
</TABLE>
Note: The combined effect on interest due to changes in both volume and rate,
which cannot be separately identified, has been allocated proportionately to the
change due to volume and the change due to rate.
Virginia Commonwealth Financial Corporation 10 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Rate Sensitivity
An important component of both earnings performance and liquidity is
management of interest rate sensitivity. Interest rate sensitivity reflects the
potential effect on net interest income of a movement in market interest rates.
VCFC is subject to interest rate sensitivity to the degree that its
interest-earning assets mature or reprice at a different time interval from that
of its interest-bearing liabilities.
The Corporation uses a number of tools to manage its interest rate risk,
including simulating net interest income under various scenarios, monitoring the
present value change in equity under the same scenarios, and monitoring the
difference or gap between rate sensitive assets and rate sensitive liabilities
over various time periods. Management believes that rate risk is best measured
by simulation modeling.
The earnings simulation model forecasts annual net income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effects on net interest income and
present value equity under varying market rate assumptions.
The Corporation monitors exposure to gradual change in rates of up to 200
basis points up or down over a rolling 12-month period. The Corporation's policy
limit for the maximum negative impact on net interest income, gap analysis and
change in equity from a gradual change in interest rates of 200 basis points
over 12 months is 15%. Management has maintained a risk position well within
these guideline levels during 1998.
The following tables present the Corporation's present value change in
equity under various rate scenarios as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Current
1998 Minus 200 pts. Minus 100 pts. Fair Value Plus 100 pts. Plus 200 pts.
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities $ 106,582 $ 104,752 $ 102,639 $ 99,802 $ 96,884
Market value change 3,943 2,114 -- (2,837) (5,755)
Loans receivable 227,050 224,520 221,756 218,639 215,367
Market value change 5,294 2,764 -- (3,117) (6,389)
Total rate sensitive assets 333,632 329,272 324,395 318,441 312,251
Other assets 22,079 22,079 22,079 22,079 22,079
Total assets 355,711 351,351 346,474 340,520 334,330
Deposits
Rate sensitive 265,698 261,651 257,716 253,890 250,167
Market value change 7,982 3,935 -- (3,827) (7,549)
Non rate sensitive 45,530 44,233 42,997 41,814 40,685
Market value change 2,533 1,238 -- (1,182) (2,312)
Total liabilities 311,228 305,884 300,713 295,704 290,852
- ------------------------------------------------------------------------------------------------------------
Present Value Equity $ 44,483 $ 45,467 $ 45,761 $ 44,816 $ 43,478
- ------------------------------------------------------------------------------------------------------------
Market Value Change $ (1,278) $ (294) $ -- $ 945 $ 2,283
- ------------------------------------------------------------------------------------------------------------
Percentage Change -2.79% -0.64% 0% 2.07% 4.99%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 11 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Current
1997 Minus 200 pts. Minus 100 pts. Fair Value Plus 100 pts. Plus 200 pts.
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities $ 100,749 $ 98,975 $ 97,030 $ 94,710 $ 92,368
Market value change 3,719 1,945 -- (2,231) (4,661)
Loans receivable 196,553 193,759 190,937 187,932 184,945
Market value change 5,617 2,822 -- (3,005) (5,991)
Total rate sensitive assets 297,302 292,734 287,967 282,642 277,313
Other assets 21,931 21,931 21,931 21,931 21,931
Total assets 319,233 314,665 309,898 304,573 299,244
Deposits
Rate sensitive 240,708 237,041 233,476 230,009 226,637
Market value change 7,232 3,565 -- (3,467) (6,839)
Non rate sensitive 34,385 33,431 32,521 31,652 30,819
Market value change 1,864 911 -- (870) (1,702)
Total liabilities 275,093 270,472 265,997 261,661 257,456
- -----------------------------------------------------------------------------------------------------------
Present Value Equity $ 44,140 $ 44,193 $ 43,901 $ 42,912 $ 41,788
- -----------------------------------------------------------------------------------------------------------
Market Value Change $ 239 $ 292 $ -- $ 989 $ 2,113
- -----------------------------------------------------------------------------------------------------------
Percentage Change 0.54% 0.67% 0% 2.25% 4.81%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest Income
Noninterest income consists of earnings generated primarily from service
charges on deposit accounts, fiduciary income from trust operations, commissions
on investment sales and gains on the sale of mortgage loans in the secondary
market. Each major component noninterest income exhibited growth in 1998, with
significant increases recorded in fees from investment sales, trust and mortgage
operations. The Corporation's noninterest income increased 49.8% to $2.684
million for the year ended December 31, 1998 compared to $1.792 million in 1997
and $1.453 million (23.3%) in 1996.
The mortgage division, driven by an active refinance market, generated fees
of $554 thousand on gross originations of $36.058 million, compared to fees of
$128 thousand on originations of $18.038 million in 1997, and fees of $45
thousand on originations of $10.815 million in 1996. The Corporation's fee
income from trust operations totaled $520 thousand, compared to fees of $409
thousand in 1997 and $371 thousand in 1996. An overall increase in Trust
accounts managed and greater market values for trust assets accounted for the
gains in each period. The investment services division generated $148 thousand
in gross commissions, compared to $77 thousand in 1997, its first full year of
operations.
Noninterest Expense
Noninterest expenses for 1998 were $9.871 million, compared to $8.230
million in 1997 and $7.255 million in 1996, respectively. The increase in 1998
compared to 1997 of $1.641 million or 19.9% was attributable to several factors,
the most significant of which was $443 thousand in merger and restructuring
costs associated with the merger. Excluding such merger costs, noninterest
expenses increased 14.6%, with personnel costs associated with management and
branch hirings and commissions paid for loan production accounting for much of
this increase.
The increase in 1997 compared to 1996 of $975 thousand or 13.4% was
attributable to several factors including a higher salary base, marketing and
supplies associated with the opening of four new branches, as well as increased
expenditures for professional services and technology related costs.
Virginia Commonwealth Financial Corporation 12 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Loan Losses
Provisions for loan losses are charged to income to bring the total
allowance for loan losses to a level deemed appropriate by management of the
Corporation based on such factors as historical experience, the volume and type
of lending conducted, and the amount of nonperforming assets for each member
bank. Other considerations include regulatory policies and general economic
conditions.
The provision for loan losses for 1998 amounted to $831 thousand, an
increase of $340 thousand or 69.2% compared to $491 thousand in 1997. The
provisions for 1997 and 1996 were constant, with $490 thousand recorded in 1996.
The increase reflects a conscious effort to maintain the allowance on an
increasing loan portfolio. The Company had net charge-offs of $555 thousand in
1998, compared to $354 thousand for 1997 and $591 thousand in 1996. While net
charge-offs showed an increase in 1998, the ratio of such charge-offs to average
loans outstanding increased only eight basis points to .28% in 1998 compared to
1997.
Management believes the allowance is adequate to absorb losses inherent in
the loan portfolio. With anticipated additional growth in the loan portfolio,
management anticipates a continuation of allowance provisions recorded in 1998
to maintain the level of the allowance account as a percentage of gross loans
receivable. The Corporation does not anticipate that such provisions will have a
material adverse impact on the results of operations in future periods.
ANALYSIS OF FINANCIAL CONDITION
Loan Portfolio
Gross loans as of December 31, 1998, were $214.763 million increasing 13.9%
from $188.473 million in 1997. The increase in loans was due principally to
growth in our commercial lending portfolio, particularly through our
Harrisonburg and Fredericksburg markets. The Corporation's member banks provide
funds for business expansion, equipment, receivables, inventory, working capital
and other financing needs in various aspects of commercial and agricultural
operations. In its lending activities, the Bank utilizes lines of credit and
commercial term loans in its portfolio. At December 31, 1998, off balance sheet
unused loan commitments and standby letters of credit amounted to $44.824
million. These commitments may be secured or unsecured. On December 31, 1998,
VCFC had no concentration of loans to any one industry in excess of 10% of its
loan portfolio.
VCFC's combined loan portfolio at December 31, 1998 was comprised of loans
secured primarily by real estate. Residential real estate loans consist of fixed
rate loans that have contractual maturities of one, three, or five years with
balloon payments, and are secured by first liens on real estate, and adjustable
rate mortgages are also offered. The Bank's historically have limited their real
estate lending to its market area and have applied conservative loan standards
which have, management believes, insured the quality of the loan portfolio. VCFC
also makes real estate construction loans generally for residential and
commercial construction purposes and for local construction projects with
acceptable take out commitments. Real estate construction loans currently
offered by the Banks generally have six month to nine month terms. Construction
loans outstanding total $20.330 million at December 31, 1998. VCFC also offers
various types of installment loans including automobile, home improvement,
equipment and personal loans.
Virginia Commonwealth Financial Corporation 13 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables set forth the makeup and certain maturity information
for the loan portfolio at December 31, 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans
Construction $ 20,330 $20,892 $ 9,737 $ 9,240 $ 10,724
Mortgage 150,268 126,566 116,534 102,759 86,061
Commercial loans 17,680 17,779 18,202 16,360 14,221
Installment loans 22,504 19,980 18,189 17,129 14,078
Other loans 3,981 3,256 3,685 3,862 3,771
- ----------------------------------------------------------------------------------------------
Total loans before deduction of
unearned income 214,763 188,473 166,347 149,350 128,855
Less: unearned income (195) (129) (134) (185) (129)
- ----------------------------------------------------------------------------------------------
Total loans before allowance
for loan losses 214,568 188,344 166,213 149,165 128,726
Less: allowance for loan losses (2,286) (2,010) (1,873) (1,974) (1,952)
- ----------------------------------------------------------------------------------------------
Net loans 212,282 186,334 164,340 147,191 126,774
Loans held for sale 5,400 3,044 -- -- --
- ----------------------------------------------------------------------------------------------
Total loans $217,682 $189,378 $164,340 $147,191 $126,774
- ----------------------------------------------------------------------------------------------
</TABLE>
Information regarding the interest sensitivity of the loan portfolio at
December 31, 1998 is presented below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
After one but
One year but less than After Total
(Dollars in thousands) or less five years five years
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate loans $ 45,169 $74,670 $ 50,330 $170,169
Commercial loans 9,054 6,439 2,007 17,500
Installment loans 2,845 18,387 1,170 22,402
Other loans 1,014 1,004 1,963 3,981
- ----------------------------------------------------------------------------------
Net loans (1)(2) 58,082 100,500 55,470 214,052
Loans held for sale 5,400 5,400
- ----------------------------------------------------------------------------------
Total loans $ 63,482 $100,500 $ 55,470 $219,452
- ----------------------------------------------------------------------------------
</TABLE>
(1) Excluding nonaccrual loans and before deduction of unearned income or the
allowance for loan losses. Includes loans classified as impaired under FASB 114.
(2) Includes $138.580 million in fixed rate loans and $5.328 million in
adjustable rate loans with a maturity greater than one year.
Asset Quality
Each of VCFC's member banks has a formal loan review program that regularly
reviews loans and assigns credit ratings or classifications based on estimated
risk. Activities of the loan review program are reviewed with the Board of
Directors.
VCFC generally places loans on nonaccrual status when a loan becomes 90 days
past due as to principal and interest, or when, in the opinion of management,
principal or interest is not likely to be paid in accordance with the terms of
the obligation. Real estate acquired by the member banks as a result of
foreclosure or in-substance foreclosure is classified as other real estate owned
(OREO). Such real estate is initially recorded at the lower of cost or fair
value less estimated selling costs. Further losses are recorded as charges to
operations if management determines value of the OREO has deteriorated, or
expenses associated with maintaining such property have been incurred. VCFC's
OREO at December 31, 1998 amounted to $759 thousand, and consisted primarily of
residential real estate properties and building lots.
Virginia Commonwealth Financial Corporation 14 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming assets amounted to $1.432 million or .65% of loans and other
assets at December 31, 1998, compared to $1.179 million or .61% of loans and
other assets at December 31, 1997.
The allowance for loan losses at December 31, 1998 amounted to $2.286
million compared to $2.010 million for 1997. The allowance for loan losses
represents 160% of nonperforming assets at December 31, 1998. The allowance for
loan losses as a percentage of net loans amounted to 1.04% at December 31, 1998
compared to 1.05% at December 31, 1997. This decrease was primarily attributable
to a 13.9% increase in gross loans in 1998.
