Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended: Commission File
March 31, 1996 Number: 33-67746
Virginia First Financial Corporation
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1678497
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Franklin and Adams Streets, Petersburg, Virginia 23804-2009
(Address of Principal Executive Office) (Zip Code)
804-733-0333 or 804-748-5847
(Registrant's Telephone Number, Including Area Code)
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
At May 1, 1996, 5,740,320 shares of common stock of the Registrant were
outstanding.
Virginia First Financial Corporation
Quarterly Report on Form 10-Q
March 31, 1996
Index
Part I. Financial Information Page No.
Item 1 Consolidated Statements of Condition as of
March 31, 1996, June 30, 1995, and March 31, 1995 3
Consolidated Statements of Operations for the
three-month and nine-month periods ended
March 31, 1996 and March 31, 1995 4
Consolidated Statements of Cash Flows for the
three-month and nine-month periods ended
March 31, 1996 and March 31, 1995 5
Selected Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 4 Submission of Matters to a Vote of Security Holders 48
Item 6 Exhibits and Reports on Form 8-K 48
Signatures 49
2
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, June 30, March 31,
(In thousands, except share data) 1996 1995 1995
--------------------- --------------------- ----------------------
(Unaudited) (Note) (Unaudited)
Assets
<S> <C>
Cash and cash equivalents $ 22,067 $ 16,638 $ 18,841
Investment securities, net 11,550 23,090 23,407
Mortgage-backed securities and collateralized
mortgage obligations, net 12,613 9,371 10,273
Loans receivable held for investment, net 592,882 580,507 569,905
Loans receivable held for sale 44,972 35,542 14,755
Real estate acquired for development 733 757 880
Real estate owned, net 5,831 3,256 3,232
Accrued interest receivable, net 4,952 4,117 3,940
Federal Home Loan Bank stock, at cost 5,728 7,333 5,983
Office properties and equipment, net 8,759 8,867 8,507
Excess of cost over fair value of tangible net assets
acquired, net 1,983 2,168 2,229
Other assets 1,861 1,903 2,031
===================== ===================== ======================
Total assets $ 713,931 $ 693,549 $ 663,983
===================== ===================== ======================
Liabilities and Stockholders' Equity
Deposits $ 575,942 $ 503,667 $ 486,505
Notes payable and other borrowings 598 557 10,066
Advances from Federal Home Loan Bank 74,552 134,658 114,658
Advance payments by borrowers for taxes and insurance 3,103 2,254 2,607
Accrued interest payable 494 934 792
Accrued expenses and other liabilities 4,128 2,707 2,715
--------------------- --------------------- ----------------------
Total liabilities 658,817 644,777 617,343
--------------------- --------------------- ----------------------
Stockholders' equity:
Preferred stock of $1 par value. Authorized 5,000,000 shares;
none issued - - -
Common stock of $1 par value. Authorized 20,000,000 shares;
issued and outstanding 5,615,450 shares at March 31, 1996,
5,569,636 at June 30, 1995 and March 31, 1995 5,615 5,570 5,570
Additional paid-in capital 8,341 8,078 8,078
Retained earnings - substantially restricted 41,143 35,219 33,183
Net unrealized gain (loss) on securities available for sale,
net of taxes 15 (95) (191)
--------------------- --------------------- ----------------------
Total stockholders' equity 55,114 48,772 46,640
--------------------- --------------------- ----------------------
Total liabilities and stockholders' equity $ 713,931 $ 693,549 $ 663,983
===================== ===================== ======================
</TABLE>
NOTE: The Consolidated Statements of Condition for June 30, 1995, has been taken
from the Audited Financial Statements.
The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements.
3
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
(In thousands, except per share data) 1996 1995
------------------ -----------------
(Unaudited) (Unaudited)
<S> <C>
Interest Income
Loans receivable $ 13,880 13,029
Mortgage-backed securities and collateralized
mortgage obligations 105 158
Investment securities 276 446
Other interest-earning assets 220 102
------------------ -----------------
Total interest income 14,481 13,735
------------------ -----------------
Interest Expense
Deposits 6,697 5,304
Borrowings 1,207 1,856
------------------ -----------------
Total interest expense 7,904 7,160
------------------ -----------------
Net interest income 6,577 6,575
Provision for loan losses 413 373
------------------ -----------------
Net interest income after provision for loan losses 6,164 6,202
------------------ -----------------
Noninterest Income
Gain on sale of loans and securitized loans, net 1,067 278
Loan servicing income 821 802
Gain on sale of loan servicing rights - 14
Gain (loss) on sale of investment securities - 14
Loss on sale and revaluation of mortgage-backed securities
and collateralized mortgage obligations - -
Financial service fees 546 459
Gain on sale of real estate owned 66 63
Loss on revaluation of real estate owned (77) (80)
Other 90 7
------------------ -----------------
Total noninterest income 2,513 1,557
------------------ -----------------
Noninterest Expense
Personnel 2,548 2,309
Occupancy, net 447 385
Equipment 347 265
Advertising 87 59
Federal deposit insurance premiums 301 264
Data processing 438 364
Amortization of intangibles 61 62
Other 1,026 639
------------------ -----------------
Total noninterest expenses 5,255 4,347
------------------ -----------------
Earnings before income tax expense 3,422 3,412
Income tax expense 1,231 1,359
================== =================
Net earnings $ 2,191 2,053
================== =================
Net earnings per share $ .38 .36
================== =================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------------
(In thousands, except per share data) 1996 1995
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C>
Interest Income
Loans receivable $ 41,797 $ 37,209
Mortgage-backed securities and collateralized
mortgage obligations 304 504
Investment securities 1,107 1,311
Other interest-earning assets 507 262
------------------ ------------------
Total interest income 43,715 39,286
------------------ ------------------
Interest Expense
Deposits 19,620 14,781
Borrowings 4,610 4,911
------------------ ------------------
Total interest expense 24,230 19,692
------------------ ------------------
Net interest income 19,485 19,594
Provision for loan losses 1,344 948
------------------ ------------------
Net interest income after provision for loan losses 18,141 18,646
------------------ ------------------
Noninterest Income
Gain on sale of loans and securitized loans, net 1,994 673
Loan servicing income 2,536 2,239
Gain on sale of loan servicing rights - 14
Gain (loss) on sale of investment securities - (52)
Loss on sale and revaluation of mortgage-backed securities
and collateralized mortgage obligations - (50)
Financial service fees 1,677 1,486
Gain on sale of real estate owned 136 205
Loss on revaluation of real estate owned (444) (153)
Other 186 108
------------------ ------------------
Total noninterest income 6,085 4,470
------------------ ------------------
Noninterest Expense
Personnel 7,127 7,639
Occupancy, net 1,202 1,091
Equipment 943 782
Advertising 267 229
Federal deposit insurance premiums 862 784
Data processing 1,286 1,152
Amortization of intangibles 185 185
Other 2,538 2,102
------------------ ------------------
Total noninterest expenses 14,410 13,964
------------------ ------------------
Earnings before income tax expense 9,816 9,152
Income tax expense 3,617 3,707
================== ==================
Net earnings $ 6,199 $ 5,445
================== ==================
Net earnings per share $ 1.07 $ .96
================== ==================
</TABLE>
The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements.
4
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------
(In thousands) 1996 1995
--------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C>
Operating Activities:
Net earnings $ 2,191 $ 2,053
Adjustment to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 294 258
Provision for loan losses and losses on real estate owned 490 453
Loans and securitized loans held for sale:
Originations and purchases (83,700) (37,596)
Gains on sales (1,991) (247)
Proceeds from sales 92,566 40,984
Losses on securities available for sale and held to maturity - -
(Increase) decrease in other assets 198 (940)
Increase in accrued expenses and other liabilities 431 (407)
--------------------- ---------------------
Net cash provided by (used in) operating activities 10,479 4,558
--------------------- ---------------------
Investing Activities:
Net increase in loans receivable held for investment (1,573) (25,313)
Mortgage-backed securities available for sale:
Purchases (6,112) -
Principal collected 567 529
Mortgage-backed securities held to maturity:
Principal collected - 32
Investment securities available for sale:
Purchases (4,001) (53)
Proceeds from sales, net - -
Investment securities held to maturity:
Purchases - -
Principal collected 26 26
Office properties and equipment
Purchases (159) (222)
Proceeds from sales, net - 1
--------------------- ---------------------
Net cash used in investing activities (11,252) (25,000)
--------------------- ---------------------
Financing Activities:
Net increase (decrease) in savings, checking and
money market deposit accounts 13,465 (13,397)
Net increase in certificates of deposit 12,677 28,892
Borrowings resulting from:
Securities sold under agreements to repurchase - 345
Advances from Federal Home Loan Bank 70,144 21,536
Other 3,621 3,642
Repayments of borrowings attributable to:
Securities sold under agreements to repurchase - (90)
Advances from Federal Home Loan Bank (106,500) (22,000)
Other (3,054) (3,636)
Net increase in mortgage escrow funds 1,120 951
--------------------- ---------------------
Net cash provided by financing activities (8,527) 16,243
--------------------- ---------------------
Net increase in cash and cash equivalents (9,300) (4,199)
Cash and cash equivalents at beginning of period 31,367 23,040
===================== =====================
Cash and cash equivalents at end of period $ 22,067 $ 18,841
===================== =====================
Supplemental Disclosures of Cash Flow Information:
Cash payments of interest $ 9,539 $ 7,079
===================== =====================
Cash payments of income taxes $ 1,131 $ 1,254
===================== =====================
<CAPTION>
Nine Months Ended
March 31,
-----------------------------------------------
(In thousands) 1996 1995
--------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C>
Operating Activities:
Net earnings $ 6,199 $ 5,445
Adjustment to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 849 766
Provision for loan losses and losses on real estate owned 1,788 1,101
Loans and securitized loans held for sale:
Originations and purchases (291,878) (156,052)
Gains on sales (1,994) (642)
Proceeds from sales 289,275 169,365
Losses on securities available for sale and held to maturity - 50
(Increase) decrease in other assets 813 (1,703)
Increase in accrued expenses and other liabilities 981 93
--------------------- ---------------------
Net cash provided by (used in) operating activities 6,033 18,423
--------------------- ---------------------
Investing Activities:
Net increase in loans receivable held for investment (12,375) (83,866)
Mortgage-backed securities available for sale:
Purchases (6,112) -
Principal collected 2,866 1,467
Mortgage-backed securities held to maturity:
Principal collected - 146
Investment securities available for sale:
Purchases (10,062) (218)
Proceeds from sales, net - 3,500
Investment securities held to maturity:
Purchases (5,000) (7,000)
Principal collected 17,578 111
Office properties and equipment
Purchases (556) (349)
Proceeds from sales, net 2 1
--------------------- ---------------------
Net cash used in investing activities (13,659) (86,208)
--------------------- ---------------------
Financing Activities:
Net increase (decrease) in savings, checking and
money market deposit accounts 20,989 (46,143)
Net increase in certificates of deposit 51,286 75,928
Borrowings resulting from:
Securities sold under agreements to repurchase - 18,582
Advances from Federal Home Loan Bank 134,644 98,478
Other 10,030 9,733
Repayments of borrowings attributable to:
Securities sold under agreements to repurchase - (8,888)
Advances from Federal Home Loan Bank (194,750) (63,692)
Other (9,993) (9,911)
Net increase in mortgage escrow funds 849 661
--------------------- ---------------------
Net cash provided by financing activities 13,055 74,748
--------------------- ---------------------
Net increase in cash and cash equivalents 5,429 6,963
Cash and cash equivalents at beginning of period 16,638 11,878
===================== =====================
Cash and cash equivalents at end of period $ 22,067 $ 18,841
===================== =====================
Supplemental Disclosures of Cash Flow Information:
Cash payments of interest $ 25,658 $ 19,358
===================== =====================
Cash payments of income taxes $ 3,424 $ 3,708
===================== =====================
</TABLE>
The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements.
5
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Selected Notes to Consolidated Financial Statements
Note 1: The interim condensed consolidated financial statements are
unaudited but, in the opinion of management, reflect all
adjustments necessary for a fair presentation of results for
such periods. All such adjustments are of a normal, recurring
nature. The results of operations for any interim period are
not necessarily indicative of results for the full year. These
consolidated financial statements should be read in
conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report for the
year ended June 30, 1995 ("fiscal year 1995"). The
accompanying consolidated financial statements for prior
periods reflect certain reclassifications in order to conform
to the fiscal year 1996 presentation.
Note 2: For purposes of computing net earnings per share, the weighted
average number of shares outstanding for the quarters ended
March 31, 1996 and 1995 were 5,805,881 and 5,675,212,
respectively. The number of shares for the quarter ended March
31, 1995 has been adjusted to reflect the two-for-one split of
the Company's common stock, which occurred November 17, 1995.
During the quarters ended March 31, 1996 and 1995, the Company
paid cash dividends of 1.5 cents and 1.25 cents per share,
respectively.
