<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
FORM 10-K405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] 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
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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, 2000 was $49,486,500
The number of shares outstanding of the registrant's common stock as of
March 15, 2000 were 2,356,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report to Shareholders are incorporated by
reference into Parts I, II, and IV. Portions of the definitive Proxy Statement
dated February 28, 2000 to be delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held May 10, 2000 are incorporated by
reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Virginia Commonwealth Financial Corporation ("VCFC" or "the Company") is a
bank holding company incorporated under the laws of the Commonwealth of Virginia
on July 2, 1990. VCFC holds 100% ownership in three affiliate companies: 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; Virginia Heartland Bank
(VHB), which affiliated with VCFC on October 8, 1998; and Virginia Commonwealth
Trust Company, which was organized in May, 1999. The trust company purchased the
existing trust division of Second Bank & Trust.
The Company's primary asset is its stock investment in the affiliates, 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 6%
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
affiliates, offers a full array of banking, trust and investment services
through ten 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. The trust subsidiary provides
investment management, trust, estate administration and financial planning
services. The Company's affiliates are community-oriented organizations
servicing the financial service needs of their respective markets.
The principal sources of funds for the Company's lending and investment
activities include deposits, repayments on loans and mortgage-backed securities,
repayments on maturing securities and other borrowed funds. Principal sources of
revenue include interest and fees on loans and investment securities, fee income
derived from deposit and investment account relationships. Principal expenses
include interest paid on deposits and other borrowings as well as operating
expenses.
2
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For more information on the Company's business, see "Message to
Stockholders" on pages 2 through 3 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 5 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 the major
statewide and community banks. The Banks also compete with savings associations,
credit unions, brokerage houses and mortgage brokers. The primary factors in
competing for savings deposits include convenience of locations and rates being
offered. Primary factors in competing for loans include rate and fee structures
as well as compliment of product offerings.
Employees
At December 31, 1999, VCFC had no employees. The subsidiary banks employ
155 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.
3
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The Gramm-Leach-Bliley Act of 1999 (the Act) was enacted on November 12,
1999. The Act draws new lines between the types of activities that are financial
in nature and permitted for banking organizations, and those activities that are
commercial in nature and not permitted. The Act imposes Community Reinvestment
requirements on financial service organizations that seek to qualify for the
expanded powers to engage in broader financial activities and affiliations with
financial companies that are permitted.
The Act creates a new form of financial organization called a financial
holding company that may own banks, insurance companies and securities firms. A
financial holding company is authorized to engage in any activity that is
financial in nature, incidental to an activity that is financial in nature, or
is a complimentary activity. These activities may include insurance, securities
transactions, and traditional banking related activities. The Act establishes a
consultative and cooperative procedure between the Federal Reserve and the
Secretary of the Treasury for purposes of determination as to the scope of
activities permitted by the Act.
A bank holding company must satisfy special criteria to qualify for the
expanded powers authorized by the Act, including the maintenance of a well-
capitalized and well-managed status for all affiliate banks and a satisfactory
community reinvestment rating,
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 or 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, 1999,
that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank categorized the 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 19 to the consolidated financial statements on pages 39 and 40 of the
1999 Annual Report to Stockholders incorporated by reference herein for further
discussion.
4
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New Accounting Pronouncements
See "New Accounting Pronouncements" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 19 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 seven branch locations and lease three other
locations in Virginia. Additional information regarding lease commitments can be
found on pages 35 and 36 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.
5
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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 page 47 of
the 1999 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
1999 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
1999 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 1999 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 43 of the 1999 Annual Report to
Stockholders and is filed herewith as Exhibit 13.
1. Auditor's Report (page 43).
2. Consolidated Balance Sheets - December 31, 1999 and 1998 (page 20).
3. Consolidated Statements of Income - Years Ended December 31, 1999,
1998, and 1997 (page 21).
4. Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1999, 1998, and 1997 (page 22).
5. Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998, and 1997 (pages 23-24).
6. Notes to Consolidated Financial Statements (pages 25-43).
6
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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 2 through 4 of the Company's 2000 Proxy Statement, which is attached
hereto as Exhibit 99, related to "Election of Directors." The executive
officers of the Company as of February 28, 2000 are as follows:
Name Age Current Position
- ---- --- ----------------
William B. Young 62 Chairman and CEO of the 1998; Chairman
of Virginia 1988. Company since October,
Heartland Bank since
O. R. Barham, Jr. 49 President of the Company of Second Bank
& Trust since since 1996; President and
1996. CEO
Edward V. Allison, Jr. 61 Senior Vice President and since October,
1998; since 1988, CEO of Virginia 2000.
Secretary of the Company President of
Virginia Heartland Bank since January,
Heartland Bank
Jeffrey W. Farrar 39 Executive Vice President and Chief
Financial Officer of the Company since
1996.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference herein from pages 5 through 6 of the Company's
2000 Proxy Statement, which is attached hereto as Exhibit 99 under the caption
"Executive Compensation."
7
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference herein from page 3 through 4 of the Company's
2000 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 8 of the Company's 2000 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 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. 2.1 Agreement and Plan of Reorganization between Caroline
Savings Bank and Virginia Commonwealth Financial
Corporation, dated as of September 15, 1999, incorporated
herein by reference to Appendix A to Form S-4 filed on
November 26, 1999 (File No. 333-91711).
Exhibit No. 3.1 Articles of Incorporation incorporated by reference to
Exhibit 3 to the Company's 10-K, dated March 30, 1999.
Exhibit No. 3.2 Bylaws incorporated by reference to Exhibit 3 to the
Company's 10-K, dated March 30, 1999.
Exhibit No. 4 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 10 Employment contracts of certain officers are 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 1999 Annual
Report to Stockholders.
Exhibit No. 21 Subsidiaries of the Registrant are incorporated by
reference to page 25 of the 1999 Annual Report to
Stockholders.
Exhibit No. 27 Financial Data Schedule.
Exhibit No. 99 Virginia Commonwealth Financial Corporation 2000 Annual
Proxy Statement.
8
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Item 14(b) Reports on Form 8-K
On February 15, 2000, the Company filed a Form 8-K that included a press
release announcing the February 14, 2000 completion of the Caroline Savings
Bank acquisition.
On September 24, 1999, the Company filed a Form 8-K that included a press
release announcing the September 15, 1999 execution of a definitive
agreement and plan of reorganization with Caroline Savings Bank.
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.
9
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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. 3/27/00
----------------------------------- --------------
O. R. Barham, Jr. Date
President and Director
/s/ Jeffrey W. Farrar 3/27/00
----------------------------------- --------------
Jeffrey W. Farrar, CPA Date
Executive Vice President/Principle Accounting Officer
Pursuant to the requirements of the Securities and 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
- ---- -------------------
3/27/00 /s/ O.R. Barham, Jr.
- -------------------------- ----------------------------------------
O.R. Barham, Jr., President & Director
3/27/00 /s/ E. Page Butler
- -------------------------- ----------------------------------------
E. Page Butler, Director
3/27/00 /s/Gregory L. Fisher
- -------------------------- ----------------------------------------
Gregory L. Fisher, Director
3/27/00 /s/ Marshall D. Gayheart, Jr.
- -------------------------- ----------------------------------------
Marshall D. Gayheart, Jr., Director
3/27/00 /s/ Taylor E. Gore
- -------------------------- ----------------------------------------
Taylor E. Gore, Chairman & Director
3/27/00 /s/ W. Robert Jebson, Jr.
- -------------------------- ----------------------------------------
W. Robert Jebson, Jr., Director
3/27/00 /s/ H. Wayne Parrish
- -------------------------- ----------------------------------------
H. Wayne Parrish, Director
3/27/00 /s/ W. R. Southworth
- -------------------------- ----------------------------------------
W.R. Southworth, Director
3/27/00 /s/Thomas F. Williams, Fr.
- -------------------------- ----------------------------------------
Thomas F. Williams, Jr., Director
3/27/00 /s/William B. Young
- -------------------------- ----------------------------------------
William B. Young, Chairman & CEO, Director
<PAGE>
BUSINESS PROFILE
Virginia Commonwealth Financial Corporation (VCFC) is a bank holding company
headquartered in Culpeper, Virginia, 40 miles north of Charlottesville and 60
miles south of Washington, DC. Virginia Commonwealth serves communities in north
central Virginia through its two affiliate banks and trust company, Second Bank
& Trust, Virginia Heartland Bank and Virginia Commonwealth Trust Company. The
banks offer full banking and mortgage services, while Virginia Commonwealth
Trust Company offers asset management and traditional trust services. A third
banking affiliate, Caroline Savings Bank, was added in early 2000 giving VCFC a
15% marketshare in the contiguous Caroline County market. As of December 31,
1999, VCFC had approximately $372 million in assets, $42 million in
stockholders' equity and 155 employees.
NOTICE OF ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3:00 P.M. on Wednesday, May
10, 2000 at the Lake of the Woods Clubhouse, Locust Grove, Virginia. All
stockholders are cordially invited to attend.
IN MEMORIAM
[PHOTO] [PHOTO]
J. Carlton (Zeus) Clore Edwin G. (Eddy) Adair, Jr.
<PAGE>
[LOGO OF VIRGINIA COMMONWEALTH FINANCIAL CORPORATION]
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TABLE OF CONTENTS
-----------------------------------------------------
Message to Stockholders .......................... 2
Financial Highlights ............................. 4
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 ................................. 45
<PAGE>
MESSAGE TO SHAREHOLDERS
To our Shareholders, Customers and Friends,
We are pleased to report on behalf of the Board of Directors and staff our
annual report for 1999. It was a year in which your Company saw continued growth
in profitability and market presence. Strategically, your Company continued its
efforts to diversify and develop a stronger regional presence. On May 1, 1999,
the Company established Virginia Commonwealth Trust Company, with offices in
Culpeper, Fredericksburg and Harrisonburg. On February 14, 2000, balance sheet
growth and market share were enhanced through the affiliation of Caroline
Savings Bank, a $47 million savings bank headquartered in Bowling Green with two
offices in Caroline County and one office in the greater Fredericksburg area.
Internally, much effort was made to develop a multi-company operating structure
that would maximize efficiencies and reduce overlapping functions within the
organization. While our Year 2000 event came and went with little impact, many
man-hours were expended in preparation. We thank our staff for this effort and
our customers for your support during this period.
From a financial perspective, we are pleased to report that VCFC achieved
continued growth in earnings during 1999, with earnings of $4.487 million or
$2.19 per share, compared to $4.191 million or $2.06 per share in 1998.
Recurring earnings, adjusted to exclude the effect of nonrecurring items
principally related to merger and acquisition costs, were $4.620 million or
$2.26 per share, compared to $4.524 or $2.22 per share. Such recurring earnings
produced a return on average assets of 1.28% and return on average equity of
11.12%, compared to 1998 results of 1.35% and 11.44%, respectively. The Company
ended 1999 with assets of $371.7 million, compared to $352.8 million in 1998.