The following table provides an analysis of the allowance for loan losses
for the past five years.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31
- ----------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $2,010 $1,873 $1,974 $1,952 $1,897
Loans charged off:
Commercial 286 97 203 185 108
Real estate 7 -- -- -- 41
Installment 354 339 449 180 91
- --------------------------------------------------------------------------------------------
Total loans charged off 647 435 652 365 240
- --------------------------------------------------------------------------------------------
Recoveries:
Commercial 2 18 9 13 2
Real estate -- -- -- -- 10
Installment 90 64 52 33 58
- --------------------------------------------------------------------------------------------
Total recoveries 92 81 61 46 70
- --------------------------------------------------------------------------------------------
Net charge offs 555 354 591 319 170
Provision for loan losses 831 491 490 341 225
- --------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $2,286 $2,010 $1,873 $1,974 $1,952
- --------------------------------------------------------------------------------------------
Ratio of allowance for loan losses to
total loans outstanding at end of year .. 1.04% 1.05% 1.13% 1.32% 1.60%
- --------------------------------------------------------------------------------------------
Ratio of net charge offs (recoveries) to
average loans outstanding during the year 0.28% 0.20% 0.38% 0.23% 0.14%
- --------------------------------------------------------------------------------------------
</TABLE>
The following table reflects the composition of nonperforming assets for the
past five years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 673 $ 719 $ 783 $1,262 $1,562
Other property owned 759 460 411 129 268
- ------------------------------------------------------------------------------------------------
Total non-performing assets $1,432 $1,179 $1,194 $1,391 $1,830
- ------------------------------------------------------------------------------------------------
Loans past due 90 days
accruing interest $ 349 $ 229 $1,112 $ 963 $ 302
- ------------------------------------------------------------------------------------------------
Allowance for loan losses to
non-accrual loans 339.67% 279.55% 239.21% 156.42% 124.97%
- ------------------------------------------------------------------------------------------------
Non-performing assets to year-end
loans and other property owned 0.65% 0.61% 0.72% 0.93% 1.49%
- ------------------------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 15 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Securities
Investment securities and securities available for sale totaled $104.943
million and comprised 29.74% of total assets at December 31, 1998, as compared
with $98.963 million and 31.35% of assets at December 31, 1997.
Despite a significant shift downward in the U.S. treasury curve, the
Corporation yield on its securities portfolio declined slightly in 1998, with
the portfolio yielding 6.45% in 1998 compared to 6.47% in 1997. The Corporation
attempts to maintain diversity in its portfolio, maintain durations that are
consistent with its asset/liability management policy and holds a significant
allocation of securities in states and political subdivisions that provide tax
benefits.
The following table includes information with respect to the Corporation's
securities portfolio at December 31, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
December 31, 1998 (1)
- ------------------------------------------------------------------------------------
1 Year 1 - 5 5 - 10 Over 10
(In thousands) or Less Years Years Years Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U. S. Agency Securities:
Amortized cost $ 2,499 $ 19,551 $ 7,000 $ -- $ 29,050
Fair value 2,501 19,663 7,026 -- 29,190
Weighted average yield 5.97% 5.89% 6.18% 0.00% 5.96%
Mortgage-backed Securities:
Amortized cost $ -- $ 1,582 $ 14,264 $1,478 $ 17,324
Fair value -- 1,601 14,322 1,518 17,441
Weighted average yield 0.00% 6.09% 6.26% 6.82% 6.30%
U. S. Treasury Securities:
Amortized cost $ 11,493 $ 9,529 $ -- $ -- $ 21,022
Fair value 11,551 9,767 -- -- 21,318
Weighted average yield 6.06% 6.19% 0.00% 0.00% 6.12%
Corporate Bonds:
Amortized cost $ 1,000 $ 7,572 $ 1,026 $ -- $ 9,598
Fair value 1,000 7,581 1,047 -- 9,628
Weighted average yield 6.07% 6.19% 6.17% 0.00% 6.17%
Municipal Bonds:
Amortized cost $ 890 $ 7,630 $ 16,238 $ 691 $ 25,449
Fair value 911 7,864 16,737 737 26,249
Weighted average yield 9.67% 7.17% 6.92% 7.98% 7.12%
Equity Securities:
Amortized cost $ -- $ 495 $ -- $ -- $ 495
Fair value -- 495 -- -- 495
Weighted average yield 0.00% 6.50% 0.00% 0.00% 6.50%
Other Investments:
Amortized cost $ -- $ 1,357 $ -- $ -- $ 1,357
Fair value -- 1,357 -- -- 1,357
Weighted average yield 0.00% 3.17% 0.00% 0.00% 3.17%
Total Securities:
Amortized cost $ 15,882 $ 47,716 $ 38,528 $2,169 $104,295
Fair value 15,963 48,328 39,132 2,255 105,678
Weighted average yield 6.25% 6.14% 6.52% 7.19% 6.32%
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
Virginia Commonwealth Financial Corporation 16 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposits
The Corporation had significant deposit growth in 1998. Deposits at December
31, 1998 amounted to $306.515 million, an increase of $38.035 million or 14.2%
over $268.480 million in 1997. Funds provided by the increase in deposits
allowed the Corporation to fund its loan growth with retail deposits, limit the
use of higher cost borrowings and better leveraged its capital base in 1998.
Noninterest bearing deposits increased by $10.175 million or 28.9% in 1998,
which helped offset the higher cost associated with an increase of $14.9 million
in certificates of deposit. The over all cost of deposit funds remained constant
in 1998 compared to 1997 at 4.53%, and decreased slightly from 4.55% in 1996.
The following table illustrates average outstanding deposits and rates paid.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Years Ended December 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand accounts $39,158 -- $30,522 -- $26,758 --
Interest-bearing accounts:
Interest checking 33,366 2.23% 30,724 2.41% 29,163 2.25%
Money market 36,564 3.47% 33,981 3.61% 32,828 3.59%
Regular savings 28,978 3.06% 28,143 2.91% 29,611 2.78%
Time deposits:
Less than $100,000 120,671 5.55% 110,491 5.57% 105,690 5.72%
$100,000 and over 28,598 5.74% 23,363 5.73% 21,043 5.83%
- ----------------------------------------------------------------------------------------------
Total interest-bearing 248,177 4.53% 226,702 4.53% 218,335 4.55%
- ----------------------------------------------------------------------------------------------
Total average deposits $287,335 $257,224 $245,093
- ----------------------------------------------------------------------------------------------
</TABLE>
Maturities of Time Deposits of $100,000 and Over
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Within 3 - 6 6 - 12 Over 12
(Dollars in thousands) 3 Months Months Months Months
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998 $4,474 $ 2,875 $9,217 $ 12,466
</TABLE>
GENERAL
Capital Adequacy
Management seeks to maintain a capital structure that will maintain a level
of capital that ensures the Corporation will meet regulatory requirements for a
"well-capitalized" institution and absorb potential losses. In achieving this
goal, management recognizes the need to obtain proper leveraging of its capital
base to maximize shareholder value.
Stockholders' equity as of December 31, 1998 of $40.995 million increased
$3.211 million or approximately 8.5% from $37.784 million in 1997. The
Corporation had a ratio of risk-weighted assets to total capital of 18.37% and
20.31% at December 31, 1998 and 1997, and a ratio of risk-weighted assets to
Tier I capital of 17.39% and 19.28% in 1998 and 1997, respectively.
Virginia Commonwealth Financial Corporation 17 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient
amounts of cash when needed and at reasonable cost to accommodate withdrawals,
payments of debt, and increased loan demand. These events may occur daily or
other short-term intervals in the normal operation of the business. Experience
helps management predict time cycles in the amount of cash required. In
assessing liquidity, management gives consideration to relevant factors
including stability of deposits, quality of assets, economy of market served,
concentrations of business and industry, competition, and the Corporation's
overall financial condition. The Corporation's primary source of liquidity are
cash, due from banks, fed funds sold and securities in the available for sale
portfolio. In addition, the member banks have substantial lines of credit from
correspondent banks and access to the Federal Reserve discount window and
Federal Home Loan Bank of Atlanta to support liquidity as conditions dictate.
The Corporation has no brokered deposits. Certificates of deposit in
denominations of $100 thousand or more represent 9.47% of total deposits
primarily from established core depositors.
In the judgment of management, the Corporation maintains the ability to
generate sufficient amounts of cash to cover normal requirements and any
additional needs which may arise, within realistic limitations.
New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Corporation has not determined whether to adopt the new statement
early. The Statement will require the Corporation to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value of derivatives will either be
offset against the change in the fair value of the hedged assets, liabilities,
or firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Because the Corporation does not utilize derivatives as defined, management
does not anticipate that the adoption of the new Statement will have a
significant effect on VCFC's earnings or financial position.
In October, 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," an amendment of FASB Statement
No. 65. Statement 65, as amended requires that, after securitization of a
mortgage loan as held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security. This
statement further amends Statement 65 to require that after the securitization
of mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other retained
interests based on ability and intent to sell or hold those investments. This
statement is effective for 1999.
Because the Corporation does participate in securitization as defined,
management does not anticipate that the adoption of the new Statement will have
a significant effect on VCFC's earnings or financial position.
Year 2000
In 1997, management of the Corporation created a steering committee and
established a Y2K Plan to prevent or mitigate adverse effects of the Y2K issue
on the Corporation and its customers. Goals of the Y2K Plan include identifying
risks, testing data processing and other systems and equipment used by the
Corporation, informing customers of Y2K issues and risks, establishing a
contingency plan for operating if Y2K issues cause important systems or
equipment to fail, implementing changes necessary to achieve Y2K compliance, and
verifying that these changes are effective. The Board of Directors reviews
progress under the plan each quarter.
Management designed the Y2K Plan to comply with the requirements for Y2K
efforts established by the Federal Reserve, the primary federal regulator of the
Corporation. The Federal Reserve also has performed Y2K examinations of the
Corporation's Y2K Plan and the Corporation's progress in implementing the plan.
Federal regulations prevent banks from disclosing the results of Y2K
examinations by banking regulators. The examinations do not represent approval
or certification of a bank or bank holding company's Y2K plans or efforts.
Virginia Commonwealth Financial Corporation 18 1998 Annual Report
<PAGE>
[logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation continues to implement the Y2K Plan. The Corporation has met
its Y2K goals to date and believes that it will continue to meet the goals of
the Y2K Plan. By December 31, 1998, the Corporation had performed risk
assessments, had assessed the Y2K preparedness of suppliers of data processing
services to the Corporation and of large customers, had implemented its customer
awareness program, had begun developing its Y2K contingency plan, and was in the
process of implementing necessary changes in hardware and software. Some
additional steps must be taken to achieve Y2K compliance, including some steps
that may not yet be identified. Elements of the Y2K Plan, such as risk
assessments, customer communications, and testing of systems and equipment, are
processes that are ongoing. The Y2K contingency plan calls for the Corporation
to manually process bank transactions and to use other data processing methods,
in the event that Y2K efforts of the Corporation and its data services providers
are not successful. The Corporation must assure that the computer systems it
uses to process transactions are Y2K ready in order to avoid these disruptions.
Management believes that the cost of resolving Y2K issues related to the
Corporation's computer programs and those used by its suppliers of significant
data processing services will not be material to the Corporation's business,
operations, liquidity, capital resources, or financial condition, based on
information developed to date and communications from data processing suppliers.
The Corporation expects that its total cash outlay for Y2K compliance in 1998
and future years will be less than $250,000. This amount includes approximately
$200,000 in costs of software and equipment upgrades or replacements and $50,000
in miscellaneous expenses, including training, consulting, and testing costs.
Approximately $125,000 of these costs were incurred in 1998.
The Corporation expects that the total effect on net income, after tax
deductions, of these Y2K expenditures and the accelerated writeoff of replaced
software and equipment will be less than $100,000, and that the effect on net
income for the year ended December 31, 1998 of these costs was approximately
$25,000. These amounts do not include allocations of compensation and other
costs of the Corporation's regular personnel. The Corporation is funding its Y2K
expenditures through continuing operations.
The Corporation continues to assess its risk from other environmental
factors over which it has little direct control, such as electrical power
supply, and voice and data transmission. Because of the nature of these external
factors, however, the Corporation is not actively engaged in any repair,
replacement, or testing efforts for these services. Based on its current
assessments and remediation plans, which are based in part on certain
representations of third-party services, the Corporation does not expect that it
will experience a significant disruption of its operations as a result of the
change to the new millennium. Although the Corporation has no reason to conclude
that a failure will occur, the most reasonably likely worst-case Year 2000
scenario would entail a disruption or failure of the Corporation's power
suppliers' or voice and data transmission supplier's capability to provide power
or data transmission services to a Computer system or a facility. If such a
failure were to occur, the Corporation would implement a contingency plan. While
it is impossible to quantify the impact of such a scenario, the most reasonable
likely worst-case scenario would entail diminishment of service levels, some
customer inconvenience, and additional, as yet understood, costs associated with
the implementation of the contingency plan.
Although the Corporation has completed an assessment of Y2K effects on its
current commercial lending and other customers, the actual effects on
individual, corporate and governmental customers of the Corporation and on
governmental authorities that regulate the Corporation and its subsidiaries, and
any resulting consequences to the Corporation, cannot be determined with any
assurance. The Corporation's belief that it will achieve Y2K compliance are
based on a number of assumptions and on statements made by third parties, and
are subject to uncertainty. The Corporation also is not able to predict the
effects, if any, on the Corporation, financial markets or society in general of
the public's reaction to Y2K. Because of this uncertainty and reliance upon
assumptions and statements of third parties, the Corporation cannot be assured
that the results of its Y2K Plan will be achieved. Management believes, however,
that the Corporation will be able to accomplish its Y2K goals and be able to
continue providing financial services to its customers into the next Century.