Note 3: Regulatory Capital of Virginia First Savings Bank:
<TABLE>
<CAPTION>
Excess
Over
Actual Required Requirement
---------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(In thousands)
March 31, 1996
<S> <C>
Tangible capital $52,488 7.38% $10,669 1.50% $41,819 5.88%
Core capital 52,764 7.42 28,463 4.00 24,301 3.42
Risk-based capital 58,626 11.45 40,953 8.00 17,673 3.45
March 31, 1995
Tangible capital $43,805 6.63% $ 9,917 1.50% $33,888 5.13%
Core capital 44,204 6.68 26,461 4.00 17,743 2.68
Risk-based capital 49,540 10.20 38,843 8.00 10,697 2.20
</TABLE>
See Page 40 for a reconciliation of GAAP capital to regulatory capital as of
March 31, 1996.
6
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Virginia First Financial Corporation (the "Company") was incorporated
in Virginia in 1993 to serve as the holding company of Virginia First Savings
Bank, F.S.B. (the "Savings Bank"). The Savings Bank is a federally chartered
capital stock savings bank with its principal offices in Petersburg, Virginia.
The Savings Bank, incorporated in 1888, is one of the oldest financial
institutions in the Commonwealth of Virginia.
The Company's principal business activities, which are conducted
through the Savings Bank, are attracting checking and savings deposits from the
general public through its retail banking offices and originating, servicing,
investing in and selling loans secured by first mortgage liens on single-family
dwellings, including condominium units. The Company also lends funds to retail
banking customers by means of home equity and installment loans, and originates
residential construction loans and loans secured by commercial property,
multi-family dwellings and manufactured housing units. The Company invests in
certain U.S. Government and agency obligations and other investments permitted
by applicable laws and regulations. The operating results of the Company are
highly dependent on net interest income, the difference between interest income
earned on loans and investments and the cost of checking and savings deposits
and borrowed funds.
Deposit accounts up to $100,000 are insured by the Savings Association
Insurance Fund administered by the Federal Deposit Insurance Corporation (the
"FDIC"). The Savings Bank is a member of the Federal Home Loan Bank (the "FHLB")
of Atlanta. The Company and the Savings Bank are subject to the supervision,
regulation and examination of the Office of Thrift Supervision (the "OTS") and
the FDIC. The Savings Bank is also subject to the regulations of the Board of
Governors of the Federal Reserve System governing reserves required to be
maintained against deposits.
The Company's only direct subsidiary is the Savings Bank and the
Company has no material assets or liabilities, except for the stock of the
Savings Bank. The Savings Bank has two active subsidiaries; one is engaged in
real estate development and the other is a title insurance agency.
7
The following commentary discusses major components of the Company's
business and presents an overview of the Company's consolidated results of
operations during the three-month and nine-month periods ended March 31, 1996
and 1995, and its consolidated financial position at March 31, 1996, June 30,
1995 and March 31, 1995. This discussion should be reviewed in conjunction with
the consolidated financial statements and accompanying notes and other
statistical information presented in the Company's Annual Report for the fiscal
year ended June 30, 1995.
Results of Operations
Results of operations for the three-month periods ended March 31, 1996
(the third quarter of the fiscal year ending June 30, 1996, or "fiscal year
1996") and March 31, 1995 (the third quarter of the fiscal year ended June 30,
1995, or "fiscal year 1995") reflect the Company's focus on expanding its
community banking and mortgage banking operations.
The Company's results of operations for the first nine months of fiscal
year 1996 reflect several differences from the same period in fiscal year 1995.
As a result of rising market interest rates, originations of residential
mortgage loans had declined dramatically in fiscal year 1995 compared to fiscal
year 1994, which resulted in a significant decrease in gains on sales of
mortgage loans in the first nine months of fiscal year 1995. During the
following twelve month period, market interest rates have moderated, and the
Company realized higher loan originations and sales in the first nine months of
fiscal year 1996 when compared to the same period in fiscal year 1995.
Net interest income declined by 0.6% in the first nine months of fiscal
year 1996, compared to the first nine months of fiscal year 1995. While recent
increases in capital have permitted the Company to increase both its assets and
liabilities, increases in interest expense exceeded the increase in interest
income for the first nine months of fiscal year 1996. The interest expense
increase is attributable to the general increase in prevailing rates and a
continued migration by depositors from lower-yielding checking and savings
deposits to higher-yielding certificates of deposit. For the first nine months
of fiscal year 1995, net interest income increased significantly compared to the
first half of fiscal year 1994. Most of the increase in net interest income in
the first nine months of fiscal year 1995 were attributable to increases in the
size of the Company's balance sheet, as increases in capital permitted the
Company to increase both its assets and its liabilities. The increases in
capital in the past two fiscal years have been generated almost entirely by
retained net earnings. Thus, in the first nine months of fiscal year 1995, the
interest spreads on loans and investments mitigated the decline in earnings from
mortgage banking operations. Finally, noninterest expenses increased by 3.2%
from $14.0 million in the first nine months of fiscal year 1995 to $14.4 million
in the first nine months of fiscal year 1996, despite a 6.7% reduction in
personnel expenses.
8
Net Earnings. The Company's net earnings for the third quarter of
fiscal year 1996 were $2,191,000, an increase of 6.7% over the $2,053,000 for
the third quarter of fiscal year 1995. On a per share basis, earnings for the
third quarter of fiscal year 1996 were $.38, an increase of 5.6% over the $.36
for the third quarter of fiscal year 1995.
The Company's net earnings for the first nine months of fiscal year
1996 were $6,199,000, an increase of 13.9% over the $5,445,000 for the first
nine months of fiscal year 1995. On a per share basis, earnings for the first
nine months of fiscal year 1996 were $1.07, an increase of 11.5% over the $.96
for the first nine months of fiscal year 1995.
The per share earnings figures for the three- and nine-month periods
ended March 31, 1995 have been adjusted to reflect the two-for-one split of the
Company's common stock, which occurred on November 17, 1995.
The following table shows changes in earnings per share:
Fiscal Year Fiscal Year
1996 1995
Versus 1995 Versus 1994
----------- -----------
Net earnings per share for the
first nine months of fiscal years
1995 and 1994, respectively $ .96 $ .92
Increase (decrease) attributable to:
Net interest income (.02) .71
Provision for loan losses (.07) (.01)
Noninterest income .28 (.86)
Noninterest expense (.08) .35
Income taxes .02 (.14)
Average shares outstanding (.02) (.01)
--- ---
Net increase .11 .04
--- ---
Net earnings per share for the
first nine months of fiscal years
1996 and 1995, respectively $ 1.07 $ .96
==== ===
Net Interest Income. Net interest income before the provision for loan
losses for the third quarter of fiscal year 1996 was $6,577,000, an increase of
$2,000, or 0.1%, compared to the third quarter of fiscal year 1995. For the
third quarter of fiscal year 1995, net interest income before the provision for
loan losses was $6,575,000, an increase of $1,323,000, or 25.2%, compared to the
third quarter of fiscal year 1994.
9
Net interest income before the provision for loan losses for the first
nine months of fiscal year 1996 was $19,485,000, a decrease of $109,000, or 0.6
%, compared to the first nine months of fiscal year 1995. For the first nine
months of fiscal year 1995, net interest income before the provision for loan
losses was $19,594,000, an increase of $4,037,000, or 25.9%, compared to the
first nine months of fiscal year 1994.
The Company's net earnings are highly dependent on the difference, or
"spread", between the income it receives from its loan and investment portfolios
and its cost of funds, consisting principally of the interest paid on checking
and savings accounts and borrowings.
The average yield received on the Company's loan portfolio may not
change at the same pace as the interest rates it must pay on its deposits and
borrowings. As a result, in times of rising interest rates, decreases in the
difference between the yield received on loans and other investments and the
rate paid on deposits and borrowings usually occur. However, interest received
on short-term investments and adjustable rate mortgage loans and construction
loans also increase as a result of upward trends in short-term interest rates,
which enables the Company to partially compensate for increased deposit and
borrowing costs.
The following tables reflect the average yields earned and rates paid
by the Company during the three-month and nine-month periods ended March 31,
1996 and 1995. In computing the average yields and rates, the accretion of loan
fees are considered an adjustment to yield.
10
<TABLE>
<CAPTION>
(In thousands)
Three-Month Periods
Ended March 31 1996 1995
------------------------------------- ------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ---- --------- --------- ----
Interest-earning assets;
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1)(2) $ 631,769 $ 13,880 8.91% $ 575,672 $ 13,029 9.18%
Mortgage-backed securities and
collateralized mortgage obligations 7,090 105 6.01 10,294 158 6.22
Investments 19,504 276 5.74 29,314 446 6.17
Other interest-earning assets 17,697 220 5.04 7,032 102 5.88
--------- --------- ---- --------- --------- ----
Total interest-earning assets 676,060 14,481 8.69 622,312 13,735 8.95
--------- --------- ---- --------- --------- ----
Noninterest-earning assets:
Cash and cash equivalents 8,183 7,856
Office properties and equipment, net 8,832 8,530
Other assets 14,821 10,565
Allowance for loan losses (6,253) (6,276)
--------- ----------
Total assets $ 701,643 $ 642,987
========= ==========
Interest-bearing liabilities:
Checking and money market
deposit accounts $ 88,703 828 3.79 $ 82,900 786 3.85
Savings deposits 67,823 577 3.45 84,555 720 3.45
Certificates 360,784 5,292 5.95 279,650 3,798 5.51
Federal Home Loan Bank advances 89,733 1,202 5.43 108,582 1,704 6.36
Other borrowings 425 5 4.77 9,868 152 6.25
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities 607,468 7,904 5.28 565,555 7,160 5.13
--------- --------- ---- --------- --------- ----
Noninterest-bearing liabilities:
Deposits 30,558 23,828
Other 8,790 7,179
--------- ----------
Total liabilities 646,816 596,562
Stockholders' equity 54,827 46,425
--------- ----------
Total liabilities and
stockholders' equity $ 701,643 $ 642,987
========= ==========
Average dollar difference between
interest-earning assets
and interest-bearing liabilities $ 68,592 $ 56,757
========= ==========
Net interest income $ 6,577 $ 6,575
========= ==========
Interest rate spread (3) 3.41% 3.82%
==== ====
Net yield on average interest-earning assets (4) 3.95% 4.28%
==== ====
Notes on Page 12.
11
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Nine-Month Periods
Ended March 31 1996 1995
------------------------------------- ------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ---- --------- --------- -----
Interest-earning assets;
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1)(2) $ 622,720 $ 41,797 8.94% $ 554,811 $ 37,209 8.93%
Mortgage-backed securities and
collateralized mortgage obligations 7,918 304 5.11 10,808 504 6.21
Investments 24,794 1,107 5.95 29,299 1,311 5.96
Other interest-earning assets 13,254 507 5.10 7,063 262 4.94
--------- --------- ---- --------- --------- -----
Total interest-earning assets 668,686 43,715 8.71 601,981 39,286 8.69
--------- --------- ---- --------- --------- -----
Noninterest-earning assets:
Cash and cash equivalents 8,671 8,455
Office properties and equipment, net 8,859 8,595
Other assets 11,214 10,524
Allowance for loan losses (6,086) (5,967)
--------- ----------
Total assets $ 691,344 $ 623,588
========= ==========
Interest-bearing liabilities:
Checking and money market
deposit accounts $ 85,942 2,504 3.88 $ 87,137 2,282 3.49
Savings deposits 68,382 1,764 3.44 94,408 2,445 3.45
Certificates 342,749 15,352 5.97 254,691 10,054 5.26
Federal Home Loan Bank advances 102,326 4,594 5.98 100,650 4,482 5.93
Other borrowings 372 16 5.73 9,579 429 5.97
--------- --------- ---- --------- --------- -----
Total interest-bearing liabilities 599,771 24,230 5.38 546,465 19,692 4.80
--------- --------- ---- --------- --------- -----
Noninterest-bearing liabilities:
Deposits 29,827 24,947
Other 8,821 7,657
--------- ----------
Total liabilities 638,419 579,069
Stockholders' equity 52,925 44,519
--------- ----------
Total liabilities and
stockholders' equity $ 691,344 $ 623,588
========= ==========
Average dollar difference between
interest-earning assets
and interest-bearing liabilities $ 68,915 $ 55,516
========= ==========
Net interest income $ 19,485 $ 19,594
========= ==========
Interest rate spread (3) 3.33% 3.89%
==== ====
Net yield on average interest-earning assets (4) 3.88% 4.34%
==== ====
</TABLE>
(1) Loans receivable shown gross of allowance for loan losses, gross of
premiums/discounts.
(2) Nonaccrual loans are included in the average loan balances and income
on such loans is recognized on a cash basis.
(3) Average yield on total interest-earning assets during the period less
the average rate paid on total interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
12
The Company's net interest income is affected by changes in both
average interest rates and the average volumes of interest-earning assets and
interest-bearing liabilities. Total interest income increased by $4,429,000 in
the first nine months of fiscal year 1996 and increased by $7,996,000 in the
first nine months of fiscal year 1995, as compared to the same periods in the
previous fiscal years. Total interest expense increased by $4,538,000 in the
first nine months of fiscal year 1996 and increased by $3,959,000 in the first
nine months of fiscal year 1995, as compared to the same periods in the previous
fiscal years. The fiscal year 1996 and 1995 increases in both interest income
and interest expense are due primarily to increases in average interest-earning
assets and interest-bearing liabilities, and increases in the market interest
rates on loans and deposits. Deposit rates increased in the first nine months of
fiscal year 1996, while assets yields remained flat. By contrast, asset yields
increased more rapidly than deposit rates in the first nine months of fiscal
year 1995.
