Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: Commission File
June 30, 1996 Number: 33-67746
Virginia First Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1678497
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Franklin and Adams Streets
Petersburg, Virginia 23804 - 2009
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (804) 733-0333
(804) 748-5847
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
Preferred Stock
Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of August 31, 1996, the aggregate market value of the Common Stock of the
Registrant outstanding on such date, excluding 1,675,325 shares held by all
directors and executive officers of the Registrant as a group, was $52,883,000.
This figure was calculated using the closing price of $13.00 per common share
quoted on the NASDAQ National Market System on August 31, 1996. There were
5,743,267 shares of Common Stock outstanding as of August 31, 1996.
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Documents Incorporated by Reference
List hereunder the following documents if incorporated by reference and the Part
of Form 10-K into which the documents are incorporated:
(1) Part II incorporates information by reference from the registrant's Annual
Report to Stockholders for the fiscal year ended June 30, 1996.
(2) Part III incorporates by reference from the registrant's proxy statement
for its Annual Meeting of Stockholders scheduled for October 23, 1996.
(3) Part IV incorporates by reference from: (i) the registrant's Annual Report
to Stockholders for the fiscal year ended June 30, 1996; and (ii) the
registrant's proxy statement for its Annual Meeting of Stockholders
scheduled for October 23, 1996.
The exhibit index is located on page 26.
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Part I.
Item I. Business
General
Virginia First Financial Corporation (the "Company") was incorporated in
Virginia in 1993 to serve as the holding company for Virginia First Savings
Bank, F.S.B. (the "Savings Bank"). The stockholders of the Savings Bank approved
the Plan of Reorganization at the Annual Meeting on November 10, 1993, and the
reorganization was consummated on January 14, 1994 with the Savings Bank
becoming a wholly-owned subsidiary of the Company. The Savings Bank is a
federally chartered capital stock savings bank with principal offices in
Petersburg, Virginia. The Savings Bank, incorporated in 1888, is one of the
oldest financial institutions in the Commonwealth of Virginia.
At June 30, 1996, the Company had total assets of $746,867,000, deposits
of $573,536,000, and net worth of $60,966,000.
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. All of the retail banking offices are located in
Virginia, while the mortgage loan origination offices are in Virginia and
Maryland. 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 ("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 Company 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.
The Company operates twenty-three full service retail facilities
throughout southside, central and southwestern Virginia. In addition, the
Company operates twelve loan origination centers in southside, central and
southwestern Virginia, in northern Virginia and southern Maryland under the
trade name Virginia First Mortgage.
The results of operations for the fiscal years ended June 30, 1996, 1995
and 1994 ("fiscal year 1996", "fiscal year 1995" and "fiscal year 1994",
respectively) reflect the Company's strategies of expanding its community
banking and mortgage banking operations.
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See "Management's Discussion and Analysis" of operations and financial
condition, included as part of the Annual Report to Stockholders, for a detailed
discussion of certain aspects of the Company's business.
Lending Activities
Residential Mortgage Lending
The Company's lending policy is generally to lend up to 95% of the
appraised value of residential property subject to the Company's normal
requirement of insurance from private mortgage insurance companies (approved by
the Federal National Mortgage Association ("FNMA") and/or the Federal Home Loan
Mortgage Corporation ("FHLMC")) on loans over 80% of property value. This
insurance effectively reduces the loan to value ratio to no more than 76% of the
appraised value of the property.
The Company also offers competitive fixed rate second mortgages at 80% of
appraised value for a term not to exceed fifteen years, as well as no closing
costs for equity lines over $15,000 with a ten year term, also at 80% of
appraised value.
The Company's existing loan contracts generally provide for repayment of
residential mortgage loans over periods ranging from 15 to 30 years, depending
upon the age, physical condition and type of property. However, such loans
normally have remained outstanding for substantially shorter periods of time, as
borrowers often refinance or prepay their loans through the sale of their homes.
Most of the Company's residential fixed-rate mortgage loans include "due
on sale" clauses, which give the creditor the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage loan without repayment of
the loan. The Company's adjustable mortgage loan products are assumable by a
qualified borrower. The borrower must qualify under the FNMA/FHLMC underwriting
guidelines which the Company employs. The assumability feature of the Company's
adjustable rate products is intended to help the Company maximize the retention
of its existing adjustable mortgage loan portfolio.