Virginia Commonwealth Financial Corporation 19 1998 Annual Report
<PAGE>
[logo]
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 9,764,707 $ 10,461,974
Federal funds sold 5,916,598 4,511,492
Securities (market value: 1998, $105,678,026;
1997, $99,627,525) 104,943,459 98,962,999
Loans held for sale 5,399,884 3,043,853
Loans, net 212,281,978 186,333,594
Bank premises and equipment, net 9,232,997 7,825,865
Interest receivable 2,536,007 2,538,455
Other real estate owned 758,901 460,077
Other assets 1,978,513 1,568,365
- ----------------------------------------------------------------------------------------------
Total assets $352,813,044 $315,706,674
- ----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 45,370,092 $ 35,194,783
Savings and interest-bearing demand deposits 105,856,672 92,929,218
Time deposits 155,287,997 140,355,868
- ----------------------------------------------------------------------------------------------
Total deposits $306,514,761 $268,479,869
Federal funds purchased and securities sold under
agreement to repurchase 1,305,031 3,301,037
Other short-term borrowings 1,081,406 3,838,000
Interest payable 1,206,833 1,103,584
Other liabilities 1,609,849 1,200,360
Note payable 100,000 --
Commitments and contingent liabilities -- --
- ----------------------------------------------------------------------------------------------
Total liabilities $311,817,880 $277,922,850
- ----------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, no par value, 1,000,000 shares authorized,
no shares issued and outstanding $ -- $ --
Common stock, par value $2.50 per share; 3,000,000 shares
authorized; 1998, 2,041,764 shares issued and outstanding;
1997, 2,034,245 shares issued and outstanding 5,104,411 5,085,613
Capital surplus 7,738,492 7,467,554
Retained earnings 27,724,435 25,125,926
Accumulated other comprehensive income 427,826 104,731
- ----------------------------------------------------------------------------------------------
Total stockholders' equity $ 40,995,164 $ 37,783,824
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $352,813,044 $315,706,674
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Virginia Commonwealth Financial Corporation 20 1998 Annual Report
<PAGE>
[logo]
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $18,690,900 $16,951,013 $15,248,215
Interest on investment securities:
Taxable 1,035,189 1,118,820 842,368
Nontaxable 866,066 709,316 659,983
Interest and dividends on securities
available for sale:
Taxable 3,940,833 4,105,621 4,291,402
Nontaxable 89,550 -- --
Dividends 92,330 68,532 23,988
Interest income on federal funds sold 690,528 396,453 552,979
Interest on deposits in banks -- -- 54,523
- ----------------------------------------------------------------------------------------------
Total interest income $25,405,396 $23,349,755 $21,673,458
- ----------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits $11,241,167 $10,276,990 $9,931,852
Interest on federal funds purchased
and securities sold under agreement
to repurchase 73,077 106,317 60,781
Interest on other short-term borrowings 130,062 126,737 108,393
Interest on note payable 2,088 -- 121,858
- ----------------------------------------------------------------------------------------------
Total interest expense $11,446,394 $10,510,044 $10,222,884
- ----------------------------------------------------------------------------------------------
Net interest income $13,959,002 $12,839,711 $11,450,574
Provision for loan losses 831,107 491,000 489,500
- ----------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses $13,127,895 $12,348,711 $10,961,074
- ----------------------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts $ 1,077,828 $1,012,899 $ 961,731
Fees for trust services 519,818 408,620 371,065
Investment fee income 148,019 77,065 1,155
Other operating income 229,462 197,519 160,542
Gains (losses) on sales of securities
available for sale 237,094 (3,741) (32,375)
(Losses) on sale of other real estate owned (82,342) (28,669) (54,943)
Fees on mortgage loans sold 553,697 128,083 45,359
- ----------------------------------------------------------------------------------------------
Total other income $ 2,683,576 $1,791,776 $1,452,534
- ----------------------------------------------------------------------------------------------
Other Expenses
Compensation and employee benefits $ 5,262,828 $4,529,167 $4,114,642
Net occupancy expense 718,299 593,537 502,931
Supplies and equipment expenses 1,205,439 1,106,543 887,297
Merger and merger related expenses 443,000 -- --
Other operating expenses 2,241,557 2,000,828 1,750,440
- ----------------------------------------------------------------------------------------------
Total other expenses $ 9,871,123 $8,230,075 $7,255,310
- ----------------------------------------------------------------------------------------------
Income before income taxes $ 5,940,348 $5,910,412 $5,158,298
Income tax expense 1,749,828 1,760,121 1,448,466
- ----------------------------------------------------------------------------------------------
Net income $ 4,190,520 $4,150,291 $3,709,832
Earnings per Share, basic and
assuming dilution $ 2.06 $ 2.05 $ 1.82
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Virginia Commonwealth Financial Corporation 21 1998 Annual Report
<PAGE>
[logo]
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Other
Common Capital Retained Comprehensive Comprehensive
Stock Surplus Earnings Income Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 5,091,446 $ 6,482,553 $ 21,212,297 $ (18,401) $ -- $ 32,767,895
Net income -- -- 3,709,832 -- 3,709,832 3,709,832
Other comprehensive income net of tax:
Unrealized holding losses arising
during the period, net of tax
of $(84,822) -- -- -- -- (164,654) --
Add reclassification adjustment,
net of tax of $11,008 -- -- -- -- 21,367 --
------------
Other comprehensive income -- -- -- (143,287) (143,287) (143,287)
------------
Comprehensive income -- -- -- -- $ 3,566,545
============
Cash dividends -- -- (1,394,054) -- (1,394,054)
Issuance of common stock under
dividend reinvestment plan 38,601 251,432 -- -- 290,033
Acquisition of common stock (58,620) (404,074) -- -- (462,694)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 5,071,427 $ 6,329,911 $ 23,528,075 $ (161,688) $ -- $ 34,767,725
Net income -- -- 4,150,291 -- 4,150,291 4,150,291
Other comprehensive income net of tax:
Unrealized holding gains arising
during the period,
net of tax of $135,975 -- -- -- -- 263,950 --
Add reclassification adjustment,
net of tax of $1,272 -- -- -- -- 2,469 --
------------
Other comprehensive income -- -- -- 266,419 266,419 266,419
------------
Comprehensive income -- -- -- -- $ 4,416,710
============
Cash dividends -- -- (1,552,440) -- (1,552,440)
Issuance of common stock under
dividend reinvestment plan 36,425 293,313 -- -- 329,738
Acquisition of common stock (22,239) (155,670) -- -- (177,909)
Discretionary transfer -- 1,000,000 (1,000,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 5,085,613 $ 7,467,554 $ 25,125,926 $ 104,731 $ -- $ 37,783,824
Net income -- -- 4,190,520 -- 4,190,520 4,190,520
Other comprehensive income net of tax:
Unrealized holding gains arising
during the period,
net of tax of $247,055 -- -- -- -- 479,577 --
Less reclassification adjustment,
net of tax of ($80,612) -- -- -- -- (156,482) --
------------
Other comprehensive income -- -- -- 323,095 323,095 323,095
------------
Comprehensive income -- -- -- -- $ 4,513,615 --
============
Cash dividends -- -- (1,592,011) -- (1,592,011)
Issuance of common stock under
dividend reinvestment plan 18,798 270,938 -- -- 289,736
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 5,104,411 $ 7,738,492 $ 27,724,435 $ 427,826 $ 40,995,164
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Virginia Commonwealth Financial Corporation 22 1998 Annual Report
<PAGE>
[logo]
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 4,190,520 $ 4,150,291 $ 3,709,832
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 778,514 696,008 624,652
Provision for loan losses 831,107 491,000 489,500
Deferred tax expense (benefit) (139,573) (76,769) 93,942
Pension (income) expense -- 33,291 (24,762)
Loss on other real estate owned 82,342 28,669 54,943
(Gain) on sale of equipment -- (12,988) --
(Gain) loss on sale of securities
available for sale (237,094) 3,741 32,375
Fees on loans sold (553,697) (128,083) (45,539)
Proceeds from sale of mortgage loans 48,928,802 20,449,244 10,860,908
Purchase of loans for sale (48,375,105) (20,321,161) (10,815,369)
Amortization of security premiums and
accretion of discounts, net 65,006 (20,438) (56,615)
Amortization of organization expenses 14,400 2,800 --
Changes in assets and liabilities:
(Increase) decrease in interest receivable 2,448 54,760 (91,203)
(Increase) decrease in other assets (436,123) 411,387 (389,952)
Increase in interest payable 103,249 61,328 82,743
Increase in other liabilities 409,489 161,951 192,274
- ----------------------------------------------------------------------------------------------
Net cash provided by operating
activities $ 5,664,285 $ 5,985,031 $ 4,717,729
- ----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Decrease in interest-bearing deposits
in other banks $ -- $ -- $ 2,254,764
Proceeds from sale of securities
available for sale 12,030,105 5,497,656 5,966,508
Proceeds from maturities and principal
payments of investment securities 5,157,187 8,925,000 7,988,601
Proceeds from maturities and principal
payments of securities available for sale 37,838,957 18,353,449 34,071,985
Purchase of investment securities (11,483,544) (12,111,542) (11,347,040)
Purchase of securities available for sale (48,861,539) (19,329,415) (38,037,449)
Proceeds from sale of fixed assets -- 16,903 --
Purchase of premises and equipment (2,185,646) (1,305,231) (1,942,577)
Additions to other real estate (65,001) -- --
Increase in cash surrender value
of life insurance (15,295) (92,354) (82,578)
Proceeds from sale of other real estate 431,777 137,900 193,712
Net (increase) in loans (29,883,464) (25,742,908) (18,172,829)
- ----------------------------------------------------------------------------------------------
Net cash (used in) investing
activities $(37,036,463) $(25,650,542) $(19,106,903)
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Virginia Commonwealth Financial Corporation 23 1998 Annual Report
<PAGE>
[logo]
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase in demand, money market and
savings deposits $24,972,100 $6,355,625 $ 5,412,794
Net increase in certificates of deposit 13,062,792 8,890,981 13,473,726
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase (1,996,006) 2,101,037 --
Net increase (decrease) in other
short-term borrowings (2,756,594) 389,146 730,900
Principal payments on note payable -- -- (1,675,000)
Issuance of note payable 100,000 -- --
Issuance of common stock - dividend
reinvestment plan 289,736 329,738 290,033
Acquisition of common stock -- (177,909) (462,694)
Cash dividends paid (1,592,011) (1,552,440) (1,394,054)
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities $32,080,017 $16,336,178 $16,375,705
- ----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents $ 707,839 $(3,329,333) $ 1,986,531
Cash and Cash Equivalents
Beginning 14,973,466 18,302,799 16,316,268
- ----------------------------------------------------------------------------------------------
Ending $15,681,305 $14,973,466 $18,302,799
- ----------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $11,343,145 $10,453,157 $10,126,963
- ----------------------------------------------------------------------------------------------
Income taxes $ 2,034,540 $1,448,693 $1,502,277
- ----------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash
Investing Activities
Other real estate acquired in settlement
of loans $ 747,942 $ 215,297 $ 643,073
- ----------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities
available for sale $ 489,538 $ 403,666 $ (217,102)
- ----------------------------------------------------------------------------------------------
Other real estate disposed of through
loan proceeds $ -- $ -- $ 108,338
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Virginia Commonwealth Financial Corporation 24 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
General
Virginia Commonwealth Financial Corporation (the "Corporation") is a
Virginia multi-bank holding company headquartered in Culpeper, Virginia. The
Corporation owns Second Bank & Trust and its subsidiary, Second Services Company
as well as Virginia Heartland Bank and its subsidiary, Virginia Heartland
Service Corporation. Second Bank & Trust and Virginia Heartland Bank jointly own
VHB Mortgage Company. Virginia Heartland Bank and its subsidiary were merged
into the Corporation in a pooling of interests transaction consummated on
October 9, 1998, which is more fully described in Note 2 to the Consolidated
Financial Statements. Concurrent with the merger, Second National Financial
Corporation changed its name to Virginia Commonwealth Financial Corporation. The
consolidated statements include the accounts of the Corporation and its
wholly-owned subsidiaries. All significant intercompany accounts have been
eliminated.
The Corporation, through its member banks, provide a full array of banking
services through nine retail offices serving the counties of Culpeper, Orange,
Madison, Rockingham, Spotsylvania and the City of Fredericksburg. Among such
services are those traditionally offered by banks including commercial and
consumer demand and time deposit accounts, mortgage, commercial and consumer
loans and a network of automated transaction locations including thirteen ATM's
and phone banking. Nontraditional banking services include a full array of trust
and investment services.
Basis of Presentation
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to accepted practice within the
banking industry. The following is a description of the more significant of
those policies and practices.
Risks and Uncertainties
In its normal course of business, the Corporation encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Corporation
is subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more rapidly or on a different basis than its
interest-earning assets. Credit risk is the risk of default on the Corporation's
loan portfolio that results from the borrowers' inability or unwillingness to
make contractually required payments. Market risk reflects changes in the value
of collateral underlying loans receivable and the valuation of real estate held
by the Corporation.
The determination of the allowance for loan losses and the valuation of
real estate are based on estimates that are particularly susceptible to
significant changes in the economic environment and market conditions.