The following tables show the amounts of the changes in interest income
and expense which can be attributed to rate (change in rate multiplied by old
volume) and volume (change in volume multiplied by old rate) for the three-month
and nine-month periods ended March 31, 1996 and 1995. The changes in net
interest income due to both volume and rate changes have been allocated to
volume and rate in proportion to the relationship of absolute dollar amounts of
the change of each. The table demonstrates that the $109,000 decline in net
interest income in the first nine months of fiscal year 1996 was the net result
of a growing balance sheet adversely affected by rising deposit rates and flat
asset yields, while the $4,037,000 increase in net interest income in the first
nine months of fiscal year 1995 was the combined result of rising asset yields
and deposit rates and a growing balance sheet.
<TABLE>
<CAPTION>
(In thousands)
Three-Month Periods
Ended March 31 Fiscal Year 1996 Versus 1995 Fiscal Year 1995 Versus 1994
- -------------- ---------------------------- ----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- ------------------------------------
Volume Rate Total Volume Rate Total
------- ----- ------- ------- ------- -------
<S> <C>
Loans receivable $ 1,216 $(365) $ 851 $ 1,987 $ 1,038 $ 3,025
Mortgage-backed securities and
collateralized mortgage obligations (48) (5) (53) (69) 30 (39)
Investments (181) 11 (170) 136 127 263
Other interest-earning assets 135 (17) 118 (12) 31 19
------- ----- ------- ------- ------- -------
Total interest-earning assets 1,122 (376) 746 2,042 1,226 3,268
------- ----- ------- ------- ------- -------
Checking and money market
deposit accounts 54 (11) 43 (59) 86 27
Savings deposits (142) (2) (144) (163) (3) (166)
Certificates 1,171 323 1,494 858 232 1,090
Federal Home Loan Bank advances (272) (230) (502) 665 182 847
Other borrowings (118) (29) (147) 142 5 147
------- ----- ------- ------- ------- -------
Total interest-bearing liabilities 693 51 744 1,443 502 1,945
------- ----- ------- ------- ------- -------
Net interest income $ 429 $(427) $ 2 $ 599 $ 724 $ 1,323
======= ===== ======= ======= ======= =======
</TABLE>
13
<TABLE>
<CAPTION>
(In thousands)
Nine-Month Periods
Ended March 31 Fiscal Year 1996 Versus 1995 Fiscal Year 1995 Versus 1994
- -------------- ---------------------------- ----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------- ------------------------------------
Volume Rate Total Volume Rate Total
------- ----- ------- ------- ------- -------
<S> <C>
Loans receivable $ 4,558 $ 30 $ 4,588 $ 5,008 $ 2,413 $ 7,421
Mortgage-backed securities and
collateralized mortgage obligations (120) (80) (200) (369) 204 (165)
Investments (201) (3) (204) 354 361 715
Other interest-earning assets 237 8 245 (25) 50 25
------- ------- ------- ------- ------- -------
Total interest-earning assets 4,474 (45) 4,429 4,968 3,028 7,996
------- ------- ------- ------- ------- -------
Checking and money market
deposit accounts (31) 254 223 (1,037) 964 (73)
Savings deposits (671) (10) (681) (68) (12) (80)
Certificates 3,813 1,484 5,297 1,465 204 1,669
Federal Home Loan Bank advances 75 37 112 1,630 393 2,023
Other borrowings (397) (16) (413) 381 39 420
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 2,789 1,749 4,538 2,371 1,588 3,959
------- ------- ------- ------- ------- -------
Net interest income $ 1,685 $(1,794) $ (109) $ 2,597 $ 1,440 $ 4,037
======= ======= ======= ======= ======= =======
</TABLE>
Asset/Liability Management. Management strives to manage the maturity
or repricing match between assets and liabilities. The degree to which the
Company is "mismatched" in its maturities is a primary measure of interest rate
risk. In periods of stable interest rates, net interest income can be increased
by financing higher yielding long-term mortgage loan assets with lower cost
short-term deposits and borrowings. Although such a strategy may increase
profits in the short run, it increases the risk of exposure to rising interest
rates and can result in funding costs rising faster than asset yields. The
Company attempts to limit its interest rate risk by selling a majority of the
fixed rate mortgage loans that it originates.
The following tables summarize the contractual repayment terms of the
total loans receivable of the Company as of March 31, 1996, as well as the
amount of fixed rate and variable rate loans due after March 31, 1997. The
tables have not been adjusted for estimates of prepayments and do not reflect
periodic repricing of adjustable rate loans. The tables do include $40,587,000
of fixed rate loans receivable held for sale and $4,385,000 of adjustable rate
loans held for sale as of March 31, 1996.
14
<TABLE>
<CAPTION>
Principal Repayment Contractually Due in
Balance 12-Month Period Ending March 31,
Outstanding -----------------------------------------------------------------
March 31, 2000- 2002- 2007 and
(In thousands) 1996 1997 1998 1999 2001 2006 Thereafter
--------- -------- ------- ------- ------- ------- ----------
<S> <C>
Residential and commercial real estate (1) $469,624 $ 32,868 $21,096 $22,809 $30,580 $ 80,150 $282,121
Construction 116,712 91,485 23,703 1,174 350 -- --
Consumer and other loans 51,518 14,475 10,298 7,862 9,349 1,712 7,822
-------- -------- ------- ------- ------- -------- --------
$637,854 $138,828 $55,097 $31,845 $40,279 $ 81,862 $289,943
======== ======== ======= ======= ======= ======== ========
</TABLE>
(1) Includes loans held for sale.
<TABLE>
<CAPTION>
Fixed Variable
(In thousands) Rate Rate Total
-------- -------- --------
<S> <C> <C> <C> <C>
Residential and commercial real estate (2) $135,143 $301,613 $436,756
Construction 348 24,879 25,227
Consumer and other loans 34,239 2,804 37,043
-------- -------- --------
Total due after March 31, 1997 $169,730 $329,296 $499,026
======== ======== ========
</TABLE>
(2) Includes loans held for sale.
Contractual principal repayments of loans do not necessarily reflect
the actual term of the Company's loan portfolio. The average lives of mortgage
loans are substantially less than their contractual terms because of loan
prepayments and because of enforcement of due-on-sale clauses, which gives the
Company the right to declare a loan immediately due and payable in the event,
among other things, the borrower sells the real property subject to the mortgage
and the loan is not repaid. In addition, certain borrowers increase their equity
in the security property by making payments in excess of those required under
the terms of the mortgage.
Asset and liability management strategies impact the one year maturity
"gap", which is the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing in one year or less. The
Company's one year gap was a positive 13.50% of total assets at March 31, 1996
as follows:
15
<TABLE>
<CAPTION>
1 Year 1 - 3 3 - 5 Over 5
(In thousands) Total or Less Years Years Years
--------- -------- -------- ------- --------
<S> <C>
Interest-earning assets:
Loans receivable (1) $ 644,336 $390,548 $101,254 $26,834 $125,700
Mortgage-backed securities and
collateralized mortgage obligations 12,613 558 1,116 1,116 9,823
Investments 17,278 5,610 480 4,510 6,678
Other interest-earning assets 11,527 11,527 -- -- --
--------- -------- -------- ------- --------
Total interest-earning assets 685,754 $408,243 $102,850 $32,460 $142,201
======== ======== ======= ========
Noninterest-earning assets 34,659
Allowance for loan losses (6,482)
---------
Total assets $ 713,931
=========
Interest-bearing liabilities:
Checking and money-market
deposit accounts (2) $ 93,213 $ 37,731 $ -- $ -- $ 55,482
Savings deposits (3) 69,072 17,268 9,670 8,289 33,845
Certificates 367,198 223,757 88,237 53,401 1,803
FHLB advances 74,552 32,500 27,500 11,500 3,052
Other borrowings 598 598 -- -- --
--------- -------- -------- ------- --------
Total interest-bearing liabilities 604,633 $311,854 $125,407 $73,190 $ 94,182
======== ======== ======= ========
Noninterest-bearing liabilities 54,184
--------
Total liabilities 658,817
Stockholders' equity 55,114
--------
Total liabilities and
stockholders' equity $ 713,931
=========
Maturity/repricing gap $ 96,389 $(22,557) $(40,730) $ 48,019
Cumulative gap $ 96,389 $ 73,832 $ 33,102 $ 81,121
As percent of total assets 13.50% 10.34% 4.64% 11.36%
</TABLE>
- -------------------------
(1) Loans receivable shown gross of allowance for loan losses, net of
premiums/discounts.
(2) The Company has found that interest checking accounts are generally not
sensitive to changes in interest rates and therefore has placed such
deposits in the "over 5 years" category.
(3) In accordance with standard industry practice, decay factors have been
applied to savings deposits.
The preceding table does not reflect the degree to which adjustment of
rate sensitive assets may be restricted by contractual or other limitations
(such as loan rate ceilings) to applicable asset repricing mechanisms. Included
in rate sensitive assets maturing or repricing in one year or less are $170.9
million of adjustable rate mortgage loans with rates tied to U.S. Treasury
securities with a constant maturity of one year and a 2.00% annual interest rate
increase or decrease cap. The movement of interest rates on these loans may not
precisely correspond with the upward or downward movement in loan market rates
or deposit and borrowing rates.
16
The Company's portfolio of loans held for investment totaled
$592,882,000 at March 31, 1996, representing 83.0% of total assets. The
following table sets forth information at the dates indicated concerning the
composition of the Company's loan portfolio, by type:
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995 March 31, 1995
-------------------- -------------------- -----------------
Percent Percent Percent
of of of
Gross Gross Gross
(In thousands) Amount Loans Amount Loans Amount Loans
--------- ----- --------- ----- --------- -----
<S> <C>
First mortgage loans:
Residential - fixed rate $ 74,387 12.3% $ 74,592 12.6% $ 78,748 13.6%
Residential - adjustable rate 257,543 42.8 256,463 43.4 250,331 43.1
-------- ----- -------- ----- -------- -----
Total residential 331,930 55.1 331,055 56.0 329,079 56.7
-------- ----- -------- ----- -------- -----
Commercial - fixed rate 17,769 3.0 14,678 2.5 15,715 2.7
Commercial - adjustable rate 36,132 6.0 45,630 7.7 45,824 7.9
-------- ----- -------- ----- -------- -----
Total commercial 53,901 9.0 60,308 10.2 61,539 10.6
-------- ----- -------- ----- -------- -----
Construction - fixed rate 15,194 2.5 9,640 1.6 -- --
Construction - adjustable rate 104,325 17.3 100,477 17.0 103,839 17.9
-------- ----- -------- ----- -------- -----
Total construction (1) 119,519 19.8 110,117 18.6 103,839 17.9
-------- ----- -------- ----- -------- -----
Total first mortgage loans 505,350 83.9 501,480 84.8 494,457 85.2
-------- ----- -------- ----- -------- -----
Second mortgage loans (2):
Fixed rate 16,403 2.7 14,981 2.6 14,118 2.4
Adjustable rate 28,167 4.7 24,845 4.2 23,326 4.0
-------- ----- -------- ----- -------- -----
Total second mortgage loans 44,570 7.4 39,826 6.8 37,444 6.4
-------- ----- -------- ----- -------- -----
Loans on savings accounts 1,339 0.2 1,363 0.2 1,022 0.2
-------- ----- -------- ----- -------- -----
Installment loans:
Fixed rate 47,904 8.0 44,977 7.6 44,214 7.6
Adjustable rate 3,333 0.5 3,481 0.6 3,721 0.6
-------- ----- -------- ----- -------- -----
Total installment loans 51,237 8.5 48,458 8.2 47,935 8.2
-------- ----- -------- ----- -------- -----
Gross Loans 602,496 100.0% 591,127 100.0% 580,858 100.0%
===== ===== =====
Less:
Unearned discount 429 1,361 1,419
Deferred income 2,703 2,886 3,013
Allowance for loan losses 6,482 6,373 6,521
-------- -------- --------
9,614 10,620 10,953
-------- -------- --------
Total net loans held for investment $592,882 $580,507 $569,905
======== ======== ========
</TABLE>
(1) Construction loans are shown net of undisbursed loan funds.
(2) Includes home equity lines of credit.
17
Provision for Loan Losses. The Company provided $413,000 during the
third quarter of fiscal year 1996 as additions to the allowance for loan losses,
compared to $373,000 in the third quarter of fiscal year 1995. The Company
provided $1,344,000 during the first nine months of fiscal year 1996 as
additions to the allowance for loan losses, compared to $948,000 in the first
nine months of fiscal year 1995. In establishing the level of the allowance for
loan losses, the Company considers many factors, including general economic
conditions, loan loss experience, historical trends and other circumstances,
both internal and external. The amount of the provision for loan losses is
established based on evaluations of the adequacy of the allowance for loan
losses. The Company considers the size and risk exposure of each segment of the
loan portfolio. For secured loans, management considers estimates of the fair
value of the collateral, considering the current and currently anticipated
future operating or sales conditions. Such estimates are particularly
susceptible to changes that could result in a material adjustment to future
results of operations. Factors such as independent appraisals, current economic
conditions and the financial condition of borrowers are continuously evaluated
to determine whether the Company's investment in such assets does not exceed
their estimated values. The Company's policy is to establish both general and
specific allowances for loan losses.