Mortgage loans exceeding $350,000 but not exceeding the greater of
$1,000,000 or one quarter of one percent (.25%) of assets must be approved by
the Chairman of the Board of Directors and one other member of the Loan
Committee established by the Board of Directors. Loans exceeding the greater of
$1,000,000 or one quarter of one percent (.25%) of assets must be approved by
the full Board of Directors or by the Executive Committee of the Board of
Directors.
The Company's basic residential adjustable product is rate indexed at
287.5 basis points over the average yield on United States Treasury securities
adjusted to a constant maturity of one year. An adjustment limitation (increase
or decrease) of 2% per annum or 6% over the life of the loan is included.
Additionally, the Company offers a three year adjustable rate loan product. This
product is indexed at 295 basis points over the average yield on United States
Treasury securities adjusted to a constant maturity of three years. An
adjustment limitation of 2% per three year anniversary and 6% over the life of
the loan applies to this product.
All of the Company's mortgage lending is subject to loan origination
procedures prescribed by the Board of Directors. Property valuations by fee
appraisers approved by the Company's Board of Directors are required. Loan
applications are obtained to determine the borrower's ability to repay.
Significant items on the applications are verified through the use of credit
reports, financial statements and confirmations. To comply with FHLMC and FNMA
requirements all applications, appraisals and other items are reviewed by the
Underwriting Department of the Mortgage Banking Division, for all residential
loans originated up to $207,000. Loans exceeding $207,000 but not in excess of
$350,000 require the approval of an underwriter and any member of the Loan
Committee.
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It is the Company's policy to require title insurance on all first
mortgage loans and to require that fire and casualty insurance (extended
coverage) be maintained on all property standing as security for its loans in
amounts equal to the amount of the outstanding principal balance of the loans.
Borrowers must also obtain hazard insurance policies prior to closing and flood
insurance policies when required by the Department of Housing and Urban
Development. Borrowers are required to advance funds on a monthly basis together
with each payment of principal and interest to a mortgage escrow account from
which the Company makes disbursements for items such as real estate taxes,
hazard insurance premiums, and private mortgage insurance premiums as they fall
due.
Federal regulations allow the Company to originate loans on real estate
within the State of Virginia and, within limits, to originate and purchase loans
or loan participations secured by real estate located in any part of the United
States. During fiscal year 1996 the Company's primary lending areas were
southside, central and southwestern Virginia, plus northern Virginia and
southern Maryland.
The Company's loan originations come from a number of sources. Residential
loan originations can be attributed to depositors, walk-in customers, and
referrals of real estate brokers. Construction loan originations are primarily
obtained from referrals of real estate brokers and builders. Commercial loan
originations are obtained by direct solicitation and mortgage broker referrals.
Loans may be purchased from other lenders for amounts greater or less than
their par value. Any amount paid in excess of the par value is known as a
premium and is amortized against income over the life of the loan. The excess of
the par value of a loan over its purchase price is known as a discount. Any
discount received is deferred and accreted into income under the same methods
used for excess loan origination fees.
Under federal regulations the aggregate loans that the Company may make to
any one borrower, including related entities, is the same that are applicable to
a national bank. This requirement is generally that loans to one borrower may
not exceed 15% of unimpaired capital and unimpaired surplus. At June 30, 1996,
the Company's regulatory limit on loans to one borrower was $7.8 million and the
Company's largest loan or group of loans to one borrower, including related
entities, was $6.8 million.
In addition to interest earned on loans, the Company receives fees in
connection with real estate loan originations, loan modifications, late
payments, prepayments and miscellaneous services related to its loans. Income
from these activities varies from period to period depending on the volume and
type of loans made.
The Company receives income related to existing loans where monthly
payments are delinquent but are later paid. These fees are commonly referred to
as late charges and are not a significant portion of the Company's income.