Management believes that, as of December 31, 1998, the allowance for loan losses
and the valuation of real estate are adequate based on information currently
available. A worsening or protracted economic decline or substantial increase in
interest rates, would increase the likelihood of losses due to credit and market
risks and could create the need for substantial increases to the allowance for
loan losses.
The Corporation is subject to the regulations of various regulatory agencies
which can change significantly from year to year. In addition, the Corporation
undergoes periodic examinations by regulatory agencies which may subject it to
further changes based on the regulators' judgments about information available
to them at the time of their examinations.
Securities
Securities are classified in three categories and accounted for as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt securities the
Corporation has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost
adjusted for amortization of premium and accretion of discount, computed
by the interest method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and equity
securities that the Corporation intends to hold for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security
classified as available
Virginia Commonwealth Financial Corporation 25 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Corporation's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale
are carried at fair value. Unrealized gains or losses are reported as
increases or decreases in stockholders' equity, net of the related
deferred tax effect. Realized gains or losses, determined on the basis of
the cost of specific securities sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized and
unrealized gains and losses on trading account assets are included in
interest income on trading account securities. The Corporation had no
trading securities at December 31, 1998 and 1997.
Loans
Loans are shown on the balance sheets net of unearned discounts and the
allowance for loan losses.
Interest is computed by methods which result in level rates of return on
principal. Loans are charged off when in the opinion of management they are
deemed to be uncollectible after taking into consideration such factors as the
current financial condition of the customer and the underlying collateral and
guarantees.
Impairment of loans that have been separately identified for evaluation is
to be measured based on the present value of expected future cash flows or,
alternatively, the observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent (that is, if
repayment of those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is probable, the
measure of impairment is to be based on the fair value of the collateral.
The Corporation considers all consumer installment loans and residential
mortgage loans to be homogeneous loans. These loans are not subject to the above
impairment provisions. A loan is considered impaired when it is probable that
the Corporation will be unable to collect all principal and interest amounts
according to the contractual terms of the loan agreement. Factors involved in
determining impairment include, but are not limited to, expected future cash
flows, financial condition of the borrower, and the current economic conditions.
A performing loan may be considered impaired, if the factors above indicate a
need for impairment. A loan on nonaccrual status may not be impaired if in the
process of collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less than 5% of the
required principal and interest payment generally does not indicate an
impairment situation, if in management's judgment the loan will be paid in full.
Loans that meet the regulatory definitions of doubtful or loss generally qualify
as an impaired loan. Charge-offs for impaired loans occur when the loan, or
portion of the loan is determined to be uncollectible, as is the case for all
loans.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgement, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowances relating to impaired
loans are charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Virginia Commonwealth Financial Corporation 26 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Premises and equipment are depreciated over their estimated useful
lives; leasehold improvements are amortized over the lives of the respective
leases or the estimated useful life of the leasehold improvement, whichever is
less. Depreciation and amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs
of replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating loss
carryforwards, and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of the changes in tax laws and rates on
the date of enactment.
Retirement Plans
The Corporation has a noncontributory, defined benefit pension plan covering
certain employees meeting certain age and service requirements. The Corporation
computes the net periodic pension cost of the plan in accordance with FASB No.
87, "Employers' Accounting for Pensions."
In 1998, the Corporation adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This pronouncement does not change the measurement or recognition of
amounts recognized in the Corporation's financial statements applicable to its
defined benefit plan. Statement No. 132 revises the existing disclosure
requirements by standardizing the disclosure requirements for pensions requiring
certain additional information on changes in the benefit obligations and fair
values of plan assets, and eliminating certain disclosures.
Earnings Per Share
Earnings per common share has been computed on the basis of the
weighted-average number of common shares outstanding during each period
presented.
Weighted average shares were 2,038,186, 2,027,193 and 2,034,583 for the
years ended 1998, 1997 and 1996, respectively. The Corporation had no potential
common stock as of December 31, 1998, 1997 and 1996.
Nonrefundable Loan Fees and Costs
Loan origination and commitment fees are being deferred and amortized as an
adjustment of the related loan's yield.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Trust Division
Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Corporation and are not included in the
accompanying consolidated financial statements.
Other Real Estate
Real estate acquired through foreclosure is carried at the lower of cost or
fair market value less estimated selling costs.
Advertising
The Corporation follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense of $189,735, $190,890 and $90,222 were
incurred in 1998, 1997 and 1996, respectively.
Virginia Commonwealth Financial Corporation 27 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
As of January 1, 1998, the Corporation adopted FASB No. 130, "Reporting
Comprehensive Income." FASB No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Corporation's net income or stockholders'
equity. FASB No. 130 requires other comprehensive income to include unrealized
gains (losses) on available for sale securities, which prior to adoption were
reported separately in stockholders' equity. The December 31, 1997 and 1996
financial statements have been reclassified to conform to the requirements of
FASB No. 130.
Note 2. Business Combination
On October 9, 1998, Second National Financial Corporation (SNFC) effected a
business combination with Virginia Heartland Bank (VHB) by exchanging 533,716
shares of its common stock for all of the stock of VHB. The principal business
of VHB is community banking. On the effective date of the business combination,
SNFC changed its name to Virginia Commonwealth Financial Corporation. The
combination has been accounted for as a pooling of interests and, accordingly,
all prior financial statements have been restated to include VHB. The results of
operations of the separate companies for periods prior to the combination are
summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Total Total Net
(thousands) Assets Income Income
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Nine months ended September 30, 1998:
SNFC $ 239,437 $14,283 $2,586
VHB 104,480 6,353 664
Year ended December 31, 1997:
SNFC $ 222,070 $17,136 $3,245
VHB 93,740 7,938 906
</TABLE>
In connection with the business combination, the Corporation recorded after
tax changes to noninterest expenses of $443,000 (22(cent) per share) for direct
and merger related costs. Merger transaction costs consisted primarily of fees
for investment bankers, attorneys, accountants and financial printers. Merger
related costs consisted of adjustments to supplemental retirement benefits for
certain senior officers.
Note 3. Cash and Due From Banks
The Corporation is required to maintain reserve balances with the Federal
Reserve Bank. For the final weekly reporting period in the years ended December
31, 1998 and 1997, the aggregate amounts of daily average required balances were
approximately $1,581,000 and $1,774,000, respectively.
Virginia Commonwealth Financial Corporation 28 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Securities
The amortized cost and fair value of securities being held to maturity as of
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Obligations of states and
political subdivisions $22,057,578 $739,706 $ (5,139) $22,792,145
- --------------------------------------------------------------------------------
1997
U.S. Government agencies $20,040,630 $166,266 $(13,379) $20,193,517
Obligations of states and
political subdivisions 14,919,710 515,180 (3,541) 15,431,349
- --------------------------------------------------------------------------------
$34,960,340 $681,446 $(16,920) $35,624,866
- --------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of securities being held to maturity as
of December 31, 1998, by contractual maturity are shown below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 889,814 $ 910,375
Due after one year through five years 6,601,616 6,810,672
Due after five years through ten years 13,875,083 14,333,992
Due after ten years 691,065 737,106
- ------------------------------------------------------------------------------
$22,057,578 $22,792,145
- ------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
U.S. Treasury securities $21,021,627 $ 296,032 $ -- $21,317,659
U.S. Government agencies 29,050,265 188,057 (48,030) 29,190,292
State and political subdivisions 3,391,123 65,699 -- 3,456,822
Corporate bonds 9,598,522 76,374 (46,849) 9,628,047
Mortgage-backed securities 17,323,949 155,133 (38,197) 17,440,885
Equity securities 495,000 -- -- 495,000
Other 1,357,176 -- -- 1,357,176
- ---------------------------------------------------------------------------------------
$82,237,662 $ 781,295 $(133,076) $82,885,881
1997
U.S. Treasury securities $18,946,358 $ 84,384 $ (5,572) $19,025,170
U.S. Government agencies 29,988,787 60,982 (127,225) 29,922,544
State and political subdivisions 1,008,630 -- -- 1,008,630
Corporate bonds 3,502,325 8,605 -- 3,510,930
Mortgage-backed securities 9,715,620 137,510 -- 9,853,130
Equity securities 278,504 -- -- 278,504
Other 403,751 -- -- 403,751
- ---------------------------------------------------------------------------------------
$63,843,975 $ 291,481 $(132,797) $64,002,659
- ---------------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 29 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities available for sale as of
December 31, 1998, by contractual maturity are shown below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Amortized Fair
Cost Value
- -----------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $14,992,047 $15,051,560
Due after one year through five years 38,177,302 38,562,953
Due after five years through ten years 10,387,188 10,473,307
Other 1,357,176 1,357,176
Mortgage-backed securities 17,323,949 17,440,885
- -----------------------------------------------------------------------
$82,237,662 $82,885,881
- -----------------------------------------------------------------------
</TABLE>
As permitted under FASB No. 115, Virginia Heartland Bank transferred
securities from the held to maturity category to the available for sale
category. These securities had an amortized cost of $19,504,568 and resulting in
an unrealized gain of $225,557.
There were no sales of securities being held to maturity during 1998 and
1997.
Proceeds from sales of securities available for sale during 1998, 1997 and
1996 were $12,030,105, $5,497,656, and $5,966,508. Gross realized gains of
$239,828, $-0- and $-0- and gross realized losses of $2,734, $3,741 and $32,375
were recognized on those sales.
Securities with amortized cost of $17,619,198 and $21,863,933 at December
31, 1998 and 1997, respectively, were pledged to secure public deposits and for
other purposes.
Note 5. Loans
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------
(thousands) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
Construction and land development $ 20,330 $ 20,892
Farm land 1,143 1,297
1-4 family residential 85,086 78,184
Multifamily nonresidential and junior liens 64,039 47,085
Loans to farmers (except secured by real estate) 144 455
Commercial and industrial loans 17,536 17,324
Consumer and installment loans 22,504 19,980
All other loans 3,981 3,256
- ----------------------------------------------------------------------------
Total loans $214,763 $188,473
Less: Allowance for loan losses 2,286 2,010
Unearned loan fees 195 129
- ----------------------------------------------------------------------------
Loans, net $212,282 $186,334
- ----------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 30 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------
(thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,010 $1,873 $1,974
Recoveries 92 81 61
Provision for loan losses 831 491 490
Charge-offs (647) (435) (652)
- -------------------------------------------------------------------------------
Balance at end of year $ 2,286 $2,010 $1,873
- -------------------------------------------------------------------------------
</TABLE>
Information about impaired loans as of and for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Impaired loans for which an
allowance has been provided $378,117 $680,666
Impaired loans for which no
allowance has been provided 233,792 258,890
- -------------------------------------------------------------------------
Total impaired loans $611,909 $939,556
- -------------------------------------------------------------------------
Allowance provided for
impaired loans, included in
the allowance for loan losses $ 85,626 $178,964
- -------------------------------------------------------------------------
Average balance in impaired loans $530,559 $986,275
- -------------------------------------------------------------------------
Interest income recognized $ 41,371 $ 74,551
- -------------------------------------------------------------------------
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $386,618 and $256,883 at December 31, 1998 and 1997. If interest on
these loans had been accrued, such income would have approximated $85,235 and
$40,953, respectively.
Note 7. Related Party Transactions
The Securities and Exchange Commission requires disclosure of loans which
exceed $60,000 to Executive Officers and Directors of the Corporation or to
their associates. Such loans were made on substantially the same terms as those
prevailing for comparable transactions with similar risk. At December 31, 1998
and 1997, these loans totaled $3,327,019 and $3,246,671, respectively. During
1998, total principal additions were $4,728,806 and total principal payments
were $4,648,458.
Note 8. Bank Premises and Equipment, Net
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Bank premises $ 6,659,649 $ 5,993,540
Leasehold improvements 970,248 970,248
Furniture and equipment 5,212,623 4,521,655
Construction in progress 829,574 --
- -----------------------------------------------------------------------------
$13,672,094 $11,485,443
Less accumulated depreciation and amortization 4,439,097 3,659,578
- -----------------------------------------------------------------------------
$ 9,232,997 $ 7,825,865
- -----------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense amounted to $778,514, $696,008 and
$624,652 for 1998, 1997 and 1996, respectively.
Virginia Commonwealth Financial Corporation 31 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Deposits
The aggregate amount of jumbo time deposits, each with a minimum of
$100,000, was approximately $29,032,739 and $26,965,661 at December 31, 1998 and
1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 $93,470,560
2000 35,100,047
2001 11,159,936
2002 6,833,819
2003 8,710,829
2004 and thereafter 12,806
----------------------------------------------------
$155,287,997
----------------------------------------------------
Note 10. Other Borrowings
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Second Bank
& Trust has an agreement with the Federal Reserve Bank where it can borrow funds
deposited by customers. This agreement calls for variable interest and is
payable on demand. U. S. Government securities are pledged as collateral. The
maximum amount available under this agreement is $1,000,000. The balance
outstanding as of December 31, 1998 and 1997 was $227,405 and $1,000,000,
respectively.
Other short-term borrowings consists of Master Promissory Notes with
Corporate customers. These notes bear a variable interest rate and are payable
on demand.