[GRAPH]
Improvements in net interest income (8.3%) and recurring noninterest income
(10.9%) offset an 11.2% increase in infrastructure costs associated with new
retail branches, technology development, trust company formation and officer
hirings. Net interest income improvement was driven by a 14.5% improvement in
average loans outstanding. Our second retail branch in Orange County allowed the
Company to increase its marketshare to approximately 15% of commercial bank
deposits in that County. Identification and site planning for a new Stafford
County branch for Virginia Heartland Bank was completed. Newly established trust
company offices in Harrisonburg and Fredericksburg completed their first full
year of operation with positive results.
[GRAPH]
2 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
MESSAGE TO SHAREHOLDERS
After extensive analysis and planning, the first quarter of 2000 will see
certain backoffice operations and systems merged or converted to reduce
overlapping functions and improve efficiency. Employee benefit plans have been
consolidated and moved to the holding company level. Plans are underway to
transition certain key personnel and functions to the holding company to improve
efficiency, including finance, human resources, internal audit, compliance and
credit review.
The Company will begin to introduce its internet banking service in the
spring. We are excited to bring our customers the ability to transact with us
over the internet, and will also offer bill pay functions, cash management
services for our commercial accounts and a community website for business to
business services.
While the internet has and will continue to provide vast potential, the
appeal of internet and technology companies in general continue to place
pressure on value stocks like the financial services industry. For all the
accomplishments in 1999, the performance of our stock and financial stocks in
general was disappointing. Financial stocks also tend to underperform in periods
of rising short term rates, as we saw for most of 1999. We remain confident that
our business will continue to thrive, and our focus will remain on customer
service, earnings and shareholder value.
We have learned from recent studies that customer profitability can vary
dramatically. Through the efforts of our marketing personnel, we are
implementing strategies to ensure that our best customers receive the highest
level of service. We have redoubled our efforts to ensure that our tellers and
client service representatives greet our customers in a courteous and
professional manner. We want our people to match the product or service with the
need.
1999 saw the passing of two of our esteemed Directors Emeritus. Messrs.
Edwin G. Adair, Jr. and J. Carlton Clore contributed greatly to the success of
this organization and our community. We also saw the passing of Lucian W. Clore,
a member of our Madison Advisory Board. We are truly blessed and grateful to
have served with each of these gentlemen.
[GRAPH]
The financial industry continues to be very competitive and change will no
doubt continue. Our local economies continue to grow, and we are confident that
VCFC can be a competitive long-term player in an ever changing financial
landscape. We are most appreciative of the support of our shareholders,
customers, directors, officers and staff. We await the challenges and
opportunities of 2000 with great anticipation and enthusiasm.
/s/ William B. Young
William B. Young
Chairman and CEO
/s/ O.R. Barham, Jr.
O.R. Barham, Jr.
President
1999 ANNUAL REPORT 3
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FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, except per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total Interest Income
and Fees on Loans $ 26,593 $ 25,405 $ 23,350 $ 21,673 $ 19,851
Total Interest Expense 11,602 11,446 10,510 10,223 9,395
Net Interest Income 14,991 13,959 12,840 11,451 10,457
Provision for Loan Losses 673 831 491 490 341
Total Noninterest Income 2,758 2,684 1,791 1,453 1,353
Total Noninterest Expense 10,974 9,871 8,230 7,255 6,667
Net Income 4,487 4,191 4,150 3,710 3,386
PERFORMANCE RATIOS:
Return on Average Assets 1.24% 1.26% 1.38% 1.30% 1.27%
Return on Average Equity 10.81% 10.60% 11.50% 11.06% 11.14%
Net Interest Margin 4.66% 4.65% 4.68% 4.39% 4.21%
Efficiency Ratio (1) 58.46% 55.61% 54.67% 54.52% 54.60%
PER SHARE DATA:
Net Income $ 2.19 $ 2.06 $ 2.05 $ 1.82 $ 1.69
Cash Dividends 1.00 0.78 0.77 0.69 0.52
Book Value 20.46 20.08 18.57 17.14 16.09
Market Price Per Share 24.50 33.50 33.00 20.00 19.00
Cash Dividend Payout Ratio 45.58% 47.16% 43.95% 43.31% 42.09%
PERFORMANCE HIGHLIGHTS
BASED ON RECURRING
EARNINGS (2):
Net Income $ 4,620 $ 4,524 $ 4,150 $ 3,710 $ 3,386
Earnings per share 2.26 2.22 2.05 1.82 1.69
Return on Average Assets 1.28% 1.35% 1.38% 1.30% 1.27%
Return on Average Equity 11.12% 11.44% 11.50% 11.06% 11.14%
BALANCE SHEET DATA:
Assets $ 371,657 $ 352,813 $ 315,707 $ 294,654 $ 274,417
Deposits 325,541 306,515 268,480 253,233 234,347
Loans 240,457 217,682 189,377 164,341 147,191
Stockholders' Equity 41,869 40,995 37,784 34,768 32,768
ASSET QUALITY RATIOS:
Total allowance for loan losses to
total loans outstanding 1.13% 1.04% 1.05% 1.13% 1.32%
Non-performing assets to year-end
loans and other property owned 0.41% 0.65% 0.61% .72% .93%
</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.
2) Excludes the effects of nonrecurring items principally related to completing
mergers and acquisitions totalling $133,000, net of tax, in 1999 and $334,000,
net of tax, in 1998.
4 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
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.
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. The risks and uncertainties that may affect the
Corporation include, but are not limited to: the growth in the economy, interest
rate movements, timely development by the Corporation of technology enhancements
for its products and operating systems, the impact of competitive products and
the internet, services and pricing, customer needs and banking legislation.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date thereof.
Corporate Highlights
Virginia Commonwealth Financial Corporation ended 1999 with assets of
$371.7 million, $240.5 million in net loans and $41.9 million in stockholders'
equity. The Corporation achieved earnings of $4.487 million or $2.19 per share.
Strategic initiatives during 1999 included the spin-off of Virginia Commonwealth
Trust Company, a newly formed subsidiary of the Corporation, which contributed
gross fees of $664 thousand on assets under management of $116.9 million. On
February 14, 2000, the Corporation acquired Caroline Savings Bank, a $47 million
savings bank headquartered in Caroline County with two offices in Caroline
County and one office in Spotsylvania County adjacent to the City of
Fredericksburg. Caroline stockholders received .7959 shares of VCFC common stock
for each share of Caroline in a tax-free pooling-of-interests transaction.
Caroline's financial statements have not been reflected in the Corporation's
1999 results.
During 1999, much effort was placed on reengineering the corporate
structure of VCFC to better align the Corporation as a multi-bank holding
company. 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 Corporation was able to realize some
benefits in both revenue enhancements and operating efficiencies related to its
1998 affiliation with Virginia Heartland Bank, and expects more bottom line
improvement in 2000.
Results of Operations
VCFC was able to grow earnings in 1999, with earnings of $4.487 million, or
$2.19 per share, representing a 7.1% increase over $4.191 million or $2.06 per
share in 1998. Earnings for the year ended December 31, 1999 produced a return
on average assets of 1.24% and return on average equity of 10.81%, compared to
prior year ratios of 1.26% and 10.60%, respectively.
After excluding nonrecurring items principally related to acquisitions, net
income was $4.620 million or $2.26 per share, representing an 2.1% increase over
$4.524 million or $2.22 per share for 1998. Recurring earnings for the year
ended December 31, 1999 produced a return on average assets of 1.28% and return
on average equity of 11.12%, compared to prior year ratios of 1.35% and 11.44%,
respectively.
The improvement in net income in 1999 was the result of improvements in net
interest income and recurring noninterest income. Net interest income, on a
taxable equivalent basis, increased $1.2 million or 8.3% to $15.7 million for
1999, compared to $14.5 million for 1998 and $13.2 million for 1997. Noninterest
income, excluding nonrecurring gains and losses on other real estate and
securities available for sale, increased 10.9% to $2.8 million for the year
ended December 31, 1999 compared to $2.5 million in 1998 and $1.8 million in
1997.
[GRAPH]
1999 ANNUAL REPORT 5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Balance sheet growth was stable for the corporation in 1999, with loan
growth providing the greatest impact on operations. Total assets were $371.7
million at December 31, 1999, an increase of 5.3%. Average loans outstanding in
1999 amounted to $227.1 million, an increase of 14.5% over $198.4 million in
1998. Average deposits were $315.4 million, an increase of 9.8% over $287.3
million in 1998. An expanding economy, a broader branch network, and increased
loan participations among the affiliate banks were contributing factors to this
growth. New offices in Harrisonburg, Lake of the Woods, and the Town of Orange
were significant contributors to deposit growth.
VCFC's efficiency ratio, a measure of the organization's ability to control
its operating (noninterest) expenses, increased to 58.46% in 1999, compared to
55.61% in 1998 and 54.67% in 1997. Expenses of the merger are excluded from the
computation of this ratio due to their nonrecurring nature. The increase in the
efficiency ratio for 1999 was attributable to investments in infrastructure
consisting of: (1) Start-up costs associated with one new full service branch
and two trust offices, (2) professional fees associated with personnel
recruitment and the spin-off of Virginia Commonwealth Trust Company, and (3)
compensation and benefits associated with hirings of corporate officers. It is
anticipated that the Corporation will continue to see some economic efficiency
in noninterest expenses as certain back office functions are consolidated in
2000.
The following table presents a quarterly summary of earnings components for
the last two years. In 1999, quarterly income was very stable, with increases
noted in each successive quarter. 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.
[GRAPH]
[GRAPH]
6 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended 1999 Three Months Ended 1998
(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 $6,843 $6,732 $6,595 $6,422 $6,577 $6,475 $6,306 $6,049
Interest expense 2,981 2,949 2,869 2,803 2,942 2,946 2,814 2,744
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,862 3,783 3,726 3,619 3,635 3,529 3,492 3,305
Provision for loan losses 189 152 162 170 351 170 175 135
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,673 3,631 3,564 3,449 3,284 3,359 3,317 3,170
Other income 695 629 712 722 796 671 676 540
Other expense 2,868 2,710 2,765 2,631 2,737 2,546 2,372 2,218
- ------------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes 1,500 1,550 1,511 1,540 1,343 1,484 1,621 1,492
Applicable income taxes 359 421 391 443 395 426 498 431
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $1,141 $1,129 $1,120 $1,097 $ 948 $1,058 $1,123 $1,061
====================================================================================================================================
Net income per share,
basic and diluted $ 0.56 $ 0.55 $ 0.54 $ 0.54 $ 0.46 $ 0.53 $ 0.55 $ 0.52
====================================================================================================================================
</TABLE>
Net Interest Income and Net Interest Margin
The most significant component of the Corporation's statement of operations
is net interest income. Net interest income is defined as the difference between
income on earning assets and the cost of funds supporting those assets.
Significant categories of income on earning assets are loans and securities
while interest on deposits and short term borrowings represent the significant
cost of funds.