Construction and Commercial Real Estate Lending
The Company makes construction loans for periods of one month to one year
on residential property and eighteen months on commercial real estate property,
to provide interim financing on property during the construction period. At June
30, 1996, outstanding construction loans (net of undisbursed funds) amounted to
$121,375,000 or 19.4% of the Company's loans held for investment. This compares
to $110,117,000 or 18.6% of loans held for investment as of June 30, 1995. These
loans are generally made for 80% or less of the appraised value of the property
upon completion. Construction loan funds are disbursed periodically at
pre-specified stages of completion, after an inspection by the Company's staff
inspector or a qualified independent fee appraiser. Mortgage loans may also be
made on commercial and industrial real estate based on Company-established
underwriting standards.
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The Company makes commitments to builders and developers to provide for
the permanent financing of individual residential units and residential units in
condominium projects. Commitments are also issued for construction loans and for
permanent mortgages on commercial projects. Such commitments, for which the
Company charges a standby or commitment fee of 1% or more of the dollar amount
of such commitment, are generally to originate mortgage loans at a date in the
future at the then prevailing interest rate.
Loans on commercial properties, apartment buildings, and other
multi-family dwellings are typically made at 75% to 80% of the appraised value.
Such loans totalled $48,722,000 or 7.8% of loans held for investment at June 30,
1996, compared to $60,308,000 or 10.2% of loans held for investment at June 30,
1995.
Commercial real estate and construction lending entails additional risk as
compared with residential mortgage lending. Commercial real estate loans
typically involve larger loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject, to a
greater extent, to adverse conditions in the real estate market or in the
economy generally. Construction loans involve additional risk attributable to
the fact that loan funds are advanced upon the security of a project or house
under construction. Construction delays, cost overruns or the inability of the
contractor to sell the finished product add an additional element of risk to
such lending.
Consumer Lending
The Company also offers other types of loans in addition to real estate
mortgage and construction loans. Such loans accounted for 9.7% and 8.4% of the
Company's loans held for investment at June 30, 1996 and 1995, respectively.
Depositors are currently permitted to borrow up to 90% of their deposit account
balance at a rate of interest which is set at 3% above the rate of interest
currently paid on such savings accounts, the loan being secured by the account.
The Company also makes fixed rate loans for the purchase of automobiles, boats
and manufactured housing units, as well as secured and unsecured personal loans.
The terms generally do not exceed 15 years on manufactured housing units and
five years on other consumer loans.
Investments
Mortgage-Backed Securities
The Company invests in mortgage-backed securities. A substantial portion
of this portfolio consists of securities that are either insured or guaranteed
by FHLMC or FNMA. Guaranteed securities are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations of the
Company. At June 30, 1996, the Company's mortgage-backed securities portfolio
had a carrying value of $15,694,000 or 2.1% of total assets, compared to
$9,371,000 or 1.4% of total assets at June 30, 1995. Due to repayments and
prepayments of the underlying loans, the actual maturities of mortgage-backed
securities are expected to be substantially less than the scheduled maturities.
Investment Activities
Under OTS regulations, the Savings Bank is required to maintain certain
liquidity ratios and does so by investing in certain obligations and other
securities which qualify as liquid assets under OTS regulations. See
"Regulation". As a federally chartered savings bank, the Savings Bank's
investment authority is limited by federal law which permits investment in,
among other things, certain certificates of deposit issued by commercial banks,
banker's acceptances, loans to commercial banks for Federal Funds, United States
government and agency obligations and obligations of state governments, and
corporate bonds.
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The Company had $6,278,000 and $7,630,000 invested in municipal bond
investments at June 30, 1995 and 1994, respectively. These investments
represented approximately 0.8% and 1.1% of total assets at those dates.
The Company's investment committee, which meets monthly, follows OTS
guidelines with respect to portfolio investment and accounting. Such OTS
guidelines state that insured institutions must account for securities held for
investment, sale and/or trading in accordance with generally accepted accounting
principles. The Company maintains a written investment policy to set forth
investment portfolio composition and investment strategy. The investment
portfolio composition policy considers, among other factors, the financial
condition of the institution, the types of securities, amounts of investments in
those securities and safety and soundness considerations pertaining to the
institution. The investment strategy considers, among other factors, interest
rate risk, anticipated maturity of each type of investment and the intent of the
institution with respect to each investment.