Note 11. Note Payable
Second Bank & Trust issued a note payable, secured by property in Orange,
Virginia with a face amount of $100,000. The note is payable in two annual
installments of $50,000 beginning on January 2, 1999. The note bears interest of
6% per annum. At December 31, 1998, the unpaid balance of this note payable was
$100,000. Aggregate maturities are as follows:
1999 $ 50,000
2000 50,000
---------------------------------------------------
$100,000
---------------------------------------------------
Note 12. Employee Benefit Plans
Second Bank & Trust maintains a profit sharing plan for all eligible
employees. Amounts charged to operations were $225,000, $205,000 and $175,000 in
1998, 1997 and 1996, respectively.
Eligible employees of Second Bank & Trust also participate in an Employee
Stock Ownership Plan (ESOP) and 401(k) Plan. Contributions to these plans are
determined by the Board of Directors in accordance with Internal Revenue Service
regulations. Such contributions are limited to a percentage of the annual
compensation of all employees covered by the plans. The Bank's cash contribution
to the ESOP was $63,027, $64,420 and $54,965 in 1998, 1997 and 1996,
respectively. The Bank's cash contribution to the 401(k) Plan was $62,973,
$45,980 and $45,869 in 1998, 1997 and 1996, respectively.
Eligible employees of Virginia Heartland Bank participate in a 401(k) plan.
Contributions to the plan are determined by the Bank's Board of Directors in
accordance with Internal Revenue Service regulations. The Bank's contribution to
the 401(k) plan was $49,185, $46,663 and $43,935 in 1998, 1997 and 1996,
respectively.
Second Bank & Trust also has a noncontributory, defined benefit pension plan
covering substantially all employees. The benefits are based on years of service
and level of compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the future.
Virginia Commonwealth Financial Corporation 32 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about the plan follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning $2,494,895 $ 2,429,721
Service cost 64,747 55,962
Interest cost 167,832 162,952
Actuarial loss 260,261 53,377
Benefits paid (198,020) (207,117)
- ----------------------------------------------------------------------------------------------
Benefit obligation, ending $2,789,715 $2,494,895
- ----------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets, beginning $3,309,339 $2,821,152
Actual return on plan assets 899,666 695,304
Benefits paid (198,020) (207,117)
- ----------------------------------------------------------------------------------------------
Fair value of plan assets, ending $4,010,985 $3,309,339
- ----------------------------------------------------------------------------------------------
Funded status $1,221,270 $ 814,444
Unrecognized net actual gain (991,794) (593,652)
Unrecognized net obligation at transition (215,013) (258,016)
Unrecognized prior service cost 519,123 566,855
- ----------------------------------------------------------------------------------------------
Accrued benefit included in other assets $ 533,586 $ 529,631
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost $ 64,747 $ 55,962 $ 71,878
Interest cost 167,832 162,952 116,064
Expected return on plan assets (224,843) (190,352) (217,433)
Amortization of prior service cost 47,732 47,732 47,732
Amortization of net obligation at transition (43,003) (43,003) (43,003)
Recognized net actuarial gain (16,420) -- --
- ----------------------------------------------------------------------------------------------
Net periodic benefit cost (income) $ (3,955) $ 33,291 $ (24,762)
- ----------------------------------------------------------------------------------------------
Weighted-Average Assumptions
as of December 31
Discount rate 7.00% 7.00% 7.00%
Expected return on plan assets 7.00% 7.00% 7.00%
Rate of compensation increase 5.00% 5.00% 5.00%
</TABLE>
Note 13. Deferred Compensation
Virginia Heartland Bank has entered into a deferred compensation agreement
with the Corporation's Chairman which provides benefits payable at age sixty, or
upon his later retirement from the Corporation. The Bank also has a deferred
compensation agreement with the President which provides benefits payable at age
sixty-five. Under both agreements, circumstances may permit payments to be made
to surviving spouses. The present value of the estimated liability under the
agreements is being accrued using a discount rate of 10% and 7.5%, respectively,
ratably over the remaining years to the date when the employees are first
eligible for the benefits. The deferred compensation charged to expense totaled
$150,682, $39,128 and $64,421 for the three years ended December 31, 1998,
respectively.
Virginia Commonwealth Financial Corporation 33 1998 Annual Report
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Second Bank and Trust has a deferred compensation plan whereby certain
senior officers as selected by the Board of Directors may defer receipt of a
certain amount of pre-tax income and cash incentive compensation. The Bank
provides a matched contribution of 5% of base salary for the President, and as
determined from time to time by the Board for other executives. The deferred
compensation charged to expense totaled $7,250, $6,750 and $-0- for the three
years ended December 31, 1998, respectively.
Note 14. Income Taxes
Net deferred tax assets consist of the following components as of December
31, 1998 and 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $483,497 $ 413,525
Unearned loan fees -- 52,901
Nonaccrual loan interest 18,667 27,504
Deferred compensation 205,706 123,500
Prepaid insurance commission 17,067 14,957
Other 28,159 1,182
- ----------------------------------------------------------------------------------------------
$753,096 $ 633,569
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accrued pension asset $180,037 $ 180,037
Premises and equipment 185,311 209,086
Securities available for sale 220,393 53,953
Other 12,978 9,249
- ----------------------------------------------------------------------------------------------
$598,719 $ 452,325
- ----------------------------------------------------------------------------------------------
$154,377 $ 181,244
- ----------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes charged to operations for the years ended
December 31, 1998, 1997 and 1996, consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense $1,889,401 $1,836,890 $1,354,524
Deferred tax expense (benefit) (139,573) (76,769) 93,942
- ----------------------------------------------------------------------------------------------
$1,749,828 $1,760,121 $1,448,466
- ----------------------------------------------------------------------------------------------
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
December 31, 1998, 1997 and 1996, due to the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $2,019,718 $2,009,540 $1,753,821
Increase (decrease) in income
taxes resulting from:
Tax exempt interest income (323,852) (251,519) (240,051)
Merger costs 108,970 -- --
Other, net (55,008) 2,100 (65,304)
- ----------------------------------------------------------------------------------------------
$1,749,828 $1,760,121 $1,448,466
- ----------------------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 34 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Commitments and Contingent Liabilities
Virginia Heartland Bank rents its principal location in Fredericksburg from
a related party under an operating lease. In 1997, the Bank exercised a renewal
option extending the expiration period to March 31, 2008. The annual rent under
the renewal option is $60,900 with annual increases of 3% per year for each year
of the renewal term commencing April 1, 1999. The Bank has an additional
ten-year renewal option that remains unexercised under the terms of the lease.
Virginia Heartland Bank also leases a branch site in Spotsylvania County.
The lease requires monthly lease payments of $2,892 during the first five years,
$3,167 per month during the next five years, and $3,298 per month during the
remaining twenty years. The lease expires on January 31, 2026.
Total rent expense was $91,558, $76,700 and $53,567 for 1998, 1997 and 1996,
respectively, and was included in occupancy expense.
The following is a schedule by year of future minimum lease requirements
required under the long-term noncancellable lease agreements:
1999 $ 96,970
2000 101,863
2001 103,788
2002 105,769
2003 107,811
------------------------------------------------
Total $516,201
The Corporation continues to implement its Year 2000 (Y2K) Plan. The issue
is whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. The Corporation has met its Y2K goals to date and
believes that it will continue to meet the goals of the Y2K Plan. At December
31, 1998, the Corporation had performed risk assessments, assessed the Y2K
preparedness of suppliers of data processing services to the Corporation and of
large customers, had implemented its customer awareness program, had begun
developing its Y2K contingency plan, and was in the process of implementing
necessary changes in hardware and software. Some additional steps must be taken
to achieve Y2K compliance, including some steps that may not yet be identified.
In the normal course of business there are outstanding various commitments
and contingent liabilities, which are not reflected in the accompanying
financial statements. Management does not anticipate any material losses as a
result of these transactions.
See Note 18 with respect to financial instruments with off-balance-sheet
risk.
Note 16. Restrictions on Transfers to Parent
Transfers of funds from the banking subsidiaries to the Parent Corporation
in the form of loans, advances and cash dividends, are restricted by federal and
state regulatory authorities. During 1998, the banking subsidiaries transferred
$2,200,000 to the Parent Corporation as working capital. As of December 31, 1998
the aggregate amount of additional unrestricted funds which could be transferred
from the banking subsidiaries to the Parent Corporation without prior regulatory
approval totalled $3,890,749 or 9.5% of the consolidated net assets.
Note 17. Dividend Reinvestment Plan
The Corporation has in effect a Dividend Reinvestment Plan which provides an
automatic conversion of dividends into common stock for enrolled stockholders.
It is based on the stock's fair market value on each dividend record date, and
allows for voluntary contributions to purchase stock.
Note 18. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is 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. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes of financial
instruments.
Virginia Commonwealth Financial Corporation 35 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
A summary of the contract or notional amount of the Corporation's exposure
to off-balance-sheet risk as of December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $42,543,440 $35,571,236
Standby letters of credit $ 2,280,097 $ 2,329,703
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates 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. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation holds property, inventory and bank deposits as collateral
supporting those commitments for which collateral is deemed necessary.
The Corporation maintains cash accounts in other commercial banks. The
amount on deposit with correspondent institutions at December 31, 1998, exceeded
the insurance limits of the Federal Deposit Insurance Corporation by $3,095,304.
Note 19. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
For securities and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. For
other securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans were estimated using discounted cash flow analyses, using
interest rates currently being offered.
Loans Held for Sale
The fair value of loans held for sale is estimated based on commitments into
which individual loans will be delivered.
Virginia Commonwealth Financial Corporation 36 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using market rates
for deposits of similar remaining maturities.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under repurchase
agreements, and other short-term borrowings maturing within 90 days approximate
their fair values. Fair values of other short-term borrowings are estimated
using discounted cash flow analyses based on the Corporation's current
incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
At December 31, 1998 and 1997, the carrying amounts and fair values of loan
commitments and stand-by letters of credit were immaterial.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(thousands) Amount Value Amount Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 15,681 $ 15,681 $ 14,973 $ 14,973
Securities 104,943 105,678 98,963 99,628
Loans held for sale 5,400 5,400 3,044 3,044
Loans, net 206,882 208,615 186,334 187,139
- -------------------------------------------------------------------------------------
Total financial assets $332,906 $335,374 $303,314 $304,784
- -------------------------------------------------------------------------------------
Financial liabilities:
Deposits $306,515 $292,885 $268,480 $254,836
Other borrowings 2,486 2,491 7,139 7,139
- -------------------------------------------------------------------------------------
Total financial liabilities $309,001 $295,376 $275,619 $261,975
- -------------------------------------------------------------------------------------
</TABLE>
Note 20. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- possibly additional discretionary
- -- actions by regulators that, if undertaken, could have a direct material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1998, that the Corporation meets all capital
adequacy requirements to which it is subject.