Net interest income, on a taxable equivalent basis, increased $1.3 million
or 9.9% to $14.5 million for the year ended December 31, 1998. Net interest
income, on a taxable equivalent basis, increased $1.2 million or 8.3% to $15.7
million for 1999, compared to $14.5 million for 1998 and $13.2 million for 1997.
This improvement can be attributed to balance sheet growth and a stable net
interest margin. Average earning assets increased $25.2 million to $337.5
million at December 31, 1999, an increase of 8.1% over $312.3 million in 1998.
Average earning assets in 1998 increased 10.8% from $281.8 million in 1997.
The increase in average earning assets can be attributed to loan growth
funded with retail deposit growth. Average loans outstanding in 1999 amounted to
$227.1 million, an increase of 14.5% over $198.4 million in 1998. Average loans
increased $20.9 million (11.8%) to $198.4 million in 1998 from $177.4 in 1997.
Average deposits for 1999 were $315.4 million, an increase of 9.8% over $287.3
million in 1998. Average deposits increased $30.1 million (11.7%) to $287.3
million in 1998 from $257.2 million in 1997.
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. The Corporation's net interest margin remained essentially
flat in 1999 at 4.66%, compared to 4.65% in 1998 and 4.68% in 1997. 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.
1999 ANNUAL REPORT 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1999 Year ended December 31, 1998
---------------------------- ----------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Dollars in thousands Balance Expense Rates Balance Expense Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans receivable, net $ 227,127 $ 20,436 9.00% $ 198,426 $ 18,748 9.45%
Investment securities
Taxable 76,812 4,671 6.08% 82,182 5,068 6.17%
Tax exempt 24,674 1,785 7.23% 18,891 1,449 7.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments 101,486 6,456 6.36% 101,073 6,517 6.45%
Federal funds sold 8,845 422 4.77% 12,809 691 5.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 337,458 27,314 8.09% Tax Eql. 312,308 25,956 8.31% Tax Eql.
Allowance for loan losses (2,512) (2,143)
Cash and due from banks 9,588 8,190
Bank premises and equipment 9,339 8,333
Other assets 7,385 7,357
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 361,258 $ 334,045
====================================================================================================================================
Liabilities and Stockholders' Equity
Time and savings deposits
Interest-bearing transaction
accounts $ 38,252 $ 743 1.94% $ 33,366 $ 745 2.23%
Money market deposit accounts 43,443 1,420 3.27% 36,564 1,270 3.47%
Passbook savings accounts 31,195 941 3.02% 28,978 886 3.06%
Certificates of deposit (>$100K) 32,053 1,689 5.27% 28,598 1,642 5.74%
Other certificates of deposit 127,712 6,742 5.28% 120,671 6,697 5.55%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 272,655 11,535 4.23% 248,177 11,240 4.53%
Federal funds purchased and
securities under agreement
to repurchase 860 40 4.65% 1,359 73 5.37%
Note payable 51 3 5.88% 34 2 5.88%
Other borrowings 433 21 4.85% 416 21 5.05%
Master notes 93 3 3.23% 2,798 109 3.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest- Bearing Liabilities 274,092 11,602 4.23% 252,784 11,445 4.53%
Demand deposits 42,711 39,158
Other liabilities 2,910 2,546
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 319,713 294,488
Stockholders' equity 41,545 39,557
====================================================================================================================================
Total Liabilities and
Stockholders' Equity $ 361,258 $ 334,045
====================================================================================================================================
Net interest income
(tax equivalent) $ 15,712 $ 14,511
Average interest rate spread 3.86% 3.78%
Interest expense as percentage
of average earning assets 3.44% 3.66%
Net interest margin 4.66% 4.65%
====================================================================================================================================
</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 $721,000, $551,000 and $422,000 in 1999, 1998 and
1997, respectively.
8 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997
----------------------------
Interest
Average Income/ Average
Dollars in thousands Balance Expense Rates
- --------------------------------------------------------------------------------
Assets
Loans(net of unearned) $ 177,433 $ 17,008 9.59%
Investment securities
Taxable 83,851 5,226 6.23%
Tax exempt 13,443 1,074 7.99%
- --------------------------------------------------------------------------------
Total Investments 97,294 6,300 6.48%
Interest - bearing deposits in
other banks -- -- --
Federal funds sold 7,116 396 5.56%
- --------------------------------------------------------------------------------
Total Earning Assets 281,843 23,704 8.41% Tax Eql.
Allowance for loan losses (1,927)
Cash and due from banks 7,945
Bank premises and equipment 7,540
Other assets 5,272
- --------------------------------------------------------------------------------
Total Assets $ 300,673
================================================================================
Liabilities and Stockholders' Equity
Time and savings deposits
Interest-bearing transaction
accounts $ 30,724 $ 741 2.41%
Money market deposit
accounts 33,981 1,227 3.61%
Passbook savings accounts 28,143 818 2.91%
Certificates of deposit ($100K) 23,363 1,338 5.73%
Other certificates of deposit 110,491 6,153 5.57%
- --------------------------------------------------------------------------------
Total Time and Savings Deposits 226,702 10,277 4.53%
Federal funds purchased and
securities under agreement
to repurchase 1,867 106 5.68%
Note payable -- -- --
Other borrowings 558 25 4.00%
Master notes 2,764 102 3.69%
- --------------------------------------------------------------------------------
Total Interest- Bearing Liabilities 231,891 10,510 4.53%
Demand deposits 30,522
Other liabilities 2,157
- --------------------------------------------------------------------------------
Total Liabilities 264,570
Stockholders' equity 36,103
- --------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 300,673
================================================================================
Net interest income
(tax equivalent) $ 13,194
Average interest rate spread 3.88%
Interest expense as percentage of
average earning assets 3.73%
Net interest margin 4.68%
================================================================================
1999 ANNUAL REPORT 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
1999 vs 1998 1998 vs 1997
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: (1)
Loans $ 2,501 $ (853) $ 1,648 $ 1,949 $ (207) $ 1,742
Securities:
Taxable (327) (87) (414) (107) (119) (226)
Tax-exempt 272 (50) 222 272 (26) 246
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities (55) (137) (192) 165 (145) 20
Federal funds sold (196) (72) (268) 307 (14) 293
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 2,250 $(1,062) $ 1,188 $ 2,421 $ (366) $ 2,055
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing Liabilities:
Time and savings deposits:
Interest-bearing deposits $ (29) $ 26 $ (3) $ 125 $ (120) $ 5
Money market deposits 216 (66) 150 113 (70) 43
Savings deposits 67 (12) 55 28 40 68
Certificates of deposit:
Certificates of $100,000
or more 147 (100) 47 298 6 304
Certificates of less
than $100,000 274 (229) 45 562 (18) 544
- ------------------------------------------------------------------------------------------------------------------------------------
Total time and
savings deposits $ 675 $ (381) $ 294 $ 1,126 $ (162) $ 964
Federal funds purchased &
under agreements
to repurchase (24) (9) (33) (28) (5) (33)
Notes payable -- -- -- 2 -- 2
Other short term borrowings (125) 19 (106) (4) 7 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 526 $ (371) $ 155 $ 1,096 $ (160) $ 936
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 1,724 $ (691) $ 1,033 $ 1,325 $ (206) $ 1,119
====================================================================================================================================
</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.
10 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
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 1999.
The following table presents the Corporation's present value change in
equity under various rate scenarios as of December 31, 1999.
<TABLE>
<CAPTION>
Current
1999 Minus 200 pts. Minus 100 pts. Fair Value Plus 100 pts. Plus 200 pts.
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities $ 100,958 $ 98,982 $ 96,491 $ 93,997 $ 91,594
Market value change 4,467 2,491 -- (2,494) (4,897)
Loans receivable 248,365 245,309 241,865 238,299 234,761
Market value change 6,500 3,444 -- (3,566) (7,104)
Total rate sensitive assets 349,323 344,291 338,356 332,296 326,365
Other assets 29,339 29,339 29,339 29,339 29,339
Total assets 378,662 373,630 367,695 361,635 355,694
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits
Rate sensitive 278,210 274,208 270,314 266,524 262,833
Market value change 7,896 3,894 -- (3,791) (7,481)
Non rate sensitive 40,136 39,067 38,046 37,068 36,132
Market value change 2,090 1,021 -- (977) (1,913)
Total liabilities 318,346 313,275 308,360 303,592 298,965
- ------------------------------------------------------------------------------------------------------------------------------------
Present Value Equity $ 60,316 $ 60,355 $ 59,335 $ 58,043 $ 56,729
====================================================================================================================================
Market Value Change $ 981 $ 1,020 $ -- $ (1,292) $ (2,596)
====================================================================================================================================
Percentage Change 1.65% 1.72% 0% (2.18%) 4.38%
====================================================================================================================================
</TABLE>
1999 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. Noninterest income, excluding nonrecurring gains and losses on other
real estate and securities available for sale, increased 10.9% to $2.8 million
for the year ended December 31, 1999 compared to $2.5 million in 1998 and $1.8
million in 1997. Increases in service charges and fees from trust operations
more than offset declines in fees from mortgage and brokerage activities.
The mortgage division generated fees of $442.1 thousand on gross
originations of $35.2 million, compared to fees of $553.7 thousand on
originations of $48.4 million in 1998, and fees of $128 thousand on originations
of $20.3 million in 1997. Rising mortgage rates significantly impacted refinance
activity resulting in decreased volume.
Noninterest Expense
Noninterest expenses for 1999 were $11.0 million, compared to $9.9 million
in 1998 and $8.2 million in 1997, respectively. Adjusting for nonrecurring
merger costs associated with acquisitions, noninterest expenses increased $1.4
million or 13.2%. This increase was attributable to infrastructure costs
including startup costs associated with one new full service branch and two
trust offices, professional fees associated with personnel recruitment and the
spin-off of Virginia Commonwealth Trust Company, and compensation and benefits
associated with hiring corporate officers. The increase in recurring expenses in
1998 compared to 1997 of $1.2 million or 14.6% was primarily attributable to
personnel costs associated with personnel increases and commissions paid for
loan production and occupancy expense associated with new branches.
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 1999 amounted to $673 thousand, a
decrease of $158 thousand or 23.8% compared to $831 thousand in 1998. The
decrease in provisions in 1999 can be attributed to lower charge-offs. The
increase in 1998 as compared to $491 thousand in 1997 was attributable to
greater charge-offs and loan growth in 1998. Provisions continue to exceed
charge-offs, reflecting a conscious effort to maintain the allowance on an
increasing loan portfolio. The Company had net charge-offs of $219 thousand in
1999, compared to $555 thousand in 1998 and $354 thousand for 1997. The ratio of
charge-offs to average loans outstanding decreased to .10% in 1999 compared to
.28% in 1998 and .20% in 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 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.