Sources of Funds
General
Savings accounts and other types of deposits have traditionally been the
principal source of the Company's funds for use in lending and for other general
business purposes. In addition to savings deposits, the Company derives funds
from loan repayments, FHLB advances, agreements to repurchase securities sold
and from whole loan and loan participation sales. Borrowings may be used on a
short-term basis to compensate for seasonal or other reductions in deposits or
inflows at less than projected levels, as well as on a longer term basis to
support expanded lending activities.
Savings Activities
The Company, in its continuing effort to remain a competitive force in its
markets, offers a wide variety of savings programs and deposit services, with
varied maturities, minimum-balance requirements and market-sensitive interest
rates that are attractive to all types of depositors. The Company's deposit
products include passbook savings accounts, checking accounts, money market
deposit accounts, certificates of deposit ranging in terms from ninety-one days
to ten years and jumbo certificates of deposit. Included among these savings
programs are Individual Retirement Accounts. The Company is able to offer a
broad array of products that are consistent with current OTS regulations, and as
a major result, the Company's deposit portfolio is, for the most part, sensitive
to general market fluctuations.
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The following table sets forth the various types of accounts offered by
the Company at June 30, 1996:
Weighted
Average Minimum Amount
Interest Balance in % of
Type of Account Rate Term Deposit Thousands Total
Checking Accounts 0.00% none $ - $ 39,478 6.88%
Interest Checking Accounts 2.61 none - 30,400 5.30
Passbook Accounts 3.35 none - 68,824 12.00
Money Market
Deposit Accounts 4.28 none - 67,247 11.73
Certificates with remaining
maturities of:
1 to 30 days 5.63 various various 22,288 3.89
31 to 90 days 5.59 various various 39,305 6.85
91 to 180 days 5.48 various various 56,068 9.78
181 days to 1 year 5.42 various various 114,516 19.96
1 year to 2 years 5.95 various various 59,118 10.31
2 years to 3 years 5.84 various various 22,435 3.91
3 years to 5 years 6.80 various various 52,018 9.07
Over 5 years 6.60 various various 1,839 0.32
-------- -------
$573,536 100.00%
The variety of savings accounts offered by the Company has increased the
Company's ability to retain deposits and has allowed it to be more competitive
in obtaining new funds, reducing the threat of disintermediation (the flow of
funds away from savings institutions into direct investment vehicles such as
government and corporate securities). As customers have become more rate
conscious and willing to move funds to higher yielding accounts, the ability of
the Company to attract and maintain deposits and the Company's cost of funds
have been, and will continue to be, significantly affected by money market
conditions.
The following table sets forth information relating to the Company's
deposit flows during the years indicated.
Years Ended June 30
(In thousands) 1996 1995 1994
- -------------- -------- --------- ---------
Increase (decrease) in deposits before
interest credited $ 43,609 $ 26,405 $ (13,815)
Interest credited 26,260 20,542 16,304
-------- -------- --------
Net increase in deposits 69,869 46,947 2,489
-------- -------- --------
Total deposits at year end $573,536 $503,667 $456,720
======== ======== ========
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Borrowings
The Company may obtain advances from the FHLB upon the security of the
capital stock it owns in that bank and certain of its home mortgage loans
provided certain standards related to creditworthiness have been met ( See
"Regulation"). Such advances may be made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities
and the FHLB prescribes the acceptable uses to which the advances pursuant to
each program may be used, as well as limitations on the size of such advances.
Depending on the program, such limitations are based either on a fixed
percentage of the Company's net worth or on the FHLB's assessment of the
Company's creditworthiness. The FHLB is required to review its credit
limitations and standards at least once every six months. FHLB advances have
from time to time been available to meet seasonal and other withdrawals of
savings accounts and to expand lending. Under current FHLB regulations there are
no limitations placed on the amount of borrowings permitted by an insured
savings bank. The Company also obtains funds from sales of securities to primary
government security dealers and institutional investors under agreements to
repurchase ("repurchase agreements"), which are considered borrowings.