Virginia Commonwealth Financial Corporation 37 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Corporation's actual capital amounts and ratios are also presented in
the table. No deduction was made from capital for interest rate risk.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ----------------------------------------------------------------------------------------------
(Amount in Thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $42,854 18.37% >$18,660 >8.0% N/A
Second Bank & Trust $28,446 17.79% >$12,792 >8.0% >$15,991 >10.0%
Virginia Heartland Bank $10,180 14.69% >$5,543 >8.0% >$6,929 >10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $40,568 17.39% >$9,330 >4.0% N/A
Second Bank & Trust $26,900 16.82% >$6,396 >4.0% >$9,594 >6.0%
Virginia Heartland Bank $ 9,440 13.62% >$2,772 >4.0% >$4,157 >6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $40,568 12.14% >$13,370 >4.0% N/A
Second Bank & Trust $26,900 11.30% >$9,522 >4.0% >$11,903 >5.0%
Virginia Heartland Bank $ 9,440 8.76% >$4,311 >4.0% >$5,398 >5.0%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $39,689 20.31% >$15,633 >8.0% N/A
Second Bank & Trust $26,694 20.07% >$10,641 >8.0% >$13,302 >10.0%
Virginia Heartland Bank $ 9,471 15.50% >$4,954 >8.0% >$6,192 >10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $37,679 19.28% >$7,817 >4.0% N/A
Second Bank & Trust $25,333 19.04% >$5,321 >4.0% >$7,981 >6.0%
Virginia Heartland Bank $ 8,890 14.55% >$2,477 >4.0% >$3,715 >6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $37,679 12.26% >$12,294 >4.0% N/A
Second Bank & Trust $25,333 11.64% >$8,706 >4.0% >$10,883 >5.0%
Virginia Heartland Bank $ 8,890 9.91% >$3,588 >4.0% >$4,486 >5.0%
</TABLE>
Virginia Commonwealth Financial Corporation 38 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Parent Corporation Only Financial Statements
Virginia Commonwealth Financial Corporation (Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash held in subsidiary banks $2,669,818 $ 1,520,833
Securities available for sale 1,526,453 2,008,630
Investment in subsidiaries 36,750,027 34,282,034
Income taxes receivable 64,000 45,535
Accrued interest receivable 28,542 21,035
Due from subsidiaries 854,000 2,753,757
Other assets 10,317 --
- ----------------------------------------------------------------------------------
Total assets $41,903,157 $40,631,824
- ----------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Short-term borrowings $ 854,000 $ 2,838,000
Other liabilities 53,993 10,000
- ----------------------------------------------------------------------------------
Total liabilities $ 907,993 $ 2,848,000
- ----------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock $ -- $ --
Common stock 5,104,411 5,085,613
Capital surplus 7,738,492 7,467,554
Retained earnings 27,724,435 25,125,926
Accumulated other comprehensive income 427,826 104,731
- ----------------------------------------------------------------------------------
Total stockholders' equity $40,995,164 $37,783,824
- ----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $41,903,157 $40,631,824
- ----------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 39 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Virginia Commonwealth Financial Corporation (Parent Corporation Only)
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries $2,200,000 $4,853,656 $1,185,209
Interest and dividends on securities
available for sale:
Taxable 12,015 -- --
Nontaxable 78,551 -- --
Dividends 6,250 -- --
Interest from subsidiaries 148,209 150,281 127,083
Gain on sale of securities 10,924 -- --
- ----------------------------------------------------------------------------------------------
$2,455,949 $5,003,937 $1,312,292
- ----------------------------------------------------------------------------------------------
Expenses
Interest $ 109,431 $ 101,530 $ 84,846
Merger expenses 189,808 -- --
Miscellaneous 146,309 68,396 57,737
- ----------------------------------------------------------------------------------------------
$ 445,548 $ 169,926 $ 142,583
- ----------------------------------------------------------------------------------------------
Net income before income tax
benefit and undistributed
equity in subsidiaries $2,010,401 $4,834,011 $1,169,709
Income tax benefit 64,000 45,535 36,238
- ----------------------------------------------------------------------------------------------
Net income before undistributed
(distributed) equity in subsidiaries $2,074,401 $4,879,546 $1,205,947
Undistributed (distributed) equity
in subsidiaries 2,116,119 (729,255) 2,503,885
- ----------------------------------------------------------------------------------------------
Net income $4,190,520 $4,150,291 $3,709,832
- ----------------------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 40 1998 Annual Report
<PAGE>
[logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Virginia Commonwealth Financial Corporation (Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 4,190,520 $4,150,291 $3,709,832
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion of discounts on securities
purchased, net 2,800 -- --
Gain on sale of securities (10,924) -- --
Distributed (undistributed) earnings
of subsidiaries (2,116,119) 729,255 (2,503,885)
(Increase) in income taxes receivable (18,465) (9,297) (3,861)
(Increase) decrease in due from subsidiaries 1,854,222 (105,985) (203,216)
(Increase) in interest receivable (7,507) (21,035) --
(Increase) in other assets (10,317) -- --
Increase in other liabilities 35,364 10,000 --
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities $3,919,574 $4,753,229 $ 998,870
- ----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of securities available for sale $(2,266,470) $(2,008,630) $ --
Proceeds from sale of securities available
for sale 1,782,156 -- --
Proceeds from calls of securities available
for sale 1,000,000 -- --
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities $ 515,686 $(2,008,630) $ --
- ----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash dividends paid $(1,592,011) $(1,343,595) $(1,185,209)
Net increase (decrease) in
short-term borrowings (1,984,000) (32,000) 359,000
Issuance of common stock - dividend
reinvestment plan 289,736 329,738 290,033
Acquisition of common stock -- (177,909) (462,694)
- ----------------------------------------------------------------------------------------------
Net cash (used in) financing activities $(3,286,275) $(1,223,766) $ (998,870)
- ----------------------------------------------------------------------------------------------
Increase in cash and cash equivalents $ 1,148,985 $ 1,520,833 $ --
Cash and Cash Equivalents
Beginning 1,520,833 -- --
- ----------------------------------------------------------------------------------------------
Ending $ 2,669,818 $1,520,833 $ --
- ----------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash
Investing Activities, unrealized gain
on securities available for sale $ 25,382 $ -- $ --
- ----------------------------------------------------------------------------------------------
</TABLE>
Virginia Commonwealth Financial Corporation 41 1998 Annual Report
<PAGE>
[logo]
INDEPENDENT AUDITOR'S REPORT
[logo]
Yount, Hyde & Barbour, P.C.
Certified Public Accountants
and Consultants
To the Stockholders and Directors
Virginia Commonwealth Financial Corporation
Culpeper, Virginia
We have audited the accompanying consolidated balance sheets of Virginia
Commonwealth Financial Corporation and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the three years ended December 31, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1997 and 1996 financial
statements of Virginia Heartland Bank which was pooled with Virginia
Commonwealth Financial Corporation in 1998, as explained in Note 2 to the
consolidated financial statements, which statements are included in the restated
1997 and 1996 financial statements and reflect total assets and revenue
constituting 29.7% and 21.8%, respectively in 1997 and 29.6% and 22.9%
respectively, in 1996 of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our opinion
for 1997 and 1996 insofar as it relates to the amounts included for Virginia
Heartland Bank, is based solely upon the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Virginia Commonwealth Financial
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the three years ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
- ---------------------------------
Winchester, Virginia
January 15, 1999
Virginia Commonwealth Financial Corporation 42 1998 Annual Report
<PAGE>
[logo]
Virginia Commonwealth Financial Corporation
OFFICERS
William B. Young, Chairman & Chief Executive Officer
Jeffrey W. Farrar, Senior Vice President & Chief Financial Officer
O.R. Barham, Jr., President
Edward V. Allison, Jr., Senior Vice President & Secretary
DIRECTORS
O.R. Barham, Jr. W. Robert Jebson, Jr. Gregory L. Fisher
Marshall D. Gayheart, Jr. Thomas F. Williams, Jr. Taylor E. Gore
H. Wayne Parrish
William B. Young
SECOND BANK & TRUST
OFFICERS
Taylor E. Gore, Chairman of the Board
O.R. Barham, Jr., President & Chief Executive Officer
Jeffrey W. Farrar, Senior Vice President & Chief Financial Officer
Richard G. Frank, Senior Vice President & Senior Lender
J. Quintin Mullins, Senior Vice President & Trust Officer
George L. Pulliam, Senior Vice President & Marketing & Products Director
Georgia M. Willis, Senior Vice President & Manager of Branch Administration
Ann E.C. Homan, Vice President
Charles A. Martorana, Vice President
David W. Meadows, Vice President
John E. Meyer, Vice President
Jerry L. Raines, Vice President
Donna H. Rosson, Vice President
George J. Sutorka, Vice President
Edward M. Woodward, Vice President
Kathleen A. Brew, Assistant Vice President
William T. "Tripp" Butler, III, Assistant Vice President
Katie S. Gardner, Assistant Vice President & Controller
Richard T. Harrington, Assistant Vice President
Joseph K. Leake, Consumer Loan Officer
Peggy P. Mocarski, Assistant Vice President
Timothy B. Morris, Investment Representative
G. William Morton, IV, Assistant Vice President
William L. Pierce, Jr., Assistant Vice President & Trust Officer
C. M. Ponton, Assistant Vice President
Sallie E. Slaughter, Assistant Vice President
W. Scott Thompson, Assistant Vice President & Trust Officer
Connie M. Aylor, Branch Officer
Patricia A. Banks, Branch Officer
Joanna G. Cook, Branch Officer
Karen C. Ingram, Branch Officer
Leslie A. Whalen, Branch Officer
Steve A. Grayson, Assistant Cashier
Julia E. McMann, Assistant Cashier
Denise L. Whetzel, Assistant Cashier
DIRECTORS
Alan W. Myers
Taylor E. Gore, Chairman of the Board
Harlean Smoot
Joseph A. Troilo, Jr.
Lewis P. Armstrong
Robert Y. Button, Jr.
O. R. Barham, Jr., President and CEO
Charles K. Gyory
Christopher J. Honenberger
MADISON ADVISORY BOARD
James W. Aylor
Thomas J. Weaver
Lucian W. Clore
James C. Graves
Donald R. Eddins
HARRISONBURG ADVISORY BOARD
Donald L. Lemish
Janet T. Wendelken
Dean M. Nichols
Karen W. Wigginton
D. Kenneth Patterson
Edward M. Young
VIRGINIA HEARTLAND BANK
OFFICERS
William B. Young, Chairman & Chief Executive Officer
Edward V. Allison, Jr., President
Joyce H. Bledsoe, Assistant Secretary & Branch Officer
Gordon R. (Pete) Humes, Commercial Banking Officer
Margie L. Markham, Commercial Loan Officer
Christy F. Quesenbery, Operations & Compliance Officer
Darrell G. Swanigan, Commercial Loan Officer
DIRECTORS
William B. Young, Chairman
Edward V. Allison, Jr.
Mark S. Gardner
Christopher M. Hallberg
Jerry W. Leonard
H. Wayne Parrish
Virginia Commonwealth Financial Corporation 43 1998 Annual Report
<PAGE>
[logo]
[photo]
Virginia Heartland Bank
4700 Harrison Road
Fredericksburg, Virginia 22408
540-898-1110
1016 Charles Street
Fredericksburg, Virginia 22401
540-373-9700
5996 Plank Road
Fredericksburg, Virginia 22407
540-768-6065
Second Bank & Trust
Culpeper:
102 South Main Street
Culpeper, Virginia 22701
540-825-4800
231 Southgate Shopping Center
Culpeper, Virginia 22701
540-825-4890
717 James Madison Highway
Culpeper, Virginia 22701
540-825-4897
Madison:
U.S. Business Rt. 29 North
Madison, Virginia 22727
540-948-6811
Locust Grove:
36801 Goodwin Drive
Locust Grove, Virginia 22801
540-972-0642
Harrisonburg:
390 University Boulevard
Harrisonburg, Virginia 22801
540-434-8495
Orange:
134-136 West Main Street
Orange, Virginia 22960
540-672-7860
[photo]
Harrisonburg Branch -- Opened in 1998
[photo]
Chancellor Branch -- Opened in 1997
Virginia Commonwealth Financial Corporation 44 1998 Annual Report
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,765
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,917
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,886
<INVESTMENTS-CARRYING> 22,058
<INVESTMENTS-MARKET> 22,792
<LOANS> 214,568
<ALLOWANCE> 2,286
<TOTAL-ASSETS> 352,813
<DEPOSITS> 306,515
<SHORT-TERM> 1,081
<LIABILITIES-OTHER> 2,817
<LONG-TERM> 50
0
0
<COMMON> 5,104
<OTHER-SE> 35,891
<TOTAL-LIABILITIES-AND-EQUITY> 352,813
<INTEREST-LOAN> 18,691
<INTEREST-INVEST> 6,714
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 25,405
<INTEREST-DEPOSIT> 11,241
<INTEREST-EXPENSE> 11,446
<INTEREST-INCOME-NET> 13,959
<LOAN-LOSSES> 831
<SECURITIES-GAINS> 237
<EXPENSE-OTHER> 9,871
<INCOME-PRETAX> 5,940
<INCOME-PRE-EXTRAORDINARY> 4,191
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,191
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.06
<YIELD-ACTUAL> 325,624
<LOANS-NON> 673
<LOANS-PAST> 349
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,032
<ALLOWANCE-OPEN> 2,010
<CHARGE-OFFS> (647)
<RECOVERIES> 92
<ALLOWANCE-CLOSE> 2,286
<ALLOWANCE-DOMESTIC> 229
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,057
</TABLE>
[LOGO] Virginia
Commonwealth
Financial
Corporation
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1999
To Our Stockholders:
The Annual Meeting of Stockholders of Virginia Commonwealth Financial
Corporation will be held at the Lake of the Woods Clubhouse, Locust Grove,
Virginia, on Friday, May 14, 1999 at 3:00 p.m. for the following purposes:
1. To elect two (2) directors to serve until the 2002 Annual Meeting of
Stockholders, or until their successors are elected and qualified;
2. To vote upon a proposal to approve an amendment to VCFC's articles of
incorporation to increase the number of shares of VCFC common stock that
VCFC is authorized to issue from 3 million to 5 million.
3. To ratify the appointment of Yount, Hyde & Barbour, P.C., as external
auditors for the fiscal year ending December 31, 1999; and
4. To transact such other business as may properly come before the meeting.
Stockholders of record at the close of business on March 18, 1999, will be
entitled to notice of, and to vote at, the Annual Meeting and any adjournments
thereof.
By Order of the Board of Directors,
EDWARD V. ALLISON, JR.
SECRETARY
March 18, 1999
PLEASE SIGN, DATE, AND MAIL THE ENCLOSED PROXY CARD PROMPTLY. NO POSTAGE
IS REQUIRED IF THE RETURN ENVELOPE IS USED AND MAILED IN THE UNITED STATES. IF
YOU ATTEND THE MEETING, YOU MAY, IF YOU DESIRE, REVOKE YOUR PROXY AND VOTE IN
PERSON.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
- 2 -
<PAGE>
[LOGO] Virginia
Commonwealth
Financial
Corporation
102 SOUTH MAIN STREET
POST OFFICE BOX 71
CULPEPER, VIRGINIA 22701
- --------------------------------------------------------------------------------
PROXY STATEMENT FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 14, 1999
- --------------------------------------------------------------------------------
GENERAL INFORMATION
The enclosed proxy is solicited by the Board of Directors of Virginia
Commonwealth Financial Corporation (the "Company") for the Annual Meeting of
Stockholders of the Company (the "Annual Meeting") to be held at the Lake of
the Woods Clubhouse, Locust Grove, Virginia on May 14, 1999, at 3:00 p.m., for
the purposes set forth in the accompanying Notice of Annual Meeting. The
approximate mailing date of this Proxy Statement and accompanying proxy is
March 22, 1999.