12 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
Loan Portfolio
Gross loans as of December 31, 1999, were $239.3 million, increasing 11.4%
from $214.8 million in 1998. The increase in loans was due principally to growth
in our commercial lending market, 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 Banks' utilize lines of credit and commercial term
loans in its portfolio. At December 31, 1999, off balance sheet unused loan
commitments and standby letters of credit amounted to $39.5 million. These
commitments may be secured or unsecured. On December 31, 1999, 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, 1999 was comprised of $186.9
million of loans secured 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 Banks' historically have limited
their real estate lending to their market area and has applied conservative loan
standards, which, management believes, have 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 $18.5 million at December 31, 1999. VCFC
also offers various types of installment loans including automobile, home
improvement, equipment and personal loans.
The following table set forth the makeup of the loan portfolio at December
31, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans
Construction $ 18,506 $ 20,330 $ 20,892 $ 9,737 $ 9,240
Mortgage 168,439 150,268 126,566 116,534 102,759
Commercial loans 23,152 17,680 17,779 18,202 16,360
Installment loans 25,864 22,504 19,980 18,189 17,129
Other loans 3,360 3,981 3,256 3,685 3,862
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans before deduction of
unearned income 239,321 214,763 188,473 166,347 149,350
Less: unearned income (361) (195) (129) (134) (185)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans before allowance
for loan losses 238,960 214,568 188,344 166,213 149,165
Less: allowance for loan losses (2,740) (2,286) (2,010) (1,873) (1,974)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 236,220 212,282 186,334 164,340 147,191
Loans held for sale 4,237 5,400 3,044 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $ 240,457 $ 217,682 $ 189,378 $ 164,340 $ 147,191
====================================================================================================================================
</TABLE>
1999 ANNUAL REPORT 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information regarding the interest sensitivity of the loan portfolio at
December 31, 1999 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 $ 44,270 $ 83,729 $ 58,687 $ 186,686
Commercial loans 9,495 6,742 6,878 23,115
Installment loans 3,334 20,902 1,525 25,761
Other loans 676 1,481 1,203 3,360
Net loans (1) 57,775 112,854 68,293 238,922
Loans held for sale 4,237 4,237
- --------------------------------------------------------------------------------
Total loans $ 62,012 $ 112,854 $ 68,293 $ 243,159
================================================================================
</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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1999
Commercial, financial Real estate -
(Dollars in thousands) and agricultural construction
- --------------------------------------------------------------------------------
<S> <C> <C>
Within 1 year $ 10,168 $ 14,529
Variable rate:
Over one year through five years $ -- $ 918
Over five years $ -- $ --
Fixed rate:
Over one year through five years $ 8,097 $ 1,306
Over five years $ 4,850 $ 1,753
</TABLE>
Asset Quality
Each of VCFC's member banks have 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 monthly.
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, 1999 amounted to $599 thousand, and consisted primarily of
residential real estate properties and building lots.
Nonperforming assets amounted to $999 thousand or .41% of loans and other
assets at December 31, 1999, compared to $1.4 million or .65% of loans and other
assets at December 31, 1998.
The allowance for loan losses at December 31, 1999 amounted to $2.7 million
compared to $2.3 million for 1998. The allowance for loan losses as a percentage
of net loans amounted to 1. 13% at December 31, 1999 compared to 1.04% at
December 31, 1998.
The following table provides an analysis of the allowance for loan losses for
the past five years.
14 Virginia Commonwealth Financial Corporation
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $ 2,286 $ 2,010 $ 1,873 $ 1,974 $ 1,952
Loans charged off:
Commercial 152 286 97 203 185
Real estate -- 7 -- -- --
Installment 139 354 338 449 180
- --------------------------------------------------------------------------------------------------------------------
Total loans charged off 291 647 435 652 365
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial -- 2 18 9 13
Real estate -- -- -- -- --
Installment 72 90 63 52 33
- --------------------------------------------------------------------------------------------------------------------
Total recoveries 72 92 81 61 46
- --------------------------------------------------------------------------------------------------------------------
Net charge offs 219 555 354 591 319
Provision for loan losses 673 831 491 490 341
- --------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 2,740 $ 2,286 $ 2,010 $ 1,873 $ 1,974
- --------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses to
total loans outstanding at end of year 1.13% 1.04% 1.05% 1.13% 1.32%
- --------------------------------------------------------------------------------------------------------------------
Ratio of net charge offs (recoveries)
to average loans outstanding
during the year 0.10% 0.28% 0.20% 0.37% 0.23%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reflects the composition of nonperforming assets for the
past five years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
December 31
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 399 $ 673 $ 719 $ 783 $ 1,262
Other property owned 600 759 460 411 129
- --------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 999 $ 1,432 $ 1,179 $ 1,194 $ 1,391
- --------------------------------------------------------------------------------------------------------------------
Loans past due 90 days
accruing interest $ 98 $ 349 $ 229 $ 1,112 $ 963
- --------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to
non-accrual loans 686.72% 339.67% 279.55% 239.21% 156.42%
- --------------------------------------------------------------------------------------------------------------------
Non-performing assets to year-end
loans and other property owned 0.41% 0.65% 0.61% 0.72% 0.93%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
1999 Annual Report 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Securities
Investment securities and securities available for sale totaled $100.2 million
and comprised 27.0% of total assets at December 31, 1999, as compared with
$104.9 million and 29.7% of assets at December 31, 1998. The decrease can be
attributable to a greater allocation of assets to the loan portfolio.
Reflecting market conditions, the Corporation's yield on its securities
portfolio declined in 1999 and 1998, with the portfolio yielding 6.36% in 1999
compared to 6.45% in 1998 and 6.47% in 1997. The Corporation attempts to
maintain diversity in its portfolio, maintain durations that are consistent with
its asset/liability management and hold 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 and yields at December 31, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
December 31, 1999 (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 $ 3,003 $ 23,538 $ 6,992 $ -- $ 33,533
Fair value 2,997 22,919 6,660 -- 32,576
Weighted average yield 5.50% 5.78% 6.05% 0.00% 5.81%
Mortgage-backed Securities:
Amortized cost $ -- $ 5,916 $ 11,535 $ 1,026 $ 18,477
Fair value -- 5,786 11,297 982 18,065
Weighted average yield 0.00% 6.05% 6.34% 6.05% 6.23%
U. S. Treasury Securities:
Amortized cost $ 5,987 $ 4,548 $ -- $ -- $ 10,535
Fair value 5,990 4,496 10,486
Weighted average yield 6.28% 5.66% 0.00% 0.00% 6.01%
Corporate Bonds:
Amortized cost $ 1,499 $ 7,044 $ 1,024 $ -- $ 9,567
Fair value 1,496 6,802 956 -- 9,254
Weighted average yield 6.26% 5.92% 6.17% 0.00% 6.00%
Municipal Bonds:
Amortized cost $ 2,111 $ 8,660 $ 15,844 $ 1,542 $ 28,157
Fair value 2,115 8,585 15,568 1,502 27,770
Weighted average yield 6.66% 6.67% 7.13% 7.64% 6.98%
Equity Securities:
Amortized cost $ -- $ 495 $ -- $ -- $ 495
Fair value -- 390 -- -- 390
Weighted average yield 0.00% 8.59% 0.00% 0.00% 8.59%
Other Investments:
Amortized cost $ -- $ 1,365 $ -- $ -- $ 1,365
Fair value 1,365 1,365
Weighted average yield 0.00% 2.85% 0.00% 0.00% 2.85%
Total Securities:
Amortized cost $ 12,600 $ 51,566 $ 35,395 $ 2,568 $102,129
Fair value 12,598 50,343 34,481 2,484 99,906
Weighted average yield 6.16% 5.92% 6.63% 7.00% 6.22%
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
16 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Deposits
Deposits at December 31, 1999 amounted to $325.5 million, an increase of $19.0
million or 6.2% over $306.5 million in 1998. 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 leverage its capital base in
1999. Noninterest bearing deposits decreased $3.5 million or 7.8% in 1999. The
over all cost of deposit funds decreased to 4.23% in 1999 compared to 4.53% in
both 1998 and 1997, reflecting a lower rate environment during 1999. Deposit
rates increased during the fourth quarter of 1999, and cost of funds are
expected to be higher in 2000.
The following table illustrates average outstanding deposits and rates paid.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand accounts $ 42,711 -- $ 39,158 -- $ 30,522 --
Interest-bearing accounts:
Interest checking 38,252 1.94% 33,366 2.23% 30,724 2.41%
Money market 43,443 3.27% 36,564 3.47% 33,981 3.61%
Regular savings 31,195 3.02% 28,978 3.06% 28,143 2.91%
Time deposits:
Less than $100,000 127,712 5.28% 120,671 5.55% 110,491 5.57%
$100,000 and over 32,053 5.27% 28,598 5.74% 23,363 5.73%
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing 272,655 4.23% 248,177 4.53% 226,702 4.53%
================================================================================================================
Total average deposits $ 315,366 $ 287,335 $ 257,224
================================================================================================================
</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, 1999 $ 6,752 $ 5,003 $ 11,177 $10,750
</TABLE>
1999 Annual Report 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Capital Adequacy
Management seeks to 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, 1999 of $41.9 million increased $874
thousand or approximately 2.1% from $41.0 million in 1998. The Corporation had a
ratio of risk-weighted assets to total capital of 18.22% and 18.37% at December
31, 1999 and 1998, and a ratio of risk-weighted assets to Tier I capital of
17.13% and 17.39% in 1999 and 1998, respectively.
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 is
cash, due from banks, fed funds sold and securities in our available for sale
portfolio. In addition, the Bank has substantial lines of credit from its
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 10.35% of total deposits
primarily from established core depositors.
In the judgment of management, the Company maintains the ability to generate
sufficient amounts of cash to cover normal requirements and any additional
needs, which may arise, within realistic limitations.
18 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. Because the
Corporation does not use these derivative instruments and strategies, management
does not expect the adoption of the Statement to have any effect on earnings or
financial position.
In October 1998, the FASB issue 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 was
effective for 1999.
Because the Corporation does participate in securitization as defined, the
statement does not have a significant effect on VCFC's earnings or financial
position.
Year 2000
The Corporation incurred a successful Year 2000 event with no system failures
or disruption in service. Costs incurred in 1999 for Year 2000 preparedness were
not material to the Corporation's business, operations, liquidity, capital
resources, or financial condition.