The following table sets forth certain information as to the Company's
advances and other borrowings at the dates indicated. See Notes 8 and 9 to the
Consolidated Financial Statements, included as part of the Annual Report to
Stockholders, for information as to rates, maturities, average balances and
maximum amounts outstanding.
June 30
(In thousands) 1996 1995 1994
-------------- -------- -------- --------
Advances from FHLB $102,052 $134,658 $ 79,872
Other borrowings 639 557 550
-------- -------- --------
Total borrowings $102,691 $135,215 $ 80,422
======== ======== ========
Employees
The Company at June 30, 1996, had 308 full-time employees, including its
executive officers. None of these employees are represented by a collective
agent, and the Company believes its employee relations are excellent.
Competition
The Company encounters competition for both savings deposits and real
estate loans. For savings deposits, competition comes from other savings and
loan associations and/or savings banks, commercial banks, mutual money market
funds, credit unions and various other corporate and financial institutions.
Competition also comes from interest paying obligations issued by various levels
of government and from a variety of securities paying dividends or interest.
Competition for real estate loans comes primarily from other savings and loan
associations and/or savings banks, commercial banks, insurance companies,
mortgage companies and other lending institutions.
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The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") eliminated many of the distinctions between commercial banks, savings
institutions and holding companies thereof, reinforced certain competitive
advantages of commercial banks over savings institutions (such as with respect
to insurance premiums) and allowed bank holding companies to acquire savings
institutions (See "Regulation - Financial Institutions Reform, Recovery, and
Enforcement Act of 1989"). FIRREA has increased the competition encountered by
savings institutions and has resulted in a decrease in both the number of
savings institutions and the aggregate size of the savings industry.
Subsidiaries
The Company was incorporated in Virginia in 1993 to serve as the holding
company for the Savings Bank. The Savings Bank is a federally chartered capital
stock savings bank with principal offices in Petersburg, Virginia. The Savings
Bank, incorporated in 1888, is one of the oldest financial institutions in the
Commonwealth of Virginia.
The types of activities and the magnitude of the Savings Bank's activities
in its investments in service corporations are restricted. The Savings Bank is
permitted by current federal regulations to invest up to 3% of its assets in the
capital stock of, and make secured and unsecured loans to, service corporations
and subsidiaries and under some circumstances may make conforming loans to
service corporations in greater amounts (See "Regulation - Risk-Based Capital
Requirement").
Service Corporation Activities
At June 30, 1996, the Savings Bank had four service corporation
subsidiaries, each of which is a Virginia corporation. The wholly-owned service
corporations are operated by the Savings Bank's officers and employees, whose
time is billed to them as part of a management fee for services rendered.
Southside Service Corporation was chartered on January 25, 1972. It is
actively involved in appraisal services, land development, and financing. The
Savings Bank's investment at June 30, 1996 consisted of stock ownership of
$100,000, additional paid in capital of $852,000 and accumulated equity of
$7,000. At June 30, 1996, Southside's assets were $1,007,000 consisting
primarily of investments in real estate projects of $761,000, and a loan and
interest receivable from the Savings Bank of $240,000, which is current.
Virginia First Investment Corporation was chartered January 4, 1971. Prior
to August 16, 1993 the corporation's name was "Virginia First Financial
Corporation". It is currently inactive; previously it marketed tax deferred
annuities. The assets of the corporation at June 30, 1996, were $7,000 and
consisted primarily of cash. The Savings Bank's investment at June 30, 1996,
consisted of stock ownership of $2,000, additional paid-in capital of $207,000
and accumulated deficits of $202,000.
Colony Financial Corporation was chartered on April 14, 1977, by Colony
Savings and Loan Association. On April 1, 1982, Colony Financial Corporation
("Colony") was acquired as a wholly owned subsidiary of the Company through the
acquisition of Colony Savings and Loan Association. Colony has been involved in
real estate title insurance activities, but currently is inactive. At June 30,
1996 the assets of Colony were $5 of cash. The Savings Bank's investment at June
30, 1996, consisted of stock ownership of $1,000, additional paid-in capital of
$9,000, and accumulated deficits of $10,000.