18
The following table presents the activity in the Company's allowance
for loan losses and selected loan loss data for the first nine months of fiscal
years 1996 and 1995:
(In thousands)
Nine-Month Periods
Ended March 31 1996 1995
- -------------- --------- -------
Balance at beginning of period $ 6,373 $ 5,611
Provision charged to expense 1,344 948
Loans charged off:
Residential real estate 3 2
Commercial real estate 1,056 --
Construction -- --
Consumer and other loans 219 72
-------- --------
Total charge-offs 1,278 74
-------- --------
Recoveries of loans previously charged off:
Residential real estate -- --
Commercial real estate -- --
Construction -- --
Consumer and other loans 43 36
-------- --------
Total recoveries 43 36
-------- --------
Net charge-offs 1,235 38
-------- --------
Balance at end of period $ 6,482 $ 6,521
======== ========
Average loans held for investment $591,441 $537,624
Loans held for investment at period end 599,364 576,426
Ratio of provision for loan losses to
average loans held for investment 0.23% 0.18%
Ratio of net charge-offs to average
loans held for investment 0.21% 0.01%
Ratio of allowance for loan losses to loans
held for investment at period end 1.08% 1.13%
While the Company's management believes that its present allowance for
loan losses is adequate, future adjustments may be necessary.
The allowance for loan losses is a general allowance applicable to all
loan categories; however, management has allocated the allowance to the various
portfolios to provide an indication of the relative risk characteristics of the
total loan portfolio. The allocation is based on the same judgmental criteria
discussed earlier in determining the level of the allowance and should not be
interpreted as an indication that chargeoffs for the balance of fiscal year 1996
will occur in these amounts, or proportions, or that the allocation indicates
future trends. The
19
allocation of the allowance at March 31, 1996, June 30, 1995 and March 31, 1995
and the ratio of the related outstanding loan balances to total loans held for
investment are as follows:
<TABLE>
<CAPTION>
(In thousands) March 31, 1996 June 30, 1995 March 31, 1995
------------------------- -------------------------- --------------------
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Loans Total Loans Total Loans
Held for Held for Held for
Allowance Investment Allowance Investment Allowance Investment
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate $1,280 62.5% $1,055 62.8% $ 980 63.1%
Commercial real estate 2,127 9.0 2,958 10.2 3,341 10.6
Construction 1,825 19.8 1,150 18.6 1,000 17.9
Consumer and other loans 1,250 8.7 1,210 8.4 1,200 8.4
------ ----- ------ ----- ------ -----
$6,482 100.0% $6,373 100.0% $6,521 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Business Lines. The Company tracks the performance of its business
lines using an internal value-based accounting system. Unlike generally accepted
accounting principles, no authoritative body of guidance exists for internal
financial accounting and reporting. The Company's internal accounting process is
based on practices which support its management structure and is not necessarily
comparable with similar information for other institutions. Results for the
first nine months of fiscal years 1996 and 1995 are presented in a consistent
manner. However, methodologies may change from time to time as accounting
systems are enhanced or business products change.
The following table details the profitability of the Company's two
business lines, retail banking and mortgage banking. Retail banking includes the
retail branch network and the retail lending group, the Company's equity
line/second mortgage and installment loan portfolios, and related customer
service and administrative activities. Mortgage banking includes the loan
production and servicing functions, the Company's mortgage loan and construction
loan portfolios, and related administrative activities. A match-funded transfer
pricing system is used to allocate interest income and expense between the two
business lines. Since retail banking is a net provider of corporate funds
(retail deposits exceed the retail loan portfolio), and mortgage banking is a
net user of corporate funds, the match-funded pricing system has the effect of
transferring interest income from mortgage banking to retail banking. Loan loss
provisions are allocated based on risk weightings in each business line's
portfolio and changes therein. Corporate administrative costs have also been
allocated to the business lines.
<TABLE>
<CAPTION>
(In thousands) Retail Banking Mortgage Banking Total
Nine-Month Periods ----------------------------- ---------------------------- -------------------------
Ended March 31 Increase Increase Increase
- -------------- 1996 1995 (Decrease) 1996 1995 (Decrease) 1996 1995 (Decrease)
------- ------- --------- ------ ------- --------- ------- ------- ---------
<S> <C>
Net interest income $9,762 $10,753 $ (991) $9,723 $8,841 $ 882 $19,485 $19,594 $ (109)
Provision for loan losses 217 262 (45) 1,127 686 441 1,344 948 396
Noninterest income 1,588 1,482 106 4,497 2,988 1,509 6,085 4,470 1,615
Noninterest expenses 8,050 6,941 1,109 6,360 7,023 (663) 14,410 13,964 446
Income taxes 1,136 2,015 (879) 2,481 1,692 789 3,617 3,707 (90)
------ ------- ------- ------ ------ ------ ----- ----- ----
Net earnings $1,947 $ 3,017 $(1,070) $4,252 $2,428 $1,824 $ 6,199 $5,445 $754
====== ======= ======= ====== ====== ====== ===== ===== ====
</TABLE>
20
Net earnings generated by retail banking were $1,947,000 in the first
nine months of fiscal year 1996, a decrease of 35.5% from the $3,017,000 of net
earnings in the first nine months of fiscal year 1995. Net interest income from
retail banking declined by $991,000, or 9.2%, as the rates paid on deposits grew
at a faster rate than yields earned on interest-earning assets. There were
sizable shifts in the components of the deposit base, as customers moved their
deposits into higher-rate certificates of deposit and out of lower-rate savings,
checking and money-market accounts. Noninterest income rose by 7.2% as the
Company collected more fees related to its checking account products.
Noninterest expenses increased by 16.0%, due in part to the expansion of the
Company's retail branch network by a net of one branch. The Company added two
branches and closed one branch between March 31, 1995 and March 31, 1996.
Net earnings from mortgage banking increased by 75.1% to $4,252,000 in
the first nine months of fiscal year 1996, when compared to net earnings of
$2,428,000 in the first nine months of fiscal year 1995. Net earnings were
positively affected by a 10.0% increase in the mortgage banking net interest
margin and a 9.4% decrease in noninterest expenses. Most of the reduction in
noninterest expenses is attributable to the restructuring of the Company's
mortgage loan production network. Higher loan production volume, lower mortgage
loan interest rates, and the majority of mortgage loan sales on a
servicing-released basis resulted in sharply higher loan sale gains and thus a
50.5% increase in mortgage banking's noninterest income.
Retail Banking Operations. The Company's retail banking activities
consist of attracting checking and savings deposits from the general public
through its retail banking offices and lending funds to retail banking customers
by means of home equity and installment loans.
The Company opened a full-service retail banking branch on September
11, 1995. The new branch is located at the intersection of Old Bridge Road and
Hedges Run Drive, at the "Lake Ridge Commons Shopping Center" in Woodbridge,
Virginia. The new branch is the Company's first retail banking presence in the
Northern Virginia market. The Company's Mortgage Banking Division is also
headquartered in Woodbridge. As of March 31, 1996, the Company operated
twenty-three full service retail facilities throughout Virginia.
The Company originated $3,489,000 of residential equity lines of credit
and fixed-rate second mortgages during the third quarter of fiscal year 1996,
compared to $3,614,000 in the third quarter of fiscal year 1995. The Company
originated $16,609,000 of residential equity lines of credit and fixed-rate
second mortgages during the first nine months of fiscal year 1996, compared to
$13,980,000 in the first nine months of fiscal year 1995.
The Company originated $6,256,000 of consumer and installment loans
during the third quarter of fiscal year 1996, compared to $5,335,000 in the
third quarter of fiscal year 1995. The
21
Company originated $17,114,000 of consumer and installment loans during the
first nine months of fiscal year 1996, compared to $19,740,000 in the first nine
months of fiscal year 1995.
The Company has placed emphasis on making these forms of credit
available to its retail customers. The Company's success in promoting these loan
products is attributed to enhanced training of retail branch personnel, the
centralization of credit decision-making, and marketing campaigns that target
these products.
In addition to originating consumer-type loans, the Company
occasionally purchases loans to obtain geographic diversity and yields not
obtainable in the Company's normal lending areas. The Company purchased $976,000
of fixed-rate second mortgage loans in the third quarter of fiscal year 1996; no
such loans were purchased in the third quarter of fiscal year 1995. For the
first nine months of fiscal year 1996, the Company purchased $976,000 of fixed
rate second mortgage loans, compared to $3,170,000 in the first nine months of
fiscal year 1995.
The following table summarizes retail banking loan originations and
purchases by type of loan for the three-month and nine-month periods ended March
31, 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands)
Three-Month Periods
Ended March 31 1996 1995
-------------- --------------------- ---------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
<S> <C>
Residential equity lines of credit (1) $ 2,104 19.6% $ 1,588 10.0%
Fixed-rate second mortgage loans 2,361 22.0 2,026 12.7
Consumer loans 6,256 58.4 12,337 77.3
------- ----- ------- -----
Total originations and purchases $10,721 100.0% $15,951 100.0%
======= ===== ======= =====
<CAPTION>
Nine-Month Periods
Ended March 31 1996 1995
-------------- --------------------- ---------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
<S> <C>
Residential equity lines of credit (1) $ 8,107 23.4% $ 5,947 14.6%
Fixed-rate second mortgage loans 9,478 27.3 8,032 19.7
Consumer loans 17,113 49.3 26,743 65.7
------- ----- ------- -----
Total originations and purchases $34,698 100.0% $40,722 100.0%
======= ===== ======= =====
</TABLE>
(1) Reflects loan balances prior to deduction of undisbursed loan amounts.
22
Mortgage Banking Operations. The principal sources of revenue from the
Company's mortgage banking operations are loan origination fees, loan servicing
fees, revenues from sales of loans, and revenues from any sales of rights to
service loans. The Company anticipates that loan servicing income and gains or
losses on sales of mortgage loans will continue to influence future net earnings
to a large degree.
As of October 31, 1994, the Company operated six mortgage loan
origination centers in southside, central and southwestern Virginia under the
trade name Virginia First Mortgage, and six mortgage loan origination centers in
northern Virginia and southern Maryland under the trade name Southern Atlantic
Mortgage. Effective November 1, 1994, the Company consolidated the back-office
operations of its mortgage banking units. The divisions were merged into a
single unit based in Woodbridge, Virginia using the name Virginia First
Mortgage. The consolidation eliminated duplicate support structures and provided
for more efficient and uniform delivery of mortgage loan services, which
contributed to a substantial decrease in personnel expenses. Additionally, as of
March 1, 1995, the Company closed its mortgage loan production center in
Clinton, Maryland, reducing the total number of centers at December 31, 1995 to
eleven.
The Company is implementing the following additional consolidations in
mortgage banking:
1. The mortgage loan office in Arnold, Maryland has been consolidated
with the office in Rockville, Maryland, effective as of February 1, 1996.
2. The mortgage loan office in Sterling, Virginia has been consolidated
with the office in Annandale, Virginia, effective as of March 1, 1996. The
consolidated office is also to be relocated to Tysons Corner, Virginia.
3. The mortgage loan office in Lynchburg, Virginia will relocated into
the building presently occupied by the retail banking branch.
4. The mortgage loan office in Chesterfield County, Virginia is in the
process of being relocated and consolidated with support staff presently located
in the Petersburg, Virginia mortgage loan office.
These changes are intended to increase efficiency while maintaining the
Company's loan production capability in its most promising markets. The Company
will continue to evaluate the number and locations of its mortgage loan
origination centers to ensure the most efficient and cost effective allocation
of mortgage lending resources. In subsequent periods the Company may open new
centers or close or consolidate existing centers, depending on market
conditions.
23
The Company's present operating strategy is to originate fixed rate
mortgage loans for sale in the secondary mortgage market, while adjustable rate
mortgage loans are originated both for sale and for the Company's portfolio. In
the past two fiscal years the Company has continued to solidify its position as
a regional mortgage banker. During this period the Company has continued to add
to its mortgage loan servicing portfolio. However, see the discussion under
"Mortgage Loan Servicing" regarding the Company's decision to sell substantially
all of its portfolio of loans serviced for others, in a transaction effective as
of April 1, 1996.
Origination and Purchase of Mortgage Loans. The Company originated
$101,040,000 of fixed rate conventional, Federal Housing Administration ("FHA"),
and Veterans Administration ("VA") residential loans during the third quarter of
fiscal year 1996, compared to $42,937,000 in the third quarter of fiscal year
1995 and $121,345,000 in the third quarter of fiscal year 1994. The Company
originated $326,554,000 of such loans during the first nine months of fiscal
year 1996, compared to $173,694,000 in the first nine months of fiscal year 1995
and $549,825,000 in the first nine months of fiscal year 1994. The 68.4% decline
in originations in the first nine months of fiscal year 1995 compared to the
same period in fiscal year 1994 was due to over saturation in the refinancing
market and the rise in market interest rates. The 88.0% increase in the first
nine months of fiscal year 1996 compared to the same period in fiscal year 1995
was due to a moderation in market interest rates and an increase in new housing
starts, primarily in the Northern Virginia and Maryland markets. The Company
anticipates that the level of residential mortgage loans originated in fiscal
year 1996 will be higher than in fiscal year 1995 but less than in fiscal year
1994.