1999 Annual Report 19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
<S><C>
Assets
Cash and due from banks $ 12,792,670 $ 9,764,707
Federal funds sold 2,122,638 5,916,598
Securities (market value: 1999, $99,906,116;
1998, $105,678,025) 100,181,003 104,943,459
Loans held for sale 4,236,949 5,399,884
Loans, net of allowance for loan losses of $2,739,524 in
1999 and $2,285,727 in 1998 236,219,664 212,281,978
Bank premises and equipment, net 9,401,436 9,232,997
Interest receivable 2,669,638 2,536,007
Other real estate owned 599,829 758,901
Other assets 3,433,074 1,978,513
Total assets $ 371,656,901 $ 352,813,044
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 41,819,524 $ 45,366,791
Interest-bearing 283,721,874 261,147,970
Total deposits $ 325,541,398 $ 306,514,761
Federal funds purchased and securities sold under
agreement to repurchase 396,000 1,305,031
Short-term borrowings 907,620 1,081,406
Interest payable 1,315,704 1,206,833
Other liabilities 1,627,237 1,609,849
Note payable -- 100,000
Commitments and contingent liabilities -- --
Total liabilities $ 329,787,959 $ 311,817,880
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; 1999, 5,000,000 shares
authorized; 1998, 3,000,000 shares authorized; 1999, 2,046,487
shares issued and outstanding; 1998, 2,041,764 shares issued
and outstanding 5,116,218 5,104,411
Capital surplus 7,872,488 7,738,492
Retained earnings 30,166,151 27,724,435
Accumulated other comprehensive income (loss), net (1,285,915) 427,826
Total stockholders' equity $ 41,868,942 $ 40,995,164
Total liabilities and stockholders' equity $ 371,656,901 $ 352,813,044
</TABLE>
See Notes to Consolidated Financial Statements.
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 20,338,835 $ 18,690,900 $ 16,951,013
Interest and dividends on investment securities:
Taxable 144,715 1,035,189 1,118,820
Nontaxable 1,077,680 866,066 709,316
Interest and dividends on securities available
for sale:
Taxable 4,386,291 3,940,833 4,105,621
Nontaxable 99,948 89,550 --
Dividends 123,547 92,330 68,532
Interest income on federal funds sold 421,933 690,528 396,453
- ------------------------------------------------------------------------------------------------------
Total interest income $ 26,592,949 $ 25,405,396 $ 23,349,755
- ------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits $ 11,535,543 $ 11,241,167 $ 10,276,990
Interest on federal funds purchased and
securities sold under agreement to repurchase 39,580 73,077 106,317
Interest on short-term borrowings 24,234 130,062 126,737
Interest on note payable 3,000 2,088 --
- ------------------------------------------------------------------------------------------------------
Total interest expense $ 11,602,357 $ 11,446,394 $ 10,510,044
- ------------------------------------------------------------------------------------------------------
Net interest income $ 14,990,592 $ 13,959,002 $ 12,839,711
Provision for loan losses 673,409 831,107 491,000
- ------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses $ 14,317,183 $ 13,127,895 $ 12,348,711
- ------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposit accounts $ 1,220,860 $ 1,077,828 $ 1,012,899
Fees for trust services 663,650 519,818 408,620
Investment fee income 102,461 148,019 77,065
Other operating income 374,315 229,462 197,519
Gains (losses) on sales of securities available
for sale 858 237,094 (3,741)
(Losses) on sale of other real estate owned (46,508) (82,342) (28,669)
Fees on loans sold 442,120 553,697 128,083
- ------------------------------------------------------------------------------------------------------
Total noninterest income $ 2,757,756 $ 2,683,576 $ 1,791,776
- ------------------------------------------------------------------------------------------------------
Noninterest Expenses
Compensation and employee benefits $ 6,157,990 $ 5,262,828 $ 4,529,167
Net occupancy expense 741,493 718,299 593,537
Supplies and equipment expenses 1,442,319 1,205,439 1,106,543
Merger and merger related expenses 99,106 443,000 --
Other operating expenses 2,532,625 2,241,557 2,000,828
- ------------------------------------------------------------------------------------------------------
Total noninterest expenses $ 10,973,533 $ 9,871,123 $ 8,230,075
- ------------------------------------------------------------------------------------------------------
Income before income taxes $ 6,101,406 $ 5,940,348 $ 5,910,412
Income tax expense 1,614,386 1,749,828 1,760,121
- ------------------------------------------------------------------------------------------------------
Net income $ 4,487,020 $ 4,190,520 $ 4,150,291
======================================================================================================
Earnings per Share, basic and assuming dilution $ 2.19 $ 2.06 $ 2.05
======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
1999 ANNUAL REPORT 21
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Other
Common Capital Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net income -- -- 4,487,020 -- $ 4,487,020 4,487,020
Other comprehensive (loss)
net of tax:
Unrealized holding losses
arising during the period,
net of tax benefit of $(882,545) -- -- -- -- (1,713,175) --
Less reclassification adjustment,
net of tax of $(292) -- -- -- -- (566) --
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) -- -- -- (1,713,741) $ (1,713,741) (1,713,741)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- $ 2,773,279 --
====================================================================================================================================
Cash dividends -- -- (2,045,304) -- (2,045,304)
Issuance of common stock under
dividend reinvestment plan 11,807 133,996 -- -- 145,803
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 5,116,218 $ 7,872,488 $ 30,166,151 $ (1,285,915) $41,868,942
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
22 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 4,487,020 $ 4,190,520 $ 4,150,291
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 878,774 778,514 696,008
Provision for loan losses 673,409 831,107 491,000
Deferred tax expense (benefit) (218,931) (139,573) (76,769)
Pension (income) expense (15,498) -- 33,291
Loss on other real estate owned 46,508 82,342 28,669
(Gain) on sale of equipment -- -- (12,988)
(Gain) loss on sale of securities available
for sale (858) (237,094) 3,741
Fees on loans sold (442,120) (553,697) (128,083)
Proceeds from sale of loans 35,596,438 48,928,802 20,449,244
Purchase of loans for sale (35,154,318) (48,375,105) (20,321,161)
Amortization of security premiums and
accretion of discounts, net 59,562 65,006 (20,438)
Amortization of organization expenses -- 14,400 2,800
Changes in assets and liabilities:
(Increase) decrease in interest receivable (133,631) 2,448 54,760
(Increase) decrease in other assets (358,879) (436,123) 411,387
Increase in interest payable 108,871 103,249 61,328
Increase in other liabilities 17,388 409,489 161,951
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 5,543,735 $ 5,664,285 $ 5,985,031
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from sale of securities available
for sale $ 7,031,345 $ 12,030,105 $ 5,497,656
Proceeds from maturities and principal
payments of investment securities 1,051,600 5,157,187 8,925,000
Proceeds from maturities and principal
payments of securities available for sale 19,088,771 37,838,957 18,353,449
Purchase of investment securities (2,522,375) (11,483,544) (12,111,542)
Purchase of securities available for sale (22,542,164) (48,861,539) (19,329,415)
Proceeds from sale of fixed assets -- -- 16,903
Purchase of premises and equipment (1,047,213) (2,185,646) (1,305,231)
Additions to other real estate -- (65,001) --
(Increase) decrease in cash surrender value
of life insurance 21,581 (15,295) (92,354)
Proceeds from sale of other real estate 751,731 431,777 137,900
Net (increase) in loans (24,087,327) (29,883,464) (25,742,908)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities $(22,254,051) $(37,036,463) $(25,650,542)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
1999 ANNUAL REPORT 23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase in demand, money market
and savings deposits $ 8,571,337 $ 24,972,100 $ 6,355,625
Net increase in certificates of deposit 10,455,300 13,062,792 8,890,981
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase (909,031) (1,996,006) 2,101,037
Net increase (decrease) in short-term borrowings (173,786) (2,756,594) 389,146
Principal payments on note payable (100,000) -- --
Issuance of note payable -- 100,000 --
Issuance of common stock - dividend
reinvestment plan 145,803 289,736 329,738
Acquisition of common stock -- -- (177,909)
Cash dividends paid (2,045,304) (1,592,011) (1,552,440)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 15,944,319 $ 32,080,017 $ 16,336,178
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents $ (765,997) $ 707,839 $ (3,329,333)
Cash and Cash Equivalents
Beginning 15,681,305 14,973,466 18,302,799
- ------------------------------------------------------------------------------------------------------------------------------------
Ending $ 14,915,308 $ 15,681,305 $ 14,973,466
====================================================================================================================================
Supplemental Disclosures of Cash
Flow Information
Cash payments for:
Interest $ 11,468,726 $ 11,343,145 $ 10,453,157
====================================================================================================================================
Income taxes $ 1,825,000 $ 2,034,540 $ 1,448,693
====================================================================================================================================
Supplemental Schedule of Noncash
Investing Activities
Other real estate acquired in settlement of loans $ 676,600 $ 747,942 $ 215,297
====================================================================================================================================
Unrealized gain (loss) on securities available
for sale $ (2,596,578) $ 489,538 $ 403,666
====================================================================================================================================
Transfer of securities from held to maturity to
available for sale $ -- $ 19,504,568 $ --
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
24 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
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, provides a full array of
banking services through ten 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 a network of
ATM's and phone banking. Nontraditional banking services include a full array of
trust and investment services.
During 1999, the trust division of Second Bank & Trust was capitalized as a
stand alone entity under the name of Virginia Commonwealth Trust Company. This
entity is a wholly owned subsidiary of the Corporation.
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, securities 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, 1999, 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
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as "available for sale" and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.
1999 ANNUAL REPORT 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans
The Corporation grants mortgage, commercial and consumer loans to
customers. A substantial portion of the loan portfolio is represented by
mortgage loans. The ability of the Corporation's debtors to honor their
contracts is dependent upon the real estate and general economic conditions in
the Corporation's market area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff generally are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Installment loans and other personal loans are typically
charged off no later than 180 days past due. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures.
26 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance sheet assets
and liabilities and gives current recognition to changes in tax rates and laws.
Retirement Plans
The Corporation has a noncontributory, defined benefit pension plan
covering 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."
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 2,045,763, 2,038,186 and 2,027,193 for the
years ended 1999, 1998 and 1997, respectively. The Corporation had no potential
common stock as of December 31, 1999, 1998 and 1997.
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 Assets
Securities and other property held by the Virginia Commonwealth Trust
Company 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, or in lieu of, foreclosure are held for sale
and are initially recorded at the lower of loan balance or fair value at the
date of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value less cost to sell. Revenues and
expenses from operations and changes in the valuation are included in other
operating expenses.
Advertising
The Corporation follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense of $154,606, $189,735 and $190,890 were
incurred in 1999, 1998 and 1997, respectively.
1999 ANNUAL REPORT 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain reclassifications have been made to prior period balances to
conform to the current year provisions.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate and deferred tax assets.
Note 2. Business Combinations
On February 14, 2000, the Corporation acquired Caroline Savings Bank, for
approximately 310,246 common shares in a transaction to be accounted for as a
pooling-of-interests. If the transaction had been consummated prior to December
31, 1999, the accompanying financial statements would have included the
financial position and results of operations of Caroline Savings Bank. Total
assets and results of operations for 1999 would have been as follows:
Total assets $ 418,341,977
Total income $ 33,339,950
Net income $ 4,647,133
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:
- --------------------------------------------------------------------------------
Total Total Net
(thousands) Assets Income Income
- --------------------------------------------------------------------------------
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
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, 1999 and 1998, the aggregate amounts of daily average required balances were
approximately $1,490,000 and $1,581,000, respectively.