REVOCATION AND VOTING OF PROXIES
Execution of a proxy will not affect a Stockholder's right to attend the
Annual Meeting and to vote in person. Any Stockholder who has executed and
returned a proxy may revoke it at any time before the proxy is exercised by
filing an instrument effecting such revocation or a duly exercised proxy
bearing a later date with the Company at the above address. Stockholders also
may revoke their proxies by attending the Annual Meeting and voting in person.
Proxies will extend to, and will be voted at, any adjourned session of the
Annual Meeting.
VOTING RIGHTS OF STOCKHOLDERS
Only stockholders of record at the close of business on March 18, 1999 are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. As of the close of business on the record date, 2,041,762 shares of
Company common stock, par value of $2.50 per share, were outstanding and
entitled to vote at the meeting. The Company has no other class of stock
outstanding.
Each share of Company common stock is entitled to one vote for as many
persons as there are directors to be elected at the Annual Meeting and one vote
for all other matters voted on at the Annual Meeting. Shares of Company common
stock are not entitled to cumulative voting rights. The presence, in person or
by proxy, of a majority of the votes entitled to be cast will constitute a
quorum for the transaction of business at the Annual Meeting.
- 3 -
<PAGE>
SOLICITATION OF PROXIES
The expenses of soliciting proxies will be borne by the Company. Proxies
are being solicited by mail, and also may be solicited by directors, officers,
employees and agents of the Company in person, by telephone, or by mail.
Officers, directors and employees of the Company will not receive special
compensation for their solicitation activities. The Company may reimburse
banks, brokerage firms, and other custodians, nominees, and fiduciaries for
their reasonable expenses in sending proxy materials to beneficial owners of
Company common stock.
PRINCIPAL STOCKHOLDERS
As of March 18, 1999, no person was known to the Company to beneficially
own 5% or more of the outstanding shares of Company common stock.
The Trust Division of Second Bank & Trust, a wholly-owned subsidiary of
the Company, holds as trustee of various trust accounts a total of 93,311
shares (or approximately 4.6%) of Company common stock. Section 13.1-662E of
the Virginia Code prohibits the Trust Division from voting these shares at the
Annual Meeting unless a co-fiduciary is appointed for the sole purpose of
voting such shares.
As of March 18, 1999, the directors and executive officers of the Company
as a group beneficially owned 99,988 shares (or approximately 4.9%) of Company
common stock.
PROPOSAL ONE
ELECTION OF DIRECTORS
The Board of Directors of the Company is comprised of eight directors who
are divided into three classes (Class I, Class II, and Class III). The term of
office for the two Class I directors will expire at the Annual Meeting. The
first two persons in the beneficial share table below, all of whom currently
serve as directors of the Company, will be nominated to serve as Class I
directors. If elected, the Class I directors will serve for terms of three
years until the 2002 Annual Meeting, or until their successors are duly elected
and qualified.
The persons named in the proxy will vote for the election of the nominees
named below unless authority is withheld. If any of the persons named below is
unavailable to serve for any reason, an event which the Board of Directors does
not anticipate, proxies will be voted for the remaining nominees and such other
person or persons as the Board of Directors may reduce the size of Class I to
the number of remaining nominees, for whom the proxies will be voted.
The following table sets forth certain information concerning the nominees
for election at the Annual Meeting as Class I directors, as well as certain
information about the Class II and Class III directors, who will continue in
office after the Annual Meeting until the 2001 and 2000 Annual Meetings,
respectively. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ELECTION OF THE CLASS I DIRECTORS.
- 4 -
<PAGE>
NOMINEES FOR ELECTION
CLASS I DIRECTORS
(TO SERVE UNTIL 2002 ANNUAL MEETING)
<TABLE>
<CAPTION>
NUMBER & PERCENT
OF SHARES
DIRECTOR OCCUPATION BENEFICIALLY
NAME AND AGE SINCE(2) PAST 5 YEARS OWNED(3)
- -------------------------- --------- ----------------------------- ---------------------
<S> <C> <C> <C>
Gregory L. Fisher 49 1992 President, Eddins Ford,Inc. 450(1)
Thomas F. Williams, Jr. 60 1988 Partner, Franklin, Williams 12,754(1)(4)
and Cowan, Esq.
CLASS II DIRECTORS
(SERVING UNTIL 2001 ANNUAL MEETING)
Taylor E. Gore 60 1975 Executive Vice President & 6,747(1)
General Manager, Culpeper
Farmers' Co-op, Inc.
W. Robert Jebson, Jr. 65 1990 President, Environmental 5,867(1)(4)
Systems Service, Ltd.
William B. Young 61 1988 Chief Executive Officer, 14,933(1)(4)
Virginia Heartland Bank
CLASS III DIRECTORS
(SERVING UNTIL 2000 ANNUAL MEETING)
O. R. Barham, Jr. 48 1996 President and Chief Executive 4,900(1)
Officer, Second Bank & Trust
Marshall D. Gayheart, Jr. 68 1971 Retired, Proprietor, Gayheart 29,466(4)
Drug Store
H. Wayne Parrish 55 1988 President and General 8,167(1)(4)
Manager, Allmans BBQ;
President, Telephone
Answering Service of
Fredericksburg, Inc.
Real Estate Appraiser
All Directors & Executive Officers of the Company as a group (13) 99,988 (4.9%)
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Represents less than 1% of the outstanding shares based upon 2,041,762
shares outstanding as of March 18, 1999.
(2) Each Director has served on the Board of Directors of the Company since the
consummation of the affiliation with Virginia Heartland Bank in October,
1998. The date above refers to the year in which Messrs. Barham, Gayheart,
Gore, Jebson and Fisher were first elected to the Board of Directors of
Second Bank & Trust, and Messrs. Parrish, Williams and Young were first
elected to the Board of Directors of Virginia Heartland Bank.
- 5 -
<PAGE>
(3) For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 of the Securities Exchange
Act of 1934 under which, in general, a person is deemed to be the
beneficial owner of a security if he or she has or shares the power to
vote or direct the voting of the security or the power to dispose of or
direct the disposition of the security, or if he or she has the right to
acquire beneficial ownership of the security within sixty days.
(4) Includes shares held by spouses and minor children, shares held jointly or
with spouses, and shares held as custodian or trustee: Mr. Williams, 5,520
shares; Mr. Jebson, 523 shares; Mr. Young, 9,247 shares; Mr. Gayheart,
1,000 shares; and Mr. Parrish, 230 shares.
BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors of the Company met monthly in 1998. In 1998, all
directors attended at least 75% of the regular, special, or committee meetings
of the Board of Directors of the Company which he (she) was required to attend.
There are no family relationships among any of the directors or executive
officers, and none of the directors serves as a director of any other company
with a class of securities registered under Section 12 of the Securities
Exchange Act of 1934.
The Company has a Nominating Committee comprised of Messrs. Gayheart, Gore
and Jebson. The Nominating Committee meets once a year to nominate directors
and recommend officers to serve the Company for the coming year.
The Audit Committee is comprised of Messrs. Barham, Fisher, Gore, Williams
and Young. The Audit Committee meets periodically to examine audit reports to
determine whether audit exceptions are being addressed by management and
whether internal control of the Company remains adequate. The Committee met 4
times in 1998.
The Board of Directors of Second Bank & Trust has, among others, a
standing Personnel Committee. The Personnel Committee is comprised of Messrs.
Armstrong, Gore, Honenberger and Myers. The Committee meets periodically to
review employee benefit plans and authorizes the level of compensation for each
officer and director of the Bank. The Committee met six times in 1998.
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Directors of the Company receive a monthly fee of $600.00 for serving as
Board of Directors. Directors of the Company are not paid for committee
meetings on which they serve.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), directors and executive officers of the Company are
required to file reports with the Securities and Exchange Commission indicating
their holdings of and transactions in the Company's equity securities. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, insiders of the Company complied with all filing requirements during
the fiscal year ended December 31, 1998.
CASH COMPENSATION
The officers of the Company do not receive any compensation from the
Company, but are paid by each subsidiary Bank for their service as executive
officers of the respective Bank. During 1998, the only
- 6 -
<PAGE>
executive officers of the Company who received annual compensation in excess of
$100,000 were Messrs. Edward V. Allison, Jr., O. R. Barham, Jr. and William B.
Young. The following table summarizes the cash compensation paid to these
individuals.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(5)
------------------------------------
<TABLE>
<CAPTION>
NAME OF OFFICER OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(3)
- --------------------------- ------ ----------- ---------- ----------------
<S> <C> <C> <C> <C>
William B. Young(2) 1998 $138,800 $ 0 $ 4,155
O.R. Barham, Jr.(1) 1998 $146,668 $ 0 $31,733
1997 $139,800 $10,000 $28,702
1996 $ 97,196 $ 0 $14,194
Edward V. Allison, Jr.(4) 1998 $101,700 $ 0 $ 4,155
- --------------------------------------------------------------------------------
</TABLE>
(1) Mr. Barham served as Senior Vice President of the Company during 1996:
President and Chief Executive Officer of the Company during 1997 and 1998;
and President since the consummation of the affiliation with Virginia
Heartland Bank in October, 1998.
(2) Mr. Young has served as Chairman and Chief Executive Officer since the
consummation of the affiliation with Virginia Heartland Bank in October,
1998.
(3) Includes for 1998: $24,483 accrued on behalf of Mr. Barham under the Profit
Sharing, 401k Savings and Employee Stock Ownership Plans, $7,250 accrued to
Mr. Barham under a deferred compensation agreement, and $4,155 accrued to
Mr. Young and Mr. Allison under a profit sharing thrift plan.
(4) Mr. Allison has served as Secretary since the consumation of the affiliation
with Virginia Heartland Bank in October, 1998.
(5) No long term compensation was accrued to these officers in 1998, 1997 or
1996.
EMPLOYMENT AGREEMENTS
Mr. Barham entered into a three year employment agreement with the Company
effective January 1, 1997. The agreement is general in nature and has few
conditions relative to current or ongoing employment conditions. Mr. Barham's
base compensation under this agreement is determined at the sole discretion of
the Board of Directors, but does include minimum thresholds for each year of
the agreement. The agreement provides that in the event the Company, acting
either through its stockholders or its Directors, approves a change in control
event as defined, Mr. Barham will be entitled to receive from the Company base
compensation and accrued benefits for a twenty-four month period, regardless of
consideration of future employment. In the event the Company terminates Mr.
Barham's employment without cause, or Mr. Barham terminates his employment for
good reason as defined, the Company will pay to Mr. Barham a lump sum within
thirty days of employment termination equal to base compensation for a period
of eighteen months from the date of termination.
As incentive for Mr. Barham to remain in the employ of the Company and as
protection for the Company from Mr. Barham leaving the Company's employ, absent
a sale of the Company as defined, the agreement provides that if the officer
voluntarily leaves the employ of the Bank without there being any such change
in control of the Company, he may not be employed with or work in any office of
any company as an officer, director, employee or partner within a 50 mile
radius of any branch office of the
- 7 -
<PAGE>
Company without written consent of the Board of Directors for a period of two
years after Mr. Barham's employment. Failure to comply will result in
termination of all benefits remaining to be paid as part of the agreement.
Mr. Young entered into a two year agreement effective October, 1998 which
provides that while Mr. Young is Chairman of the Company, his combined salary
for service to the Company and Virginia Heartland Bank will be $165,000 per
year. Following such term, Mr. Young will be offered a non-employee consulting
position at $75,000 per year for a two-year period.
If Mr. Young's employment contract is terminated without "cause," as
defined in the contract, Virginia Heartland Bank must pay all compensation
(which includes salary and/or consulting fee, as applicable) due under the
terminated contract for a period not to exceed one year following the
termination. The employment contracts also contain a provision that any
successor to all or substantially all of the business and/or assets of the
Company expressly assume this employment contract. Mr. Young's annual salary
and subsequent consulting fee is fixed. In addition, Mr. Young is not eligible
for merit raises, participation in stock option plans or bonus plans given or
maintained by the Company or either Virginia Heartland or Second Bank & Trust.
The contract provides that if Mr. Young voluntarily terminates the contract, he
shall not directly or indirectly become affiliated with another financial
institution within the Commonwealth of Virginia for a period of two years.
Mr. Allison, as President of Virginia Heartland Bank, and Senior Vice
President and Secretary of the Company, entered into a five year agreement
effective October, 1998 which provides that Mr. Allison receive an initial
annual salary of $100,000, subject to annual review and adjustment by the Board
of Directors. If Mr. Allison's employment contract is terminated without
"cause," as defined in the contract, Virginia Heartland Bank must pay annual
salary for a period not to exceed one year following the termination. The
employment contracts also contain a provision that any successor to all or
substantially all of the business and/or assets of the Company expressly assume
this employment contract. The contract provides that if Mr. Allison voluntarily
terminates the contract, he shall not directly or indirectly become affiliated
with another financial institution within the Commonwealth of Virginia for a
period of two years.