The Company originated $16,816,000 of adjustable rate residential
mortgage loans during the third quarter of fiscal year 1996, compared to
$14,731,000 in the third quarter of fiscal year 1995 and $16,440,000 in the
third quarter of fiscal year 1994. The Company originated $58,342,000 of such
loans during the first nine months of fiscal year 1996, compared to $69,149,000
in the first nine months of fiscal year 1995 and $58,836,000 in the first nine
months of fiscal year 1994. The 17.5% increase in the first nine months of
fiscal year 1995, compared to the same period in fiscal year 1994, is attributed
to higher market interest rates reducing the attractiveness to consumers of
obtaining fixed rate mortgage loans. Originations in the first nine months of
fiscal year 1996 were 15.6% less than in the same period in fiscal year 1995, as
moderating interest rates shifted consumer interest back to the fixed rate
products. Adjustable rate mortgage loan originations were 13.6% of total
permanent mortgage loan and construction loan originations in the first nine
months of fiscal year 1996, compared to 23.3% in the first nine months of fiscal
year 1995.
In addition to originating residential mortgage loans, the Company also
purchases loans to obtain geographic diversity and yields not obtainable in the
Company's normal lending areas.
24
However, no adjustable rate residential mortgage loans were purchased during the
first, second or third quarters of fiscal years 1996 and 1995.
The Company originated $19,253,000 of construction loans during the
third quarter of fiscal year 1996, compared to $14,489,000 in the third quarter
of fiscal year 1995 and $28,919,000 in the third quarter of fiscal year 1994.
The Company originated $41,774,000 of construction loans during the first nine
months of fiscal year 1996, compared to $53,004,000 in the first nine months of
fiscal year 1995 and $86,067,000 in the first nine months of fiscal year 1994.
Construction loans were 9.7% of total permanent mortgage loan and construction
loan originations in the first nine months of fiscal year 1996, compared to
17.9% in the first nine months of fiscal year 1995. The increases in both
outstanding construction loan balances and loan commitments has been consistent
with management's goals of diversifying the Company's loan portfolio and
penetrating undeserved markets. The Company believes that its construction
lending underwriting standards do not expose the Company to substantial risks of
loss. Substantial builder equity is typically required and home starts ahead of
actual sales are strictly controlled.
The Company has successfully incorporated a strategic initiative
focusing on the use of a construction loan as the integral component in
obtaining a permanent mortgage loan. The Company has successfully utilized the
integrated construction loan product, in which the homebuyer prequalifies for a
permanent mortgage loan and upon completion of the house the construction loan
automatically converts to a permanent loan without the need for a second closing
transaction.
While the Company has financed residential construction projects
throughout its business area, a substantial portion of the Company's
construction lending in the past two fiscal years has been in Northern Virginia
and Maryland. The Company utilized residential construction loan financing as an
entry mechanism into the Northern Virginia and Maryland markets at a time of
diminished competition due to savings institution failures, deflated real estate
prices and a migration by traditional lending sources away from construction and
residential mortgage lending. While the Company's market penetration of the
Northern Virginia and Maryland markets in the past two years has been
substantial, management is committed to retaining its conservative credit risk
profile, and is willing to forego market share to new or returning competitors
who may be willing to sacrifice quality to achieve volume goals. Management's
adherence to its quality standards could result in reductions in construction
loan balances and commitments in future periods. As a percentage of the
Company's loan originations, construction and development lending during fiscal
year 1996 is expected to be less than the levels seen in fiscal year 1995. The
Company continues to evaluate the feasibility of sustaining or expanding the
present construction lending levels.
25
The following tables summarize first mortgage and construction loan
originations by type of loan for the three-month and nine-month periods ended
March 31, 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands)
Three-Month Periods
Ended March 31 1996 1995
-------------- ----------------- ----------------
% of % of
Amount Total Amount Total
-------- ----- -------- -----
<S> <C>
Permanent mortgage loans:
Fixed rate residential:
Conventional $ 76,476 55.8% $ 29,418 40.8%
FHA/VA 24,564 17.9 13,519 18.7
-------- ----- -------- -----
101,040 73.7 42,937 59.5
-------- ----- -------- -----
Adjustable rate residential:
One year 8,827 6.5 13,250 18.3
Three year 7,989 5.8 1,481 2.1
-------- ----- -------- -----
16,816 12.3 14,731 20.4
-------- ----- -------- -----
Fixed rate commercial -- -- -- --
-------- ----- -------- -----
Adjustable rate commercial:
One year -- -- -- --
Other -- -- -- --
-------- ----- -------- -----
-- -- -- --
-------- ----- -------- -----
Construction loans (1):
Residential construction 10,876 7.9 11,408 15.8
Acquisition, development
and commercial construction 8,377 6.1 3,081 4.3
-------- ----- -------- -----
19,253 14.0 14,489 20.1
-------- ----- -------- -----
Total originations and purchases $137,109 100.0% $ 72,157 100.0%
======== ===== ======== =====
</TABLE>
(1) Reflects loan balances prior to deduction of undisbursed loan amounts.
26
<TABLE>
<CAPTION>
(In thousands)
Nine-Month Periods
Ended March 31 1996 1995
-------------- ----------------- ----------------
% of % of
Amount Total Amount Total
-------- ----- -------- -----
<S> <C>
Permanent mortgage loans:
Fixed rate residential:
Conventional $243,405 56.6% $113,135 38.1%
FHA/VA 83,149 19.3 60,559 20.4
-------- ----- -------- -----
326,554 75.9 173,694 58.5
-------- ----- -------- -----
Adjustable rate residential:
One year 36,196 8.4 60,870 20.5
Three year 22,146 5.2 8,279 2.8
-------- ----- -------- -----
58,342 13.6 69,149 23.3
-------- ----- -------- -----
Fixed rate commercial 3,283 0.8 -- --
-------- ----- -------- -----
Adjustable rate commercial:
One year -- -- 804 0.3
Other -- -- -- --
-------- ----- -------- -----
-- -- 804 0.3
-------- ----- -------- -----
Construction loans (1):
Residential construction 29,297 6.8 38,597 13.0
Acquisition, development
and commercial construction 12,477 2.9 14,407 4.9
-------- ----- -------- -----
41,774 9.7 53,004 17.9
-------- ----- -------- -----
Total originations and purchases $429,953 100.0% $296,651 100.0%
======== ===== ======== =====
</TABLE>
(1) Reflects loan balances prior to deduction of undisbursed loan amounts.
Risks Associated with Mortgage Loan "Pipeline". The Company's mortgage
banking activities involve risks of loss if secondary mortgage market interest
rates increase or decrease substantially while a loan is in the "pipeline" (the
period beginning with the application to make or the commitment to purchase a
loan and ending with the sale of the loan). In order to reduce this interest
rate risk, the Company typically enters into forward sales commitments in an
amount approximately equal to the closed loans held in inventory, plus a portion
of the unclosed loans that the Company has committed to make which are expected
to close. Additionally, the Company occasionally purchases over-the-counter
options to refine a risk management position in the event the percentage of
loans which actually closes differs from the original expectations. Such options
provide the owner with the right, but not the obligation, to deliver the
underlying commodity or financial asset to the transaction's counter party at a
specific price for a specific period of time. In this instance, the commodity or
financial asset would generally consist of mortgage-backed
27
securities created with securitized originated mortgage loans. The portion of
the unclosed loans which the Company commits to sell depends on numerous
factors, including the total amount of the Company's outstanding commitments to
make loans, the portion of such loans that is likely to close, the timing of
such closings, and anticipated changes in interest rates. The Company
continually monitors these factors and adjusts its commitments and options
positions accordingly.
Sale of Mortgage Loans. There is an active secondary market for most
types of mortgage loans originated by the Company. By originating loans for
subsequent sale in the secondary mortgage market, the Company is able to obtain
funds which may be used for lending and investment purposes. During the past
three fiscal years, a large portion of the Company's loan sales have been on a
whole loan basis with the Company retaining the rights to service the loans.
However, during the quarter ended March 31, 1996, the Company shifted its
business strategy with respect to mortgage loan servicing, and most of the loan
sales in that quarter were on a servicing-released basis. Of total sales of
$103,196,000 during the third quarter of fiscal year 1996, the Company sold
$4,962,000, or 4.8%, on a servicing-retained basis. By comparison, 30.6% of
sales in the third quarter of fiscal year 1995 were on a servicing-retained
basis. See the discussion under "Mortgage Loan Servicing" regarding the
Company's decision to sell substantially all of its portfolio of loans serviced
for others, in a transaction effective as of April 1, 1996.
Gains from the sales of mortgage loans and securitized loans were
$1,067,000 in the third quarter of fiscal year 1996, an increase of $789,000, or
183.8%, over the gains of $278,000 in the third quarter of fiscal year 1995.
Gains from such sales were $1,994,000 in the first nine months of fiscal year
1996, an increase of $1,321,000, or 96.3%, over the gains of $673,000 in the
first nine months of fiscal year 1995. The higher gains in the three- and
nine-month periods ended March 31, 1996 reflect the higher gains from selling
loans on a servicing-released basis. Such gains are higher since the servicing
component is being sold concurrently with the loan. Also, the gains for the
three- and nine-month periods ended March 31, 1996 included $170,000 of gain
from the servicing-released sale of $8,184,000 of mortgage loans from the
Company's portfolio. There were no such portfolio sales in the first nine months
of fiscal year 1995.
All fixed rate mortgage loans originated by the Company are
underwritten following guidelines which will qualify them for sale in the
secondary market. The Company sells its FHA and VA loans to various investors on
a servicing-released basis. The Company either sells its conventional fixed rate
residential production on an individual loan basis or securitizes loans through
the creation of Federal National Mortgage Association ("FNMA") and Federal Loan
Mortgage Corporation ("FHLMC") mortgage-backed securities. The securities
created by securitizing loans originated by the Company are immediately sold to
various investors. No portions of such securities were held by the Company at
March 31, 1996, June 30, 1995, or March 31, 1995. In the event the Company were
to hold such a security as of the end of an accounting period, the security
would constitute a "trading security", and as such would be
28
recorded on the consolidated statement of financial condition at fair value, and
unrealized holding gains and losses would be included in earnings.
The Company sold $85,200,000 of fixed rate mortgage loans and
securitized loans during the third quarter of fiscal year 1996, compared to
$33,024,000 in the third quarter of fiscal year 1995. The Company sold
$245,343,000 of such loans during the first nine months of fiscal year 1996,
compared to $135,567,000 in the first nine months of fiscal year 1995. The sale
of fixed rate product is intended to protect the Company from precipitous
changes in the general level of interest rates as well as to create an income
stream from servicing fees on loans sold. The magnitudes of the period-to-period
changes in loan sales are consistent with and reflect the percentage changes in
fixed rate mortgage loan originations in those periods.
The valuation of adjustable rate mortgage loans is not as directly
dependent on the level of interest rates as is the value of fixed rate loans.
Decisions to hold or sell adjustable rate mortgage loans are based on the need
for such loans in the Company's portfolio, which is influenced by the level of
market interest rates and the Company's asset/liability management strategy. As
with other investments, the Company regularly monitors the appropriateness of
the level of adjustable rate mortgage loans in its portfolio and may decide from
time to time to sell such loans and reinvest the proceeds in other adjustable
rate investments.
The Company sold $17,996,000 of adjustable rate mortgage loans and
securitized loans during the third quarter of fiscal year 1996, compared to
$15,901,000 in the third quarter of fiscal year 1995. The Company sold
$58,306,000 of such loans during the first nine months of fiscal year 1996,
compared to $65,759,000 in the first nine months of fiscal year 1995. The
sizable proportion of adjustable rate loan and securitized loan sales to total
sales in fiscal year 1995 compared to fiscal year 1996 is due to the increased
popularity of adjustable rate mortgage loans in the rising interest rate
environment, and the corresponding demand for adjustable rate loans and
securities in the secondary market. In addition, production of adjustable rate
loans in the first, second and third quarters of both fiscal years 1996 and 1995
exceeded the Company's capacity to add such loans to its loan portfolio.
The following tables summarize mortgage loan sales by type of loan for
the three-month and nine-month periods ended March 31, 1996 and 1995. The table
does not reflect commitments sold for which mortgage loans had not been
delivered and funded at period end.
<TABLE>
<CAPTION>
(In thousands)
Three-Month Periods
Ended March 31 1996 1995
-------------- -------------------- ---------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
Fixed rate $ 85,200 82.6% $ 33,024 67.5%
Adjustable rate 17,996 17.4 15,901 32.5
-------- ----- -------- -----
Total mortgage loans sold $103,196 100.0% $ 48,925 100.0%
======== ===== ======== =====
</TABLE>
29
<TABLE>
<CAPTION>
Nine-Month Periods
Ended March 31 1996 1995
-------------- -------------------- ---------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
Fixed rate $245,343 80.8% $135,567 67.3%
Adjustable rate 58,306 19.2 65,759 32.7
-------- ----- -------- -----
Total mortgage loans sold $303,649 100.0% $201,326 100.0%
======== ===== ======== =====
</TABLE>
Included in the figures above are mortgage loans which were securitized
into mortgage-backed securities in connection with and immediately prior to
sale. Securitized loans in the above figures totaled $75,614,000 in the first
nine months of fiscal year 1996 and $34,083,000 in the first nine months of
fiscal year 1995.