28 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Securities
The amortized cost and fair value of securities being held to maturity as
of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Obligations of states and
political subdivisions $ 23,516,412 $ 140,299 $ (415,186) $ 23,241,525
======================================================================================
1998
Obligations of states and
political subdivisions $ 22,057,578 $ 739,706 $ (5,139) $ 22,792,145
======================================================================================
</TABLE>
The amortized cost and market value of securities being held to maturity as
of December 31, 1999, by contractual maturity are shown below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 2,011,108 $ 2,015,141
Due after one year through five years 6,401,158 6,347,915
Due after five years through ten years 13,874,182 13,678,363
Due after ten years 1,229,964 1,200,106
- --------------------------------------------------------------------------------------
$23,516,412 $23,241,525
======================================================================================
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
U.S. Treasury securities $ 10,535,666 $ 7,571 $ (56,517) $ 10,486,720
U.S. Government agencies 33,533,038 -- (956,693) 32,576,345
State and political subdivisions 4,640,589 2,812 (115,240) 4,528,161
Corporate bonds 9,566,772 -- (312,753) 9,254,019
Mortgage-backed securities 18,477,307 2,197 (414,734) 18,064,770
Equity securities 495,000 -- (105,000) 390,000
Other 1,364,576 -- -- 1,364,576
- ---------------------------------------------------------------------------------------------------
$ 78,612,948 $ 12,580 $ (1,960,937) $ 76,664,591
===================================================================================================
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
===================================================================================================
</TABLE>
1999 ANNUAL REPORT 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities available for sale as of
December 31, 1999, by contractual maturity are shown below.
- --------------------------------------------------------------------------------
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $10,588,732 $10,583,668
Due after one year through five years 37,884,373 36,843,965
Due after five years through ten years 9,985,525 9,506,053
Due after ten years 312,435 301,559
Other 1,364,576 1,364,576
Mortgage-backed securities 18,477,307 18,064,770
- --------------------------------------------------------------------------------
$78,612,948 $76,664,591
================================================================================
As a result of the business combination explained in Note 2, Virginia
Heartland Bank transferred securities from the held to maturity category to the
available for sale category in 1998. These securities had an amortized cost of
$19,504,568 and resulting in an unrealized gain of $225,557.
Proceeds from sales of securities available for sale during 1999, 1998, and
1997 were $7,031,345, $12,030,105, and $5,497,656. Gross realized gains of
$3,100, $239,828, and $-0- and gross realized losses of $2,242, $2,734, and
$3,741 were recognized on those sales. The tax provision (benefit) applicable to
these net realized gains and losses amounted to $292, $80,612 and $(1,272),
respectively.
Securities with amortized cost of $13,307,149 and $17,619,198 at December
31, 1999 and 1998, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
Note 5. Loans
Major classifications of loans are as follows:
- --------------------------------------------------------------------------------
December 31,
(thousands) 1999 1998
- --------------------------------------------------------------------------------
Real estate loans:
Construction and land development $ 18,506 $ 20,330
Farm land 1,600 1,143
1-4 family residential 81,825 85,086
Multifamily, nonresidential and junior liens 85,014 64,039
Loans to farmers (except secured by real estate) 156 144
Commercial loans (except secured by real estate) 22,996 17,536
Consumer and installment loans 25,864 22,504
All other loans 3,360 3,981
- --------------------------------------------------------------------------------
Total loans $239,321 $214,763
Less: Allowance for loan losses 2,740 2,286
Unearned loan fees 361 195
- --------------------------------------------------------------------------------
Loans, net $236,220 $212,282
================================================================================
30 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
- --------------------------------------------------------------------------------
December 31,
(thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 2,286 $ 2,010 $ 1,873
Recoveries 72 92 81
Provision for loan losses 673 831 491
Charge-offs (291) (647) (435)
- --------------------------------------------------------------------------------
Balance at end of year $ 2,740 $ 2,286 $ 2,010
================================================================================
Information about impaired loans is as follows:
- --------------------------------------------------------------------------------
December 31,
1999 1998
- --------------------------------------------------------------------------------
Impaired loans for which an
allowance has been provided $175,964 $378,117
Impaired loans for which no
allowance has been provided 37,101 233,792
- --------------------------------------------------------------------------------
Total impaired loans $213,065 $611,909
================================================================================
Allowance provided for impaired loans,
included in the allowance for loan losses $ 45,136 $ 85,626
================================================================================
- --------------------------------------------------------------------------------
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Average balance in impaired loans $288,953 $530,559 $986,275
================================================================================
Interest income recognized on impaired loans $ 18,381 $ 41,371 $ 74,551
================================================================================
Interest income recognized on a
cash basis on impaired loans $ 18,154 $ 41,371 $ 74,551
================================================================================
No additional funds are committed to be advanced in connection with
impaired loans.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $294,647 and $386,618 at December 31, 1999 and 1998. If interest on
these loans had been accrued, such income would have approximated $19,913 and
$85,235, 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, 1999
and 1998, these loans totaled $5,366,188 and $3,327,019, respectively. During
1999, total principal additions were $13,829,041 and total principal payments
were $11,789,872.
1999 ANNUAL REPORT 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Bank Premises and Equipment, Net
Assummary of the cost and accumulated depreciation of bank premises and
equipment follows:
- --------------------------------------------------------------------------------
December 31,
1999 1998
- --------------------------------------------------------------------------------
Bank premises $ 7,692,076 $ 6,659,649
Leasehold improvements 970,248 970,248
Furniture and equipment 5,940,620 5,212,623
Construction in progress 17,768 829,574
- --------------------------------------------------------------------------------
$14,620,712 $13,672,094
Less accumulated depreciation and amortization 5,219,276 4,439,097
- --------------------------------------------------------------------------------
$ 9,401,436 $ 9,232,997
================================================================================
Depreciation and amortization expense amounted to $878,774, $778,514 and
$696,008 for 1999, 1998 and 1997, respectively.
Note 9. Deposits
The aggregate amount of time deposits in denominations of $100,000 or more,
was $33,682,055 and $29,032,739 at December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
2000 $109,158,799
2001 29,770,690
2002 9,895,478
2003 11,752,585
2004 3,296,407
-----------------------------------
$163,873,959
===================================
Note 10. Other Borrowings
Short-term borrowings consist of Master Promissory Notes with Corporate
customers and borrowings with the Federal Reserve Bank. These Master Promissory
Notes bear a variable interest rate and are payable on demand. There were no
borrowings on these notes at December 31, 1999 and they had a balance
outstanding of $854,001 at December 31, 1998. 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 and U.S. Treasury notes are pledged as collateral.
The maximum amount available under this agreement is $1,000,000. The balance
outstanding as of December 31, 1999 and 1998 was $907,620 and $227,405,
respectively.
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date.
Note 11. Stock-Based Compensation
In 1998, the Corporation adopted an incentive stock option plan under which
options may be granted to key employees for purchase of the Corporation's common
stock. The plan reserves for issuance 100,000 shares of the Corporation's common
stock with a ten year term. The plan requires that options be granted at an
exercise price equal to at least 100% of the fair market value of the common
stock on the date of the grant. Such options are generally not exercisable until
six months after the award date. The options will expire in no more than ten
years after the date of grant. As of December 31, 1999, no options had been
granted under the plan.
32 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Employee Benefit Plans
The Corporation and its two banking subsidiaries maintain several tax
qualified and non-qualified employee benefit plans for employees. Such benefit
plans are described below. Effective January 1, 2000, the noncontributory
defined benefit pension plan and the 401(k) plan of each affiliate have been
combined at the Corporation level.
Second Bank & Trust maintains a profit sharing plan for all eligible
employees. Amounts charged to operations were $219,000, $225,000 and $205,000 in
1999, 1998 and 1997, 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 $68,506, $63,027 and $64,420 in 1999, 1998 and 1997,
respectively. Effective January 1, 2000, the ESOP plan assets were frozen and no
future contributions are anticipated. The Bank's cash contribution to the 401(k)
Plan was $75,494, $62,973 and $45,980 in 1999, 1998 and 1997, 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 $63,694, $49,185 and $46,663 in 1999, 1998 and 1997,
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.
1999 ANNUAL REPORT 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about the plan follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning $ 2,789,715 $ 2,494,895 $ 2,429,721
Service cost 108,706 64,747 55,962
Interest cost 188,812 167,832 162,952
Actuarial loss 295,777 260,261 53,377
Benefits paid (184,578) (198,020) (207,117)
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, ending $ 3,198,432 $ 2,789,715 $ 2,494,895
===================================================================================================================================
Change in Plan Assets
Fair value of plan assets, beginning $ 4,010,985 $ 3,309,339 $ 2,821,152
Actual return on plan assets 283,445 899,666 695,304
Benefits paid (184,578) (198,020) (207,117)
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, ending $ 4,109,852 $ 4,010,985 $ 3,309,339
===================================================================================================================================
Funded status $ 911,420 $ 1,221,270 $ 814,444
Unrecognized net actual gain (665,781) (991,794) (593,652)
Unrecognized net obligation at
transition (172,010) (215,013) (258,016)
Unrecognized prior service cost 471,391 519,123 566,855
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost included in
other liabilities $ 545,020 $ 533,586 $ 529,631
===================================================================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost $ 108,706 $ 64,747 $ 55,962
Interest cost 188,812 167,832 162,952
Expected return on plan assets (274,301) (224,843) (190,352)
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 (39,380) (16,420) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (income) $ (11,434) $ (3,955) $ 33,291
===================================================================================================================================
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>
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
$39,048, $150,682 and $39,128 for the three years ended December 31, 1999,
respectively.
34 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
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 $10,217, $7,250 and $6,750 for the three
years ended December 31, 1999, respectively.
Note 13. Income Taxes
Net deferred tax assets consist of the following components as of December 31,
1999 and 1998:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Reserve for loan losses $ 635,077 $ 483,497
Securities available for sale 662,441 --
Nonaccrual loan interest 28,794 18,667
Deferred compensation 276,767 205,706
Prepaid insurance commission -- 17,067
Other 37,530 28,159
- --------------------------------------------------------------------------------
$1,640,609 $ 753,096
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accrued pension asset $ 185,307 $ 180,037
Premises and equipment 185,523 185,311
Securities available for sale -- 220,393
Other 13,638 12,978
- --------------------------------------------------------------------------------
$ 384,468 $ 598,719
- --------------------------------------------------------------------------------
$1,256,141 $ 154,377
================================================================================
The income tax expense charged to operations for the years ended December 31,
1999, 1998 and 1997, consists of the following:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Current tax expense $ 1,833,317 $ 1,889,401 $ 1,836,890
Deferred tax (benefit) (218,931) (139,573) (76,769)
- --------------------------------------------------------------------------------
$ 1,614,386 $ 1,749,828 $ 1,760,121
================================================================================
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, 1999, 1998 and 1997, due to the following:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Computed "expected" tax expense $ 2,074,478 $ 2,019,718 $ 2,009,540
Increase (decrease) in income
taxes resulting from:
Tax exempt interest income (413,377) (323,852) (251,519)
Merger costs 33,696 108,970 --
Other, net (80,411) (55,008) 2,100
- --------------------------------------------------------------------------------
$ 1,614,386 $ 1,749,828 $ 1,760,121
================================================================================
Note 14. Commitments and Contingent Liabilities
Second Bank and Trust has entered into two long-term banking facility
leases. The first lease was entered into on September 18, 1985. The lease
provides for an original twenty year term with renewal options of four
additional periods of five years. Annual rent currently is $31,104 with an
adjustment at renewal based on the Consumer Price Index.