EMPLOYEE BENEFIT PLANS
The Company and its two banking subsidiaries, Second Bank & Trust and
Virginia Heartland Bank, maintain several tax qualified and non-qualified
employee benefit plans for employees of the two Banks, which benefit plans are
described below.
SECOND BANK & TRUST PLANS
Second Bank & Trust has a split dollar life insurance plan that is offered
to certain bank officers. The Bank advances a portion of the premium, which
will be reimbursed by the insured officer upon the termination of his
employment or death. In 1998, $1,931 was advanced to Mr. Barham under this
plan.
The Bank established an Employee Stock Ownership Plan ("ESOP") under
section 401(e) of the Internal Revenue Code as of January 1, 1984. The plan's
primary purpose is to enable participating employees to share in the growth and
prosperity of the Bank and the Company by allowing employees to acquire Company
common stock. The Bank contributed $ 63,027 to the plan in 1998. Funds
contributed by the Bank to the plan are allocated to participants in the plan
in the ratio which the compensation of each participant bears to the total
compensation of all the participants. In 1998, $4,013 was accrued to Mr. Barham
under this plan.
- 8 -
<PAGE>
Effective January 1, 1997, Second Bank & Trust adopted a non-qualified
Executive Deferred Compensation Plan. Pursuant to the plan, Mr. Barham and any
other employees of the Bank selected by the Board of Directors may defer
receipt of a certain amount of pre-tax income and cash incentive compensation,
plus a Bank percentage matching contribution of the deferred amount, for a
period of no less than three years or until retirement, subject to termination
of employment or certain other events, including an imminent change in control.
The Bank's matching contribution for Mr. Barham is 5% of his base salary and as
determined from time to time by the Board for other executives. In 1998, $7,250
was accrued to Mr. Barham under this plan. The participants must pay taxes on
the deferred payments when received.
The Bank has a noncontributory pension plan which conforms to the Employee
Retirement Income Security Act of 1974 (ERISA). The amount of benefits payable
under the plan is determined by an employee's period of credited service. The
amount of normal retirement benefit will be equal to 1% of a participating
employee's average compensation for each year of credited service plus .75% of
a participating employee's average compensation in excess of $10,000 for each
year of credited service. The plan provides for early retirement for
participants with 10 or more years of service to the Bank who retire after
attaining age 55. A participant who terminates employment after 3 or more years
of service is eligible for a deferred benefit.
The following table shows the estimated annual benefits payable upon
retirement based on specified remuneration and years of credited service
classifications, assuming continuation of the present plan and retirement on
January 1, 1997, at age 65 (normal retirement date):
ESTIMATED ANNUAL PENSION BASED ON AVERAGE COMPENSATION
<TABLE>
<CAPTION>
AVERAGE 10 YEARS 15 YEARS 20 YEARS 25 YEARS
COMPENSATION OF SERVICE OF SERVICE OF SERVICE OF SERVICE
- -------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
$ 10,000 $ 1,000 $ 1,500 $ 2,000 $ 2,500
25,000 3,625 5,438 7,250 9,063
50,000 8,000 12,000 16,000 20,000
75,000 12,375 18,563 24,750 30,938
100,000 16,750 25,125 33,500 41,875
125,000 21,125 31,688 42,250 52,813
150,000 25,500 38,250 51,000 63,375
175,000 29,875 44,813 59,750 74,688
200,000 34,250 51,375 68,500 85,625
</TABLE>
Mr. Barham will have an estimated 23 years of credited service at normal
retirement age.
The Bank established a 401(k) Savings Plan effective October 1, 1989. The
plan's primary purpose is to allow employees to save for retirement on a
pre-tax basis. The plan provides for matching contributions by the Bank equal
to 100% of the first 2% plus 25% of the next 4% of salary reduction
contributions made by the employee. The Bank made a matched contribution to the
plan of $ 62,973 in 1998. The plan also provides for discretionary
contributions to be made by the Bank and allocated to participant accounts in
proportion to the participant's compensation. The Bank made no discretionary
contribution to the plan in 1998. In 1998, $ 4,700 was accrued to Mr. Barham
under this plan.
The Bank has a profit sharing plan under which employees of the Bank
receive compensation directly related to the profitability of the Bank.
Compensation under the plan is calculated and approved by the Board of
Directors of the Bank. In 1998, the Bank contributed $225,000 to the plan. In
1998, $15,770 was accrued to Mr. Barham under the plan.
- 9 -
<PAGE>
VIRGINIA HEARTLAND PLANS
Virginia Heartland Bank established a 401(k) Profit Sharing Thrift Plan in
1991. All permanent employees with more than three years of service may
participate. The Bank may contribute to the plan through either matching or
descretionary contributions. The plan provides for matching contributions by
the Bank equal to 25% of each participants deferred compensation not to execeed
6% of the participants compensation. The Bank made a matched contribution to
the plan of $11,980 in 1998. The plan also provides for discretionary
contributions to be made by the Bank and allocated to participant accounts in
proportion to the participant's compensation. The Bank accrued a discretionary
contribution to the plan of $36,000 in 1998. In 1998, $4,155 was accrued to Mr.
Young and Mr. Allison under this plan.
Virginia Heartland Bank has entered into supplemental retirement
agreements with the Bank's Chairman and President which provide benefits
payable over fifteen years to begin at age sixty and sixty-five, respectively.
The agreement with Mr. Young and Mr. Allison calls for Virginia Heartland Bank
to pay each $45,000 for fifteen years upon retirement. At December 31, 1998,
$513,918 has been accrued under these contracts, and this liability is
reflected in the consolidated financial statements. In 1998, $150,682 was
accrued to Messrs. Young and Allison under this plan.
The Bank is the owner and beneficiary of whole life insurance policies on
the lives of Messrs. Young and Allison. If the Chairman or President decease
during their employment, the Bank shall pay to their designated beneficiaries
or estate $75,000 and $60,000, respectively, per year till retirement date, and
thereafter $45,000 for both Messrs. Young and Allison for a period of fifteen
years. In the event that this death benefit should become payable, such benefit
shall be in lieu of all supplemental retirement accruals provided to the date
of death.
TRANSACTIONS WITH DIRECTORS AND OFFICERS
As of December 31, 1998, borrowing from the Company by all policy-making
officers, directors, their immediate families, and affiliated companies in
which they are Stockholders amounted to approximately $3.947 million. This
amount represented 2.4% of the total equity capital and 1.1% of the total
assets of the Company as of December 31, 1998. These loans were made in the
ordinary course of the Company's business, on the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with others, and do not involve greater than normal
risks of collectibility. The Company expects to have similar banking
transactions with directors, officers, principal Stockholders and their
associates in the future.
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Personnel Committee of the Board of Directors of each respective
subsidiary bank has furnished the following report on executive compensation.
The committee has developed and implemented compensation policies and
plans which seek to enhance the profitability of the Company and maximize
stockholder value by aligning closely the financial interests of its senior
officers with those of its stockholders. The policies are designed to provide
competitive levels of compensation to attract and retain corporate officers and
key employees with outstanding abilities and to motivate them to perform to the
full extent of their abilities. The policies provide for both annual salaries
and participation in an incentive compensation plan with all other employees of
the Company.
The Board of Directors approves base salaries at levels competitive with
amounts paid to senior executives with comparable qualifications, experience
and responsibilities after comparing salary ranges
- 10 -
<PAGE>
of similar sized banks as provided by the VBA Salary Survey of Virginia Banks.
The annual and incentive compensation is also closely tied to the Company's
success in achieving significant financial performance goals.
The Board of Directors approves the Chief Executive's annual salary based
on the compensation data from selected peer banks, their assessment of past
performance and its expectation as to future contributions in leading the
Company. In addition to the internal measures above, the Board of Directors
also reviews the financial performance of the Company in relation to peer group
averages and predetermined goals set by the Board of Directors. A subjective
approach is used in its evaluation of these factors and therefore does not rely
on a formula or weights of specific factors.
The incentive compensation plan, which includes all employees of the
Company, stresses rewards for achievement of financial goals set each year.
This program rewards employees for producing higher income, reducing costs and
providing customers with excellent service. The formula for 1998 as adopted by
the Board of Directors calls for an incentive of an increasing percentage based
on achievement of specified levels of return on assets. The formula defines the
incentive fund available for distribution for the year. The incentive funds are
allocated prorata to all employees based on their salary.
- 11 -
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the Company's Stockholder return with the
return of certain indices for the period beginning December 31, 1993 and for
following five years ending December 31. The Company's stock performance is
compared to the NASDAQ Stock Index and the Carson Medlin Independent Bank
Index.
[CHART]
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION 100 102 106 116 199 207
INDEPENDENT BANK INDEX 100 119 151 191 280 296
NASDAQ INDEX 100 98 138 170 209 293
During the years 1993-1996, and for the first six months of 1997, shares of
Company Common Stock were not traded on any national or regional exchange, and
trading was generally as a result of private negotiation. Accordingly, this
graph is not necessarily indicative of how the Company's stock would have
performed if it had traded on an exchange for the entire period. On July 14,
1997, the Company's stock began trading on the Nasdaq Small Cap Market, and
currently trades under the trading symbol VCFC. The Nasdaq Stock Market is a
highly regulated electronic securities market whose listings are supported by a
communications network linking them to quotation dissemination, trade
reporting, and order execution. The Nasdaq is operated by The Nasdaq Stock
Market, Inc., a wholly-owned subsidiary of the National Association of
Securities Dealers, Inc.
- 12 -
<PAGE>
PROPOSAL TWO
AMENDMENT TO VCFC ARTICLES
VCFC is currently authorized to issue 3,000,000 shares of VCFC Common
Stock. The VCFC Board of Directors has unanimously approved a proposed
amendment to the VCFC Articles, which would increase the number of authorized
shares of VCFC Common Stock from 3,000,000 to 5,000,000.
It is VCFC's intention to finance its operations through, among other
things, the issuance from time to time of equity securities, to consider the
acquisition or affiliation of other community banks or financial service
businesses (possibly using VCFC Common Stock as consideration in some
instances) and to consider the issuance of additional shares of VCFC Common
Stock through stock splits and stock dividends in appropriate circumstances.
Accordingly, the continued availability of shares of VCFC Common Stock is
necessary to provide VCFC with the flexibility to take advantage of
opportunities in such situations.
As of the record date, there were 2,041,762 shares outstanding. The
authorization of 3,000,000 shares was initially established in 1990 in
conjunction with the establishment of the Holding Company. VCFC's assets have
increased significantly since that time, having increased $169 million or 92.1%
from VCFC's assets at December 31, 1990.
THE AFFIRMATIVE VOTE OF MORE THAN TWO-THIRDS OF ALL THE VOTES ENTITLED TO
BE CAST BY THE HOLDERS OF THE OUTSTANDING SHARES OF VCFC COMMON STOCK AT THE
VCFC MEETING IS REQUIRED TO APPROVE THE AMENDMENT TO VCFC ARTICLES. THE VCFC
BOARD UNANIMOUSLY RECOMMENDS THAT VCFC STOCKHOLDERS VOTE "FOR" THE AMENDMENT TO
INCREASE THE AUTHORIZED SHARES.
PROPOSAL THREE
RATIFICATION OF SELECTION OF ACCOUNTANTS
The Board of Directors has appointed Yount, Hyde & Barbour, P.C., as the
external auditors for the Company for the fiscal year ending December 31, 1999.
Yount, Hyde & Barbour, P.C. rendered audit services to the Company during 1998.
These services consisted primarily of the examination and audit of the
financial statements of the Company, tax reporting assistance, and other audit
and accounting matters. Representatives of Yount, Hyde & Barbour, P.C. will
have the opportunity to make a statement and to answer questions at the Annual
Meeting if they desire to do so. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE APPOINTMENT OF YOUNT, HYDE & BARBOUR, P.C.
2000 ANNUAL MEETING OF STOCKHOLDERS
The Board of Directors need not include an otherwise appropriate
stockholder proposal in its proxy statement or form of proxy for that meeting
unless the proposal is received by the Company at its main office on or before
December 15, 1999.
ANNUAL REPORTS TO STOCKHOLDERS
The Company's Annual Report for the year ended December 31, 1998, which
includes audited financial statements of the Company prepared in conformity
with generally accepted accounting principles, has been enclosed with this
proxy. A copy of the Annual Report will be sent to any stockholder upon
request. REQUESTS FOR ADDITIONAL COPIES OF THE ANNUAL REPORT SHOULD BE DIRECTED
TO JEFFREY W. FARRAR, CPA, SENIOR VICE PRESIDENT & CHIEF FINANCIAL OFFICER, AT
102 SOUTH MAIN STREET, P. O. BOX 71, CULPEPER, VIRGINIA 22701.
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<PAGE>
OTHER MATTERS
Management knows of no other business to be brought before the Annual
Meeting. Should any other business properly be presented for action at the
meeting, the shares represented by the enclosed proxy will be voted by the
persons named therein in accordance with their best judgment and in the best
interests of the Company.
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