In an environment of stable interest rates, the Company's gains on the
sale of mortgage loans and securitized loans would generally be limited to those
gains resulting from the yield differential between retail mortgage loan
interest rates and rates required by secondary market purchasers. A loss from
the sale of a loan may occur if interest rates increase between the time the
Company establishes the interest rate on a loan and the time the loan is sold.
Because of the uncertainty of future loan origination volume and the future
level of interest rates, there can be no assurance that the Company will realize
gains on the sale of financial assets in future periods.
A component of gains and losses on the sale of mortgage loans (or of
loans securitized into mortgage-backed securities prior to sale) involves the
calculation of the present value of the yield earned on such assets over the sum
of the yields paid to secondary market purchasers plus a "normal" servicing fee
to the Company for servicing such loans. These calculations utilize assumptions
of the estimated average lives of the mortgage loans (or groups of loans
packaged into mortgage-backed securities) sold and an appropriate discount rate.
The recognition of these gains results in an asset, capitalized excess
servicing, which is amortized against gross servicing fee income over the
estimated average lives of the loans sold. If loans are prepaid at rates faster
than those originally assumed, adjustments may be required to the unamortized
capitalized servicing asset which could result in charges to current earnings.
Conversely, slower prepayment rates could result in increases in mortgage loan
servicing income in future periods. No such write-downs were taken in the first,
second or third quarters of fiscal years 1996 and 1995.
It has not been the Company's practice to purchase mortgage loan
servicing rights ("PMSRs"). The purchased servicing reflected on the Company's
consolidated statements of financial condition totaled $14,000 at March 31,
1996, $16,000 at June 30, 1995, and $16,000 at March 31, 1995. PMSRs and
capitalized excess servicing have similar risk and return characteristics. The
Company structures its mortgage loan sale transactions in order to minimize the
creation of capitalized excess servicing. The Company added $2,000 of new
capitalized
30
excess servicing in the first nine months of fiscal year 1996, compared to
$11,000 added in the first nine months of fiscal year 1995. The amount of
capitalized excess servicing included on the Company's consolidated statements
of financial condition was $788,000 at March 31, 1996, compared to $836,000 at
June 30, 1995 and $845,000 at March 31, 1995.
See the discussion under "Mortgage Loan Servicing" regarding the
Company's decision to sell substantially all of its portfolio of loans serviced
for others, in a transaction effective as of April 1, 1996. In connection with
that sale, the Company's remaining unamortized balances of PMSRs and capitalized
excess servicing will be written off against the sales proceeds.
The Company defers fees it receives in loan origination, commitment and
purchase transactions. Loan origination fees and certain direct loan origination
costs are deferred and recognized over the lives of the related loans as an
adjustment of the loan's yield using the levelyield method. Net commitment fees
for permanent forward commitments issued to builders and/or developers for the
purpose of securing loans for their purchasers are also deferred. Deferred
income pertaining to loans held for sale is taken into income at the time of
sale of the loan.
Mortgage Loan Servicing. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, holding escrow
funds for payment of taxes and insurance, making required inspections of the
mortgage premises, contacting delinquent mortgagors, supervising foreclosures in
the event of unremedied defaults, and generally administering the loans for the
investors to whom they have been sold. The Company receives fees for servicing
mortgage loans, generally ranging from 1/4% to 1/2% per annum on the declining
principal balances of the loans. Servicing fees are collected by the Company out
of monthly mortgage payments.
Loan servicing income increased by $19,000 to $821,000 during the third
quarter of fiscal year 1996, and increased by $183,000 to $802,000 in the third
quarter of fiscal year 1995. Such income increased by $297,000 to $2,536,000
during the first nine months of fiscal year 1996, and increased by $362,000 to
$2,239,000 during the first nine months of fiscal year 1995. The increases in
mortgage loan servicing income for the three-month and nine-month periods ended
March 31, 1996 and 1995 were due to the increases in mortgage loans serviced for
others and the decreases in amortization of excess servicing. The average daily
balance of mortgage loans serviced for others was approximately $766.9 million
in the first nine months of fiscal year 1996, compared to average daily balances
of $732.1 million in the first nine months of fiscal year 1995 and $709.0
million in the first nine months of fiscal year 1994.
For the past few years, and until January 1, 1996, it had been the
Company's policy to sell servicing rights related to government (i.e., FHA and
VA) loans, while retaining servicing rights on other residential mortgage loans.
The Company also sold a portion of its conventional loan production on a
servicing-released basis, primarily mortgage loans with original balances above
31
the limit for purchase by FNMA and FHLMC ($207,000 at March 31, 1996). As the
Company expanded its mortgage banking operations and the volume of mortgage
loans that it serviced for others, production and other related operating
expenses increased substantially. Expenses that the Company incurred in
servicing loans were charged to operations. Although the Company sought to
increase the volume of loans that it serviced for others, from time-to-time it
sold loan servicing rights and conventional loans on a servicing-released basis,
in order to recover, on a current basis, more of the costs of creating such loan
servicing rights. However, no servicing rights were sold on a bulk basis during
the first, second or third quarters of fiscal year 1996 and 1995.
Beginning January 1, 1996, the Company shifted its business strategy
with respect to mortgage loan servicing, and most of the loan sales in the
quarter ended March 31, 1996 were on a servicing-released basis. And effective
as of April 1, 1996, the Company has sold substantially all of its portfolio of
mortgage loans serviced for others. The transaction is expected to generate a
pre-tax gain of $7.25 million, which will be reflected in the Company's fourth
fiscal quarter earnings. The amount of the gain will be net of the write-off of
remaining unamortized PMSR and capitalized excess servicing balances. The
Company's decision to exit the mortgage loan servicing business was driven by
the increasing 'critical mass' necessary to generate acceptable returns on loan
servicing activities. Management believes that the after-tax proceeds of the
sale of approximately $4.5 million can be deployed more efficiently in other
areas, and will provide additional capital to enhance the Company's core
business activities.
During the quarter ending June 30, 1996, the Company will continue to
service the loans subject to the rights sale agreement under a subservicing
arrangement. During this period, the necessary loan documents will be prepared
and transferred to the purchaser. Subsequent to the completion of the
transaction, the Company will continue to service the loans in its portfolio and
may occasionally accumulate servicing rights for sale from time to time on a
bulk basis, depending on market conditions. However, the Company does not
anticipate re-entering the mortgage loan servicing business, and it is expected
that most mortgage loan sales will continued to be made on a servicing-released
basis.
The Company's portfolio of mortgage loans serviced for others grew by
$17.4 million during the first nine months of fiscal year 1996, compared to
growth of $33.8 million in the first nine months of fiscal year 1995. While
mortgage loan production increased in the first nine months of fiscal year 1996
as compared to the first nine months of fiscal year 1995, a larger proportion of
the fiscal year 1996 originations were sold on a servicing-released basis. The
following table indicates the components of the Company's loan servicing
portfolio at the indicated dates:
32
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1996 June 30, 1995 March 31, 1995
-------------------- -------------------- -----------------
No. of No. of No. of
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Company's mortgage loan portfolio $ 436,017 4,870 $ 429,438 4,940 $ 401,922 4,226
Serviced for others:
FNMA 666,134 7,739 655,073 7,623 651,791 7,588
FHLMC 34,565 825 30,406 835 29,036 839
Other investors 62,372 870 60,214 792 58,229 757
---------- ---------- ---------- ---------- ---------- ----------
Total serviced for others 763,071 9,434 745,693 9,250 739,056 9,184
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage loans serviced $1,199,088 14,304 $1,175,131 14,190 $1,140,978 13,410
========== ========== ========== ========== ========== ==========
</TABLE>
Mortgage loan servicing provides a relatively stable source of fee
income which is not directly and immediately affected by fluctuations in
interest rates in that such income is a function of the size of the servicing
portfolio and not the interest rates on the related loans. However, the size of
the servicing portfolio may decline because of fluctuations in interest rates to
the extent that mortgage loan originations decline in a rising interest rate
environment or mortgage loan prepayments increase in a declining interest rate
environment and are not offset by new mortgage loan originations.
The weighted average note rate of mortgage loans serviced for others
was 7.76% at March 31, 1996, compared to 7.81% at June 30, 1995 and 7.78% at
March 31, 1995.
The mortgage banking operation also generates escrow deposits that
result from processing mortgage payments and which are a relatively low cost
source of funds for the Company. Such balances averaged $8.13 million and $7.86
million during the nine-month periods ended March 31, 1996 and 1995,
respectively.
Investments. As of June 30, 1994, the Company implemented changes in
its accounting for certain investment securities and mortgage-backed securities
as required by Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". Upon initial
application of the new standard, existing investments were classified based on
the enterprise's current intent. The Company classified a large portion of its
investment securities and mortgage-backed securities as available for sale. Such
securities are reported on a fair value basis, with unrealized gains and losses
excluded from earnings but reported as a separate component of stockholders'
equity, net of any deferred tax provision. Management believes the available for
sale classification allows the most flexibility in meeting liquidity needs,
adjusting interest rate risk and controlling balance sheet trends. The Company
could experience volatility in its capital account in future periods because of
market price fluctuation in its investment securities and mortgage-backed
securities holdings.
33
In November 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities". The Special Report provides implementation guidance and
a one-time opportunity for companies to reassess their intent with regard to
securities and reclassify a portion or all of them as deemed appropriate. Such
one-time reclassifications, which are expected to affect securities classified
as held to maturity most significantly, may be made without calling into
question the propriety of a company's stated intent in prior or subsequent
periods. However, any such reclassifications must have been made by December 31,
1995.
Since the adoption of SFAS 115, no transfers between portfolios had
taken place. In December 1995, as provided for in the Special Report, the
Company transferred a single security, with amortized cost of $1,966,000 and
fair value of $2,028,000, from the held to maturity category to the available
for sale category.
34
The amortized cost and fair value of the Company's investment
securities and mortgage-backed securities (including collateralized mortgage
obligations, or "CMOs") are as follows:
<TABLE>
<CAPTION>
(In thousands) March 31, 1996 June 30, 1995 March 31, 1995
------------------- --------------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
Investment Securities
<S> <C>
Held to maturity:
FHLB notes $ -- $ -- $ 13,500 $ 13,444 $ 10,000 $ 9,783
FNMA bonds -- -- 1,960 1,988 1,958 1,915
Municipal bonds 7,520 7,520 7,630 7,630 7,750 7,750
-------- -------- -------- -------- -------- --------
7,520 7,520 23,090 23,062 19,708 19,448
-------- -------- -------- -------- -------- --------
Available for sale:
Adjustable rate mortgage
mutual fund -- -- -- -- 3,743 3,699
FHLB notes 2,000 1,983 -- -- -- --
FNMA bonds 1,968 2,047 -- -- -- --
-------- -------- -------- -------- -------- --------
3,968 4,030 -- -- 3,743 3,699
Net unrealized gain (loss) 62 -- -- -- (44) --
-------- -------- -------- -------- -------- --------
4,030 4,030 -- -- 3,699 3,699
-------- -------- -------- -------- -------- --------
$ 11,550 $ 11,550 $ 23,090 $ 23,062 $ 23,407 $ 23,147
======== ======== ======== ======== ======== ========
Mortgage-Backed Securities
Held to maturity:
FHLMC $ 375 $ 385 $ 379 $ 391 $ 381 $ 394
CMO -- -- -- -- 177 177
Other 184 184 214 214 227 227
-------- -------- -------- -------- -------- --------
559 569 593 605 785 798
-------- -------- -------- -------- -------- --------
Available for sale:
FNMA 3,189 3,189 3,616 3,585 3,770 3,710
CMOs 8,905 8,865 5,315 5,193 5,981 5,778
-------- -------- -------- -------- -------- --------
12,094 12,054 8,931 8,778 9,751 9,488
Net unrealized loss (40) -- (153) -- (263) --
-------- -------- -------- -------- -------- --------
12,054 12,054 8,778 8,778 9,488 9,488
-------- -------- -------- -------- -------- --------
$ 12,613 $ 12,623 $ 9,371 $ 9,383 $ 10,273 $ 10,286
======== ======== ======== ======== ======== ========
</TABLE>
35
Noninterest Income. The Company recorded a $50,000 net loss from the
revaluation of mortgage backed securities and collateralized mortgage
obligations held for investment during the first quarter of fiscal year 1995.
The loss was related to the "other than temporary" decline in the carrying value
of certain residual investments in collateralized mortgage obligations held in
the investment portfolio. No such losses were recorded in the second or third
quarters of fiscal year 1995 or in the first, second or third quarters of fiscal
year 1996.
Financial service fees increased by $87,000, or 19.0%, in the third
quarter of fiscal year 1996 and by $54,000, or 13.3%, in the third quarter of
fiscal year 1995, compared to the same periods in the respective previous years.
Such fees increased by $191,000, or 12.9%, in the first nine months of fiscal
year 1996 and by $294,000, or 24.7%, in the first nine months of fiscal year
1995, compared to the same periods in the respective previous years. These
three-month and nine-month period-to-period increases are primarily attributed
to the increase in the number of checking accounts resulting from promotional
campaigns targeted to the checking product.