1999 ANNUAL REPORT 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The second lease for a future branch site was entered into on February 1,
1999. The lease provides for an original ten-year term with the right to renew
for an additional five-year period. Annual rent will be $21,060 until branch
renovations are complete and will increase to an amount not to exceed $42,000.
At the time of renewal the rental amount will increase by 5%. Branch renovations
were not complete at December 31, 1999.
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 $96,970, $91,558 and $76,700 for 1999, 1998 and
1997, 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:
2000 $ 161,574
2001 176,968
2002 179,168
2003 181,151
2004 183,194
Thereafter 1,287,857
-------------------------------------------------
Total $ 2,169,912
=================================================
Virginia Heartland Bank entered into a long-term lease for a future branch
site on November15, 1999. The term of the lease is twenty-five years commencing
on the earlier of 90 days after the signing of the lease or the date the branch
opens for business with the general public. Annual rent will be $60,000 for the
first five years and will increase by 10% each five years thereafter. Branch
construction was not complete at December 31, 1999.
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 17 with respect to financial instruments with off-balance-sheet
risk.
Note 15. Restrictions on Transfers to Parent
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Corporation. The
total amount of dividends which may be paid at any date is generally limited to
the retained earnings of the Bank, and loans or advances are limited to 10
percent of the Bank's capital stock and surplus on a secured basis.
Transfers of funds from the banking subsidiary to the Parent Corporation in
the form of loans, advances and cash dividends, are restricted by federal and
state regulatory authorities. During 1999, the banking subsidiaries transferred
$2,250,000 to the Parent Corporation as working capital. As of December 31, 1999
the aggregate amount of additional unrestricted funds which could be transferred
from the banking subsidiaries to the Parent Corporation without prior regulatory
approval totalled $3,777,303 or 9.02% of the consolidated net assets.
In addition, dividends paid by the Bank to the Corporation would be
prohibited if the effect thereof would cause the Bank's capital to be reduced
below applicable minimum capital requirements.
36 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. 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 17. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is party to credit related 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.
The Corporation's exposure to credit loss is represented by the contractual
amount of these commitments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
- --------------------------------------------------------------------------------
Contract Amount
1999 1998
- --------------------------------------------------------------------------------
Commitments to grant loans and unfunded
commitments under lines of credit $ 36,764,528 $ 42,543,440
Standby letters of credit $ 2,695,540 $ 2,280,097
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. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Corporation, is based on management's
credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit
lines and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are usually
uncollateralized and do not always contain a specified maturity date and may not
be drawn upon to the total extent to which the Corporation is committed.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Corporation
generally holds collateral supporting those commitments if deemed necessary.
The Corporation maintains cash accounts in other commercial banks. The
amount on deposit with correspondent institutions at December 31, 1999 exceeded
the insurance limits of the Federal Deposit Insurance Corporation by $2,899,726.
Note 18. 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.
1999 ANNUAL REPORT 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
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 standby 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, 1999 and 1998, the carrying amounts and fair values of loan
commitments and standby letters of credit were immaterial.
38 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Corporation's financial instruments are as
follows:
- --------------------------------------------------------------------------------
1999 1998
Carrying Fair Carrying Fair
(thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------
Financial assets:
Cash and short-term
investments $ 14,915 $ 14,915 $ 15,681 $ 15,681
Securities 100,181 99,906 104,943 105,678
Loans held for sale 4,237 4,237 5,400 5,400
Loans, net 236,220 235,163 212,282 214,015
Accrued interest receivable 2,670 2,670 2,536 2,536
- --------------------------------------------------------------------------------
Total financial assets $358,223 $356,891 $340,842 $343,310
================================================================================
Financial liabilities:
Deposits $325,541 $302,467 $306,515 $292,885
Other borrowings 1,304 1,303 2,486 2,491
Accrued interest payable 1,316 1,316 1,207 1,207
- --------------------------------------------------------------------------------
Total financial liabilities $328,161 $305,086 $310,208 $296,583
================================================================================
Note 19. Regulatory Matters
The Corporation (on a consolidated basis) and the subsidiary banks are
subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Corporation's
and subsidiary banks' financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Corporation and
the subsidiary banks must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December31, 1999 and
1998, that the Corporation and subsidiary banks met all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank categorized the subsidiary banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the institutions must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since the notification that management
believes have changed the institution's category.
1999 ANNUAL REPORT 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
For Capital
Actual Adequacy Purposes
- ---------------------------------------------------------------------------------------------------------------------------------
(Amount in Thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated $45,825 18.22% Greater than or equal to $ 20,123 Greater than or equal to 8.0%
Second Bank & Trust $31,117 17.78% Greater than or equal to $ 14,000 Greater than or equal to 8.0%
Virginia Heartland Bank $11,280 14.58% Greater than or equal to $ 6,191 Greater than or equal to 8.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $43,085 17.13% Greater than or equal to $ 10,062 Greater than or equal to 4.0%
Second Bank & Trust $29,258 16.72% Greater than or equal to $ 7,000 Greater than or equal to 4.0%
Virginia Heartland Bank $10,399 13.44% Greater than or equal to $ 3,095 Greater than or equal to 4.0%
Tier 1 Capital (to
Average Assets):
Consolidated $43,085 11.59% Greater than or equal to $ 14,869 Greater than or equal to 4.0%
Second Bank & Trust $29,258 11.58% Greater than or equal to $ 10,106 Greater than or equal to 4.0%
Virginia Heartland Bank $10,399 9.19% Greater than or equal to $ 4,526 Greater than or equal to 4.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $42,854 18.37% Greater than or equal to $ 18,660 Greater than or equal to 8.0%
Second Bank & Trust $28,446 17.79% Greater than or equal to $ 12,792 Greater than or equal to 8.0%
Virginia Heartland Bank $10,180 14.69% Greater than or equal to $ 5,543 Greater than or equal to 8.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $40,568 17.39% Greater than or equal to $ 9,330 Greater than or equal to 4.0%
Second Bank & Trust $26,900 16.82% Greater than or equal to $ 6,396 Greater than or equal to 4.0%
Virginia Heartland Bank $ 9,440 13.62% Greater than or equal to $ 2,772 Greater than or equal to 4.0%
Tier 1 Capital (to
Average Assets):
Consolidated $40,568 12.14% Greater than or equal to $ 13,370 Greater than or equal to 4.0%
Second Bank & Trust $26,900 11.30% Greater than or equal to $ 9,522 Greater than or equal to 4.0%
Virginia Heartland Bank $ 9,440 8.76% Greater than or equal to $ 4,311 Greater than or equal to 4.0%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
- ---------------------------------------------------------------------------------------------------------------------
(Amount in Thousands) Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated N/A
Second Bank & Trust Greater than or equal to $ 17,500 Greater than or equal to 10.0%
Virginia Heartland Bank Greater than or equal to $ 7,738 Greater than or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated N/A
Second Bank & Trust Greater than or equal to $ 9,500 Greater than or equal to 6.0%
Virginia Heartland Bank Greater than or equal to $ 4,643 Greater than or equal to 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated N/A
Second Bank & Trust Greater than or equal to $ 15,160 Greater than or equal to 5.0%
Virginia Heartland Bank Greater than or equal to $ 5,658 Greater than or equal to 5.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated N/A
Second Bank & Trust Greater than or equal to $ 15,991 Greater than or equal to 10.0%
Virginia Heartland Bank Greater than or equal to $ 6,929 Greater than or equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated N/A
Second Bank & Trust Greater than or equal to $ 9,594 Greater than or equal to 6.0%
Virginia Heartland Bank Greater than or equal to $ 4,157 Greater than or equal to 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated N/A
Second Bank & Trust Greater than or equal to $ 11,903 Greater than or equal to 5.0%
Virginia Heartland Bank Greater than or equal to $ 5,398 Greater than or equal to 5.0%
</TABLE>
40 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Parent Corporation Only Financial Statements
Virginia Commonwealth Financial Corporation (Parent Corporation Only)
Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 1,245,099 $ 2,669,818
Securities available for sale 1,789,367 1,526,453
Investment in subsidiaries 39,435,086 36,750,027
Income taxes receivable 117,302 64,000
Accrued interest receivable 34,259 28,542
Due from subsidiaries -- 854,000
Other assets 361,147 10,317
- --------------------------------------------------------------------------------
Total assets $ 42,982,260 $ 41,903,157
================================================================================
Liabilities and Stockholders' Equity
Liabilities
Short-term borrowings $ -- $ 854,000
Other liabilities 1,113,318 53,993
- --------------------------------------------------------------------------------
Total liabilities $ 1,113,318 $ 907,993
- --------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock $ -- $ --
Common stock 5,116,218 5,104,411
Capital surplus 7,872,488 7,738,492
Retained earnings 30,166,151 27,724,435
Accumulated other comprehensive
income (loss), net (1,285,915) 427,826
- --------------------------------------------------------------------------------
Total stockholders' equity $ 41,868,942 $ 40,995,164
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 42,982,260 $ 41,903,157
================================================================================
1999 ANNUAL REPORT 41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Virginia Commonwealth Financial Corporation (Parent Corporation Only)
Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from subsidiaries $ 2,250,000 $ 2,200,000 $ 4,853,656
Interest and dividends on securities
available for sale:
Taxable -- 12,015 --
Nontaxable 60,382 78,551 --
Dividends 25,006 6,250 --
Interest from subsidiaries 4,460 148,209 150,281
Gain on sale of securities -- 10,924 --
- -------------------------------------------------------------------------------------
$ 2,339,848 $ 2,455,949 $ 5,003,937
- -------------------------------------------------------------------------------------
Expenses
Interest $ 5,184 $ 109,431 $ 101,530
Merger expenses 99,106 189,808 --
Miscellaneous 320,839 146,309 68,396
- -------------------------------------------------------------------------------------
$ 425,129 $ 445,548 $ 169,926
- -------------------------------------------------------------------------------------
Net income before income tax
benefit and undistributed
equity in subsidiaries $ 1,914,719 $ 2,010,401 $ 4,834,011
Income tax benefit 181,862 64,000 45,535
- -------------------------------------------------------------------------------------
Net income before undistributed
equity in subsidiaries $ 2,096,581 $ 2,074,401 $ 4,879,546
Undistributed (distributed) equity in
subsidiaries 2,390,439 2,116,119 (729,255)
- -------------------------------------------------------------------------------------
Net income $ 4,487,020 $ 4,190,520 $ 4,150,291
=====================================================================================
</TABLE>
42 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Virginia Commonwealth Financial Corporation (Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 4,487,020 $ 4,190,520 $ 4,150,291
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion of discounts on securities
purchased, net 861 2,800 --
Deferred tax (benefit) (52,560) -- --
Gain on sale of securities -- (10,924) --
Loss on other real estate 5,547 -- --
Distributed (undistributed) earnings
of subsidiaries (2,390,439) (2,116,119) 729,255
(Increase) in income taxes receivable (53,302) (18,465) (9,297)
(Increase) decrease in due from subsidiaries 854,000 1,854,222 (105,985)
(Increase) in interest receivable (5,717) (7,507) (21,035)
(Increase) in other assets (249,264) (10,317) --
Increase in other liabilities 271,477 35,364 10,000
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 2,867,623 $ 3,919,574 $ 4,753,229
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of securities available for sale $ (433,295) $(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 --
Capital investment in trust company subsidiary (1,100,000) -- --
Purchase of other real estate (133,355) -- --
Proceeds from sale of other real estate 127,809 -- --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities $(1,538,841) $ 515,686 $(2,008,630)
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash dividends paid $(2,045,304) $(1,592,011) $(1,343,595)
Net (decrease) in short-term borrowings (854,000) (1,984,000) (32,000)
Issuance of common stock - dividend
reinvestment plan 145,803 289,736 329,738
Acquisition of common stock -- -- (177,909)
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities $(2,753,501) $(3,286,275) $(1,223,766)
- ---------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents $(1,424,719) $ 1,148,985 $ 1,520,833
Cash and Cash Equivalents
Beginning 2,669,818 1,520,833 --
- ---------------------------------------------------------------------------------------------------------
Ending $ 1,245,099 $ 2,669,818 $ 1,520,833
=========================================================================================================
Supplemental Schedule of Noncash
Investing Activities
Unrealized gain (loss) on securities available for sale $ (169,519) $ 25,382 $ --
=========================================================================================================
</TABLE>
1999 ANNUAL REPORT 43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
[LOGO OF YOUNT, HYDE & BARBOUR, P.C.]