In addition, financial service fees in the first nine months of fiscal
year 1996 include $52,000 earned from the Company's relationship with INVEST
Financial Services, Inc. ("INVEST"), compared to $137,000 in the first nine
months of fiscal year 1995. Pursuant to a contractual arrangement, INVEST leased
office space in certain of the Company's facilities through which stocks, bonds,
mutual funds and investment counseling are provided. Such fees were lower in the
first nine months of fiscal year 1996, as compared to the same period in fiscal
year 1995, since rising market interest rates reduced the popularity of mutual
fund-type investments in relation to alternative investments such as savings
certificates of deposit. Effective as of April 1, 1996, The Company has engaged
CoreLink Financial, Inc. ("CoreLink") to replace INVEST as its broker-dealer for
providing mutual funds and other securities products to the Company's customers.
Sales of real estate owned yielded net gains of $66,000 and $63,000 in
the third quarters of fiscal years 1996 and 1995, respectively, and yielded
gains of $136,000 and $205,000, respectively, for the first nine months of such
fiscal years. The Company recorded losses on the revaluation of real estate
owned of $77,000 and $80,000 in the third quarters of fiscal years 1996 and
1995, respectively, and recorded losses of $444,000 and $153,000, respectively,
for the first nine months of such fiscal years. It is the Company's policy to
record allowances for estimated losses on real estate owned when, based upon its
evaluation of various factors such as independent appraisals and current
economic conditions, it determines that the investment in such assets is greater
than their fair values less cost to dispose.
Other noninterest income includes gains on sales of real estate
acquired for development of $2,000 and $1,000 in the first nine months of fiscal
years 1996 and 1995, respectively.
Century Title Insurance Agency, Inc. was incorporated in December 1994
as a subsidiary of the Savings Bank. This new business unit offers a full range
of title insurance products to the general public and enhances the
diversification of products to both existing and prospective
36
mortgage loan customers. It is based at the headquarters of the Virginia First
Mortgage Division in Woodbridge, Virginia. Century Title generated $47,000 of
gross title fee income in the third quarter of fiscal year 1996 and $139,000 in
the first nine months of fiscal year 1996.
Noninterest Expenses. Personnel and related employee benefits expense
is the Company's largest non-interest expense. Personnel expense for the third
quarter of fiscal year 1996 was $2,548,000, compared to $2,309,000 in the third
quarter of fiscal year 1995 and $3,067,000 in the third quarter of fiscal year
1994. Such expense for the first nine months of fiscal year 1996 was $7,127,000,
compared to $7,639,000 in the first nine months of fiscal year 1995 and
$9,454,000 in the first nine months of fiscal year 1994. The 19.2% decrease in
personnel expense in the first nine months of fiscal year 1995, as compared to
the same period in fiscal year 1994, reflects the discontinuation of temporary
support as well as some permanent staff reductions. Also, commissions paid to
mortgage loan originators is a substantial component of personnel expense, and
declined proportionately to the reduction in the volume of loans closed. The
6.7% decrease in personnel expense in the first nine months of fiscal year 1996,
as compared to the same period in fiscal year 1995, reflects the consolidation
of the Company's mortgage loan backoffice operations. As described earlier,
effective November 1, 1994, the Company consolidated the back-office operations
of its mortgage banking divisions. The consolidation eliminated duplicate
support structures and provided for more efficient and uniform delivery of
mortgage loan services, which contributed to a substantial decrease in personnel
expenses.
Occupancy expense for the third quarters of fiscal years 1996 and 1995
was $447,000 and $385,000, respectively. Such expense was $1,202,000 and
$1,091,000, respectively, for the first nine months of those fiscal years. Some
of the 10.2% increase for the first nine months of fiscal year 1996 is
attributable to the opening of two retail banking branches and the closing of
one branch since March 31, 1995.
Data processing expense for the third quarters of fiscal years 1996 and
1995 was $438,000 and $364,000, respectively. Such expense was $1,286,000 and
$1,152,000, respectively, for the first nine months of those fiscal years. The
fiscal year 1996 increase of 11.6% is due to increased loan and deposit account
volume and local area networking. While the number of customer accounts
continued to grow in both fiscal years 1996 and 1995, data processing expense
also moderated due to more favorable contract provisions with the Company's data
processing service bureau.
Income Taxes. Income tax expense for the third quarter of fiscal year
1996 was $1,231,000, resulting in an effective tax rate of 36.0%. By comparison,
the Company had income tax expense of $1,359,000 for an effective tax rate of
39.8% in the third quarter of fiscal year 1995. The income tax expense and
effective tax rate of the first nine months of fiscal year 1996 were $3,617,000
and 36.8%, compared to $3,707,000 and 40.5% in the same period in fiscal year
1995.
37
The effective tax rates differ from the statutory federal rates. The
prohibition against claiming amortization for certain purchase accounting
adjustments (goodwill) for income tax purposes tends to increase the effective
tax rate, while the effective tax rate tends to be lower due to tax-exempt
interest income. The effective rate also provides for state income taxes.
Financial Condition
Liquidity and Capital Resources. The primary sources of funds for the
Company consist of checking and savings deposits, loan sale fundings, loan
repayments, borrowings from the FHLB and others, and funds provided from
operations. Deposits totaled $575,942,000 at March 31, 1996, an increase of
$72,275,000, or 14.3%, over the $503,667,000 at June 30, 1995. Certificates of
deposit grew by $51,286,000 in the first nine months of fiscal year 1995, while
savings deposits declined by $2,275,000 and checking and money market deposit
accounts increased by a total of $23,264,000. Higher market interest rates in
the first nine months of fiscal year 1996 increased the attractiveness of
certificates compared to savings and checking products, on which interest rates
have risen more slowly. Approximately $223.8 million in certificate accounts
will mature in the twelve-month period ending March 31, 1997. The Company's
management believes that most of the maturing liabilities will be reinvested
with the Company.
Advances from the FHLB decreased by $60,106,000 to $74,552,000 at March
31, 1996, compared to $134,658,000 at June 30, 1995. The Company has access to
advances from the FHLB generally secured by pledging mortgage loans and its
stock in the FHLB. The Company was able to reduce outstanding FHLB advances
during the nine month period ended March 31, 1996 because the $72.3 million
growth in deposits and the $3.6 million growth in stockholders' equity exceeded
the $20.4 million growth in total assets by $55.5 million.
The Company will sometimes borrow from several sources using
mortgage-backed securities as collateral. However, no such borrowings were
outstanding at March 31, 1996 or June 30, 1995. The Company's management will
use this method of financing to the extent that it is less expensive than
alternative sources and is within regulatory guidelines. The Company's
borrowings, including FHLB advances, at March 31, 1996 were 10.5% of assets,
compared to 19.5% of assets at June 30, 1995.
The Company sells mortgage loans and securitized loans in the secondary
market and redeploys the sales proceeds in its lending operations. To a lesser
extent, the proceeds of periodic loan payments and loan payoffs provide funds
for lending operations.
The primary use of funds by the Company is loan originations. The
Company's loan portfolio, including loans held for sale, totaled $637,854,000 at
March 31, 1996 compared to $616,049,000 at June 30, 1995, an increase of
$21,805,000, or 3.5%. The Company's loans held for investment and for sale
represented 89.3% of assets at March 31, 1996, compared to 88.8% of assets at
June 30, 1995.
38
The Company had outstanding fixed rate loan origination commitments of
$879,000 and outstanding adjustable rate loan commitments of $1,551,000 at March
31, 1996.
The Company had no outstanding loan purchase commitments at March 31,
1996. The Company had outstanding commitments to fund $25,193,000 of
construction loans at March 31, 1996. In addition, the Company had $27,552,000
outstanding in lines of credit extended to its customers at March 31, 1996. The
Company's management does not anticipate any difficulties in satisfying these
commitments.
Due to the relative size of the Company's loan portfolio, purchases and
sales of investments have a limited impact on the Company's funding
requirements. Investments and mortgage-backed securities (classified as either
held to maturity or available for sale), excluding FHLB stock, totaled
$24,163,000 at March 31, 1996 and $32,461,000 at June 30, 1995. Such balances
represented 3.4% and 4.7%, respectively, of total assets at those dates.
Liquidity is the ability to meet present and future financial
obligations, either through the acquisition of additional liabilities or from
the sale or maturity of existing assets, with minimal loss. Regulations of the
OTS require thrift associations and/or savings banks to maintain liquid assets
at certain levels. At present, the required ratio of liquid assets to
withdrawable savings and borrowings due in one year or less is 5.0%. In fiscal
year 1996 the Company is maintaining liquidity in excess of the required amount.
At March 31, 1996 and June 30, 1995, the Company had liquidity ratios of 5.4%
and 5.1%, respectively. The Company's management anticipates that it will be
able to maintain its current level of regulatory liquidity during the balance of
fiscal year 1996.
At March 31, 1996, the Savings Bank's net worth under generally
accepted accounting principles ("GAAP") was $55,068,000. OTS Regulations require
that savings institutions maintain the following capital levels: (1) tangible
capital of at least 1.5% of total adjusted assets, (2) core capital of 4.0% of
total adjusted assets, and (3) overall risk-based capital of 8.0% of total
risk-weighted assets. As of March 31, 1996, the Savings Bank satisfied all of
the regulatory capital requirements, as shown in the following table reconciling
the Savings Bank's GAAP capital to regulatory capital:
39
<TABLE>
<CAPTION>
Risk -
Tangible Core Based
(In thousands) Capital Capital Capital
-------- -------- --------
<S> <C> <C> <C>
GAAP capital $ 55,068 $ 55,068 $ 55,068
Non-allowable assets:
Goodwill (1,707) (1,707) (1,707)
Other intangible assets (276) -- --
Equity in subsidiaries (581) (581) (581)
Other (1) (1) (1)
Additional capital items:
Unrealized gain on
debt securities, net (15) (15) (15)
General loss allowances -- -- 5,862
-------- -------- --------
Regulatory capital - computed 52,488 52,764 58,626
Minimum capital requirement 10,669 28,463 40,953
-------- -------- --------
Excess regulatory capital $ 41,819 $ 24,301 $ 17,673
======== ======== ========
Ratios:
Regulatory capital - computed 7.38% 7.42% 11.45%
Minimum capital requirement 1.50 4.00 8.00
-------- -------- --------
Excess regulatory capital 5.88% 3.42% 3.45%
======== ======== ========
</TABLE>
The Company has addressed the phase-in of higher capital requirements
and the phase-out from capital of certain assets. Management believes that there
are sufficient alternatives available to enable the Company to remain in
compliance with its capital requirements.
As a result of federal legislation, the Company has been subject to
higher federal deposit insurance premiums and supervisory examination expenses.
The Savings Bank is a member of the Savings Association Insurance Fund
(the "SAIF"). Banks, generally, are members of the Bank Insurance Fund (the
"BIF"). Both the SAIF and the BIF are administered by the FDIC. Until recently,
deposit insurance premium rates for SAIF and BIF members were comparable. On
August 8, 1995, the FDIC announced that the BIF had reached a reserve ratio of
1.25% of insured deposits, and it reduced the BIF annual deposit premium for
well capitalized banks to $0.04 per $100 of insured deposits. The majority of
BIF member banks paid premiums at or near the $0.04 per $100 of deposits level
for the second half of calendar year 1995. The average premium was below $0.01
per $100 of deposits during the first quarter of calendar year 1996. Due to the
undercapitalized nature of the SAIF, and the current expectation that the SAIF
will not reach a 1.25% reserve ratio until 2002, the FDIC has retained the $0.23
to $0.31 per $100 of deposits premium rate structure for all SAIF-insured
institutions. In response to concerns raised by the disparity in SAIF and BIF
insurance rates, the FDIC, the OTS, the Treasury Department, and the thrift
industry have considered a number of legislative solutions to the problem that
would recapitalize SAIF and either reduce or eliminate the disparity between
SAIF and BIF insurance rates once SAIF becomes fully capitalized.
40
The Congress and the Clinton administration are negotiating a bill to
authorize the Board of Directors of the FDIC to impose a special assessment at a
rate sufficient to bring the reserve ratio of the SAIF to 1.25% of insured
deposits. The rate at which the special assessment will be determined is
expected to approximate 0.85% of March 31, 1995 deposits, although the
assessment rate and measurement date may be affected by the timing of the
legislative agreement. The actual payment of the special assessment will be set
by the FDIC, but will be no later than 60 days after the enactment of the
legislation. In accordance with accounting rules, the payment of the special
assessment will be recorded as an operating expense in the quarter in which the
legislation is enacted.
Although a special assessment may reduce the Company's capital,
management believes that it can continue to offer competitive deposit and loan
products. The expropriation of the thrift industry's capital is the result of an
unfortunate consensus that the remaining members of the industry should bear a
significant financial burden for previous thrift failures. However, an
anticipated positive by-product of the special assessment will be the reduction
in the SAIF premiums to a level approximating that of BIF members.
The Company is not aware of any other trends, events or uncertainties
which will have or that are likely to have a material effect on the Company's or
the Savings Bank's liquidity, capital resources or operations. The Company is
not aware of any current recommendations by regulatory authorities which if they
were implemented would have such an effect.