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, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the three years ended December 31, 1999.
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 financial statements
of Virginia Heartland Bank which was pooled with Virginia Commonwealth Financial
Corporation as explained in Note 2 to the consolidated financial statements,
which statements are included in the restated 1997 financial statements and
reflect total revenue constituting 21.8% in 1997 of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion for 1997 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 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, 1999 and 1998, and the results
of their operations and their cash flows for the three years ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 14, 2000, except for the first paragraph in Note 2
as to which the date is February 14, 2000
44 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
OFFICERS
William B. Young, Chairman of the Board & Chief Executive Officer
O. R. Barham, Jr., President
Jeffrey W. Farrar, Executive Vice President & Chief Financial Officer
Edward V. Allison, Jr., Senior Vice President & Secretary
DIRECTORS
O. R. Barham, Jr.
W. Robert Jebson, Jr.
Gregory L. Fisher
H. Wayne Parrish
Marshall D. Gayheart, Jr.
Thomas F. Williams, Jr.
Taylor E. Gore
William B. Young
Second Bank & Trust
OFFICERS
Taylor E. Gore, Chairman of the Board
Kathleen A. Brew, Assistant Vice President
O. R. Barham, Jr., President & Chief Executive Officer
Katie S. Gardner, Assistant Vice President & Controller
Jeffrey W. Farrar, Senior Vice President
Richard T. Harrington, Assistant Vice President
Richard G. Frank, Senior Vice President & Senior Lender
Joseph K. Leake, Consumer Loan Officer
J. Quintin Mullins, Senior Vice President
Peggy P. Mocarski, Assistant Vice President
George L. Pulliam, Senior Vice President & Marketing & Products Director
G. William Morton, IV, Assistant Vice President
C. M. Ponton, Assistant Vice President
Georgia M. Willis, Senior Vice President & Manager of Branch Administration
Sallie E. Slaughter, Assistant Vice President
Connie M. Aylor, Branch Sales & Service Manager
Ann E. C. Homan, Vice President
Patricia A. Banks, Branch Sales & Service Manager
Charles A. Martorana, Vice President
Joanna G. Cook, Branch Sales & Service Manager
David W. Meadows, Vice President
Karen C. Ingram, Branch Sales & Service Manager
John E. Meyer, Vice President
Leslie A. Whalen, Branch Sales & Service Manager
Jerry L. Raines, Vice President
Steve A. Grayson, Assistant Cashier
Donna H. Rosson, Vice President
Julia E. McMann, Assistant Cashier
George J. Sutorka, Vice President
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
John J. Davies, III
MADISON ADVISORY BOARD
James W. Aylor
Thomas J. Weaver
James C. Graves
Donald R. Eddins
HARRISONBURG ADVISORY BOARD
Donald L. Lemish
Karen W. Wigginton
Janet T. Wendelken
D. Kenneth Patterson
Dean M. Nichols
Edward M. Young
Virginia Commonwealth Trust Company
J. Quintin Mullins, President &
Chief Executive Officer
Katie S. Gardner, Assistant Vice President &
Controller
William T. "Tripp" Butler, III,
Assistant Vice President
William L. Pierce Jr., Assistant Vice President &
Trust Officer
W. Scott Thompson, Assistant Vice President &
Trust Officer
Glenn F. Verity, Assistant Vice President &
Trust Officer
Virginia Heartland Bank
OFFICERS
William B. Young,
Chairman of the Board
Edward V. Allison, Jr., President &
Chief Executive Officer
Joyce H. Bledsoe, Financial Services
Officer & Assistant Secretary
Diane B. Fitzgerald, Vice President &
Branch Administrator
Gordon R. (Pete) Humes,
Vice President of Commercial
Banking & Business Development
Sonia Lloyd, Commercial Loan Officer
Christy F. Quesenbery, Vice President
of Operations & Compliance Officer
Darrell G. Swanigan, Vice President
of Loan Review & Collections
DIRECTORS
William B. Young, Chairman
Edward V. Allison, Jr.
President and CEO
Mark S. Gardner
Christopher M. Hallberg
Jerry W. Leonard
H. Wayne Parrish
Thomas Y. Welsh
1999 ANNUAL REPORT 45
<PAGE>
[MAP]
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
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
*(New in 2000)
1001 Warrenton Road
Falmouth, Virginia 22406
Caroline Savings Bank (Effective 2/14/00)
Bowling Green:
268 North Main Street
P.O. Box 860
Bowling Green, Virginia 22427
804-633-9883
Ladysmith:
P.O. Box 211
Ladysmith, Virginia 22501
804-448-4345
Leavells:
11019 Leavells Road
Fredericksburg, Virginia 22407
540-898-8186
46 VIRGINIA COMMONWEALTH FINANCIAL CORPORATION
<PAGE>
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS
Virginia Commonwealth Financial Corporation
P.O. Box 71
102 S. Main Street
Culpeper, Virginia 22701
(540) 825-4800
www.vcfc.com
ANNUAL MEETING
The Annual Meeting of Stockholders
will be held at 3:00 P.M. on Wednesday,
May 10, 2000 at the Lake of the Woods
Clubhouse, Locust Grove, Virginia. All
stockholders are cordially invited to attend.
NASDAQ SYMBOL: VCFC
LOCAL MARKET MAKERS:
BB&T Scott & Stringfellow
Davenport & Company LLC
Wheat First Union
Ferris, Baker & Watts
McKinnon & Co.
STOCK TRANSFER/
DIVIDEND PAYING AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
CORPORATE COUNSEL
Mays & Valentine, L.L.C.
1111 East Main Street
Richmond, Virginia 23208-1122
INVESTOR RELATIONS:
A copy of Virginia
Commonwealth Financial Corporation's
Form 10K will be furnished without charge to
stockholders upon written request to:
Mr. Jeffrey W. Farrar
Executive Vice President and Chief Financial Officer
Virginia Commonwealth Financial Corporation
P.O. Box 71
Culpeper, Virginia 22701
(540) 825-4800
Email: [email protected]
INDEPENDENT
AUDITOR
Yount, Hyde & Barbour, P.C.
50 South Cameron St.
Winchester, Virginia
STOCK AND DIVIDEND INFORMATION
A total of 2,046,484 shares were outstanding on December 31, 1999 held by
2300 stockholders of record. The Corporation's stock trades on the Nasdaq Small
Cap Market under the symbol VCFC. The Nasdaq Stock Market is a highly regulated
electronic securities market whose trading is 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. Listed
below are the high and low prices for the common stock for the last eight
quarters ended December 31, 1999.
1999 High Low 1998 High Low
- --------------------------------------------------------------------------------
1st Quarter $34.00 $29.00 1st Quarter $35.50 $32.75
2nd Quarter 31.00 26.00 2nd Quarter 46.50 34.00
3rd Quarter 31.00 26.50 3rd Quarter 41.50 38.75
4th Quarter 28.75 24.50 4th Quarter 38.50 33.50
Dividend Reinvestment Plan
Virginia Commonwealth Financial Corporation's Dividend Reinvestment Plan
provides each registered stockholder with an economical method of investing cash
dividends into additional shares of the Company's stock. Key advantages include
reinvestment of dividends without commissions and the ability to make volun-
tary contributions to purchase additional shares without commissions. For a
prospectus on the Dividend Reinvestment Plan, contact Registrar and Transfer at
(800) 368-5948.
1999 ANNUAL REPORT 47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,793
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,123
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,665
<INVESTMENTS-CARRYING> 23,516
<INVESTMENTS-MARKET> 23,242
<LOANS> 238,960
<ALLOWANCE> 2,740
<TOTAL-ASSETS> 371,657
<DEPOSITS> 325,541
<SHORT-TERM> 1,304
<LIABILITIES-OTHER> 1,628
<LONG-TERM> 0
0
0
<COMMON> 5,116
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<INTEREST-LOAN> 20,339
<INTEREST-INVEST> 6,254
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,593
<INTEREST-DEPOSIT> 11,536
<INTEREST-EXPENSE> 11,602
<INTEREST-INCOME-NET> 14,991
<LOAN-LOSSES> 673
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 10,974
<INCOME-PRETAX> 6,101
<INCOME-PRE-EXTRAORDINARY> 6,101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,487
<EPS-BASIC> 2.19
<EPS-DILUTED> 2.19
<YIELD-ACTUAL> 350,182
<LOANS-NON> 399
<LOANS-PAST> 98
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,183
<ALLOWANCE-OPEN> 2,286
<CHARGE-OFFS> (291)
<RECOVERIES> 72
<ALLOWANCE-CLOSE> 2,740
<ALLOWANCE-DOMESTIC> 703
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,037
</TABLE>