Asset Quality. When a borrower fails to make a required loan payment,
the Company contacts the borrower and attempts to cause the default to be cured.
In general, first attempts at contact are made immediately following the
assessment of late charges 15 days following the due date. Defaults are cured
promptly in most cases. If the borrower has not paid by the 45th day of
delinquency a letter is sent giving the borrower 7 days in which to cure the
default. If the default is not cured by the expiration date the loan is
accelerated. If the delinquency on a mortgage loan exceeds 90 days and is not
cured through the Company's normal collection procedures, or an acceptable
arrangement is not worked out with the borrower, the Company will institute
measures to remedy the default, including commencing a foreclosure action or, in
special circumstances, accepting from the mortgagor a voluntary deed of the
secured property in lieu of foreclosure.
Loans are placed on non-accrual status when, in the judgement of the
Company's management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. Generally, all loans more than 90 days
delinquent are placed on non-accrual status. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate
41
property is then included in the Company's real estate owned account until it is
sold. The Company is permitted under federal regulations to finance sales of
real estate owned by "loans to facilitate," which may involve more favorable
interest rates and terms than generally would be granted under the Company's
underwriting guidelines.
The following table sets forth information regarding non-accrual loans
and real estate owned held by the Company at the dates indicated:
<TABLE>
<CAPTION>
(In thousands) March 31, June 30, March 31,
1996 1995 1995
-------- -------- --------
<S> <C>
Non-accrual loans:
Residential mortgage $ 4,427 $ 3,415 $ 3,552
Commercial mortgage 4,215 2,068 1,471
Construction 4,703 3,259 1,136
Consumer non-mortgage 1,226 545 498
-------- -------- --------
Total non-accrual loans 14,571 9,287 6,657
Specific loss allowances (596) (768) (1,186)
-------- -------- --------
Total non-accrual loans, net 13,975 8,519 5,471
-------- -------- --------
Real estate acquired through foreclosure:
One to four family
residential units 2,818 2,576 2,738
Residential land/lots 2,489 106 137
Shopping/retail centers 1,020 672 672
Office buildings -- 188 --
Commercial land 192 351 351
-------- -------- --------
Total real estate acquired
through foreclosure 6,519 3,893 3,898
Specific and general
allowances for losses (688) (637) (667)
-------- -------- --------
Total real estate acquired through
foreclosure, net 5,831 3,256 3,231
-------- -------- --------
Total non-performing assets $ 19,806 $ 11,775 $ 8,702
======== ======== ========
Non-accrual loans to gross loans 2.26% 1.49% 1.13%
Total non-performing assets to sum of
gross loans and real estate acquired
through foreclosure 3.05% 1.88% 1.46%
Total non-performing assets to total assets 2.77% 1.70% 1.31%
</TABLE>
The net amount of interest income foregone during the third quarters of
fiscal years 1996 and 1995 on loans classified as non-performing was $265,000
and $66,000, respectively. The
42
amount foregone in the first nine months of fiscal year 1996 was $507,000,
compared to $204,000 in the first nine months of fiscal year 1995.
At June 30, 1995, the Company had $8,354,000 of restructured commercial
real estate loans (five loans) which were performing in accordance with their
restructured terms. These loans were reclassified as performing loans as of
September 30, 1995. As of March 31, 1996, the Company had no restructured loans
subject to special reporting rules.
The following table summarizes all non-accrual loans, by loan type, at
March 31, 1996:
Number
of Principal Specific Net
(Dollars in thousands) Loans Balance Allowances Investment
-------- -------- -------- --------
Residential mortgage 64 $ 4,427 $ -- $ 4,427
Commercial mortgage 10 4,215 -- 4,215
Construction 3 4,703 -- 4,703
Consumer non-mortgage 76 1,226 (596) 630
-------- -------- -------- --------
153 $ 14,571 $ (596) $ 13,975
======== ======== ======== ========
Nonaccrual construction loans at June 30, 1995 included five loans
totaling $2,535,000 to a builder/developer in northern Virginia. The Company's
collateral securing the loans consisted of residential building lots as well as
completed and partially completed single family residences. During the quarter
ended September 30, 1995, the Company foreclosed on the five loans. Management
anticipates an orderly liquidation of the collateral. Management believes that
present construction loan allowances are adequate, and anticipates no material
loss of the Company's principal investment.
Effective July 1, 1995, the Company adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan". The Statement was
issued in May 1993 and is effective for fiscal years beginning after December
15, 1994. Statement 114 was further amended in October 1994 by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan Income Recognition and
Disclosures". Statement 114, as amended by SFAS 118, requires that an impaired
loan be measured based on the present value of expected future cash flows
discounted at the effective interest rate of the loan, or at fair value of the
loan's collateral for "collateral dependent" loans. A loan is considered
impaired when it is probable that a creditor will be unable to collect all
interest and principal payments as scheduled in the loan agreement. A loan is
not considered impaired during a period of delay in payment if the ultimate
collectibility of all amounts due is expected. A valuation allowance is required
to the extent that the measure of the impaired loans is less than the recorded
investment.
43
SFAS 114 does not apply to larger groups of homogeneous loans such as
consumer installment and real estate mortgage loans, which are collectively
evaluated for impairment. Impaired loans are therefore primarily business loans,
which include commercial loans and income property and construction real estate
loans. The Company's impaired loans are nonaccrual loans, as generally loans are
placed on nonaccrual status on the earlier of the date that principal or
interest amounts are 90 days or more past due or the date that collection of
such amounts is judged uncertain based on an evaluation of the net realizable
value of the collateral and the financial strength of the borrower.
Impaired loans and the applicable valuation allowance at March 31, 1996
were as follows:
In thousands) Related
Loan Valuation
Balance Allowance
------- ---------
Impaired with specific valuation allowance $ -- $--
Impaired without specific valuation allowance 9,139 --
------ ----
Total impaired loans $9,139 $--
====== ====
Collateral dependent loans, which are measured at the fair value of the
collateral, constituted 100% of impaired loans at March 31, 1996.
SFAS 118 allows a creditor to use existing methods for recognizing
interest income on an impaired loan. Consistent with the Company's method for
nonaccrual loans, interest receipts for impaired loans are recognized as
interest income and applied to principal when the ultimate collectibility of
principal is in doubt. The average recorded investment in impaired loans, the
amount of interest income recognized, and the amount of interest income
recognized on a cash basis during the three- and nine-month periods ended March
31, 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands) March 31, 1996 March 31, 1996
--------------------- -----------------
<S> <C>
Average recorded investment in impaired loans $ 5,791 $4,456
Interest income recognized during impairment 91 158
Interest income recognized on a cash basis during impairment 91 158
</TABLE>
The balance of impaired loans as of July 1, 1995 totaled $5,327,000. The initial
adoption of SFAS 114 and SFAS 118 does not require an increase in the Company's
allowance for loan losses. The impact of SFAS 114 and SFAS 118 is immaterial to
the Company's consolidated financial statements as of September 30, 1995, and
for the three-month and nine-month periods ended March 31, 1996. In accordance
with SFAS 114, no retroactive application of its provisions has been made to the
consolidated financial statements for periods prior to July 1, 1995.
44
The following table summarizes all real estate acquired through
foreclosure, by property type, at March 31, 1996:
<TABLE>
<CAPTION>
Number
of Original Net
(Dollars in thousands) Units Basis Allowances Investment
------- ------- ---------- ----------
<S> <C> <C> <C> <C>
One to four family residential units 33 $ 2,818 $ (196) $ 2,622
Residential land/lots 6 2,489 (30) 2,459
Shopping/retail centers 4 1,020 (12) 1,008
Commercial land 1 192 -- 192
------- ------- ------- -------
44 6,519 (238) 6,281
General loss allowance -- -- (450) (450)
------- ------- ------- -------
44 $ 6,519 $ (688) $ 5,831
======= ======= ======= =======
</TABLE>
Potential problem loans consist of loans that are currently performing
in accordance with contractual terms but for which potential operating or
financial concerns of the obligors have caused management to have serious doubts
regarding the ability of such obligors to continue to comply with present
repayment terms. At March 31, 1996, such potential problem loans that are not
included in the above tables as nonperforming amounted to approximately $4.4
million. Depending on the changes in the economy and other future events, these
loans and others not presently identified could be classified as non-performing
assets in the future. There are no loans classified for regulatory purposes as
loss, doubtful, substandard or special mention that have not been disclosed
above, that either (a) represent or result from trends or uncertainties that
management reasonable expects will materially impact future operating results,
liquidity or capital resources or (b) represent material credits about which
management is aware of any information that causes management to have serious
doubts as to the ability of such borrowers to comply with loan repayment terms.
During the quarter ended September 30, 1995, the Company modified the
financing for a strip shopping center located in Marietta, Georgia. Prior to
June 30, 1995, Management was advised by the owners of the shopping center that
they were interested in selling the property. The Company had previously
acquired the shopping center though foreclosure in March 1990 and subsequently
sold the property to new owners in October 1990. The resulting "loan to
facilitate" was made at a below-market rate of interest and was the Company's
largest individual outstanding loan balance at June 30, 1995. Although the loan
was performing in accordance with its terms, the owners had minimal equity in
the project, and the loan was classified for regulatory purposes since its
inception. Management added to the allowance for commercial mortgage loan losses
in the past few years due to its concerns for this specific loan.
45
Management subsequently reached a agreement with the owners to accept
the net sales proceeds from the sale of the project to a third party. The
transaction was concluded in August 1995 and resulted in a chargeoff of
$1,056,000 against the allowance for commercial mortgage loan losses. An
arms-length loan was made by the Company to the acquiring entity at market
terms, including a substantial equity contribution. The new loan is being held
in the Company's commercial mortgage loan portfolio and is classified as a
performing credit. Management believes that the $2,127,000 in the allowance for
commercial mortgage loans at March 31, 1996, is adequate to cover potential
problems in the portfolio.
Effective July 1, 1995, the Company adopted the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". The Statement was issued in March 1995 and becomes
effective for fiscal years beginning after December 15, 1995, with earlier
adoption allowed. The Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by a company to be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In performing the review
for recoverability, the Company should estimate the future cash flows expected
to result for the use of the asset and its eventual disposition. An impairment
loss would be recognized in the sum of the expected future cash flows,
undiscounted, is less than the carrying amount of the asset. The Statement also
establishes standards for recording an impairment loss for certain assets that
are subject to disposal. SFAS 121 excludes financial instruments, long-term
customer relationships of financial institutions, mortgage and other servicing
rights, and deferred tax assets. The impact of SFAS 121 was immaterial to the
Company's consolidated financial statements as of September 30, 1995, and for
the three month period ended September 30, 1995. In accordance with SFAS 121, no
retroactive application of its provisions was made to the consolidated financial
statements for periods prior to July 1, 1995.
New Accounting Standard
In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights",
was issued. SFAS 122 becomes effective for fiscal years beginning after December
15, 1995, with earlier adoption allowed. The Statement requires that the cost of
mortgage loans originated or purchased with a definitive plan to sell the loans
and retain the servicing rights, be allocated between the loans and servicing
rights based on their estimated values at the purchase or origination date. Upon
the sales of the loans, additional income may be recognized resulting from a
lower adjusted cost basis on the mortgage loans sold. The servicing rights asset
is amortized over the life of the servicing revenue stream, and thus has the
effect of reducing loan servicing income in future periods. As noted earlier,
the Company has sold substantially all of its portfolio of loans serviced for
others, in a transaction effective as of April 1, 1996. The Company does not
believe that the rule will have a material adverse effect.
46
Impact of Inflation and Changing Prices. The consolidated financial
statements and related data presented in this quarterly report have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of the financial position and operating results of the
Company in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Virtually all of the assets of the Company are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services.
47
Part II. Other Information
Virginia First Financial Corporation and Subsidiaries
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
for the three months ended March 31, 1996.
48
SIGNATURES
Pursuant to the requirements 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 First Financial Corporation
(Registrant)
Date: May 10, 1996 /s/ Charles A. Patton
------------------------
Charles A. Patton
President and
Chief Operating Officer
Date: May 10, 1996 /s/ Stephen R. Kinnier
-------------------------
Stephen R. Kinnier
Senior Vice President and
Chief Financial Officer
49
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 10,540
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,527
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,084
<INVESTMENTS-CARRYING> 8,079
<INVESTMENTS-MARKET> 8,089
<LOANS> 644,336
<ALLOWANCE> 6,482
<TOTAL-ASSETS> 713,931
<DEPOSITS> 575,942
<SHORT-TERM> 33,098
<LIABILITIES-OTHER> 7,725
<LONG-TERM> 42,052
0
0
<COMMON> 55,114
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 713,931
<INTEREST-LOAN> 41,797
<INTEREST-INVEST> 1,918
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 43,715
<INTEREST-DEPOSIT> 19,620
<INTEREST-EXPENSE> 23,230
<INTEREST-INCOME-NET> 20,485
<LOAN-LOSSES> 1,344
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,410
<INCOME-PRETAX> 9,816
<INCOME-PRE-EXTRAORDINARY> 6,199
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,199
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 3.88
<LOANS-NON> 14,571
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,437
<ALLOWANCE-OPEN> 6,373
<CHARGE-OFFS> 1,278
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 6,482
<ALLOWANCE-DOMESTIC> 6,482
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,862
</TABLE>