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Century Title Insurance Agency, Inc. was chartered on December 9, 1994 as
a title insurance agency. It offers a full range of title insurance products to
the general public. The assets of the corporation at June 30, 1996, were $14,000
and consisted primarily of cash and unamortized organizational costs. The
Savings Bank's investment at June 30, 1996, consisted of stock ownership of
$1,000, additional paid-in capital of $24,000 and accumulated deficits of
$11,000.
Federal Home Loan Bank System
The Savings Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
System is regulated by the Federal Housing Finance Board ("FHFB"). The FHFB is
composed of five members, including the Secretary of Housing and Urban
Development and four private citizens appointed by the President with the advice
and consent of the Senate for terms of seven years. At least one director must
be chosen from organizations with more than a two-year history of representing
consumer or community interests on banking services, credit needs, housing or
financial consumer protections.
The Savings Bank, as a member of the FHLB of Atlanta, is required to
purchase and maintain stock in its bank in an amount as if 30 percent of the
member's assets were home mortgage loans.
The FHFB is required to adopt regulations establishing standards of
community investment or service for members of the Federal Home Loan Banks as a
condition for continued access to advances. The regulations are to take into
account the record of performance of the institution under the Community
Reinvestment Act of 1977 and its record of lending to first time home buyers.
In addition, new collateral requirements for advances are to be
established which will be designed to insure credit quality and marketability of
the collateral.
Regulation
General
Federally chartered thrift institutions, such as the Savings Bank, are
members of the FHLB System and have their deposit accounts insured by the SAIF,
which is administered by the FDIC. By virtue of its federal charter and federal
insurance of accounts, the Company and the Savings Bank are subject to extensive
regulation by the OTS and the FDIC. SAIF-insured institutions may not enter into
certain transactions unless certain regulatory tests are met or they obtain
prior governmental approval, and they must file reports with these government
agencies describing their activities and their financial condition. There are
periodic examinations by federal authorities to test compliance by the Company
with various regulatory requirements. This supervision and regulation is
intended primarily for the protection of the depositors. Certain of these
regulatory requirements are referred to below or elsewhere in this document.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
On August 9, 1989, FIRREA was enacted into law in order to restructure the
regulation of the thrift industry and to address the financial condition of the
Federal Savings and Loan Insurance Corporation ("FSLIC"). The legislation
adversely affected the thrift industry in several ways, including higher deposit
insurance premiums, more stringent capital requirements, new investment
limitations and restrictions, and a likely reduction in dividends received on
FHLB stock as a significant portion of the earnings of the FHLB system are used
to partially fund the resolution of regulatory enforcement power.
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Insurance and Regulatory Structure
Pursuant to the provisions of FIRREA, a new insurance fund, administered
by the FDIC and named the SAIF, insures the deposits of savings institutions
such as the Savings Bank. The FDIC fund existing prior to the enactment of
FIRREA is now known as the Bank Insurance Fund ("BIF") and continues to insure
the deposits of commercial banks and is also administered by the FDIC. Although
the FDIC administers both funds, the assets and liabilities of the two funds are
not commingled. In addition, FIRREA abolished the Federal Home Loan Bank Board
("FHLBB") and replaced it with the OTS, which is a bureau in the Department of
the Treasury. The OTS is headed by a single Director who is appointed by the
President.
FIRREA also mandated the dissolution of the FSLIC and the transfer of all
its assets and liabilities to the FSLIC Resolution Fund ("FRF"), which is
managed by the FDIC and separately maintained. No assets and liabilities of the
FRF will be commingled with assets and liabilities of the FDIC, SAIF, or BIF.
The FRF will be dissolved upon satisfaction of all debts and liabilities and the
sale of all assets acquired in case resolutions. FIRREA also mandated the
organization of the Resolution Trust Corporation ("RTC"). The purpose of the RTC
is to manage and resolve all institutions previously insured by the FSLIC which
are placed in receivership or liquidating conservatorship within three years
after enactment of FIRREA.
Insurance of Deposits
Under FIRREA, savings institution deposits continue to be insured to a
maximum of $100,000 for each insured account, but are now insured by the SAIF
and backed by the full faith and credit of the United States Government. Deposit
insurance premiums paid by savings associations and banks have increased
significantly in the past three years. While deposit insurance premium rates for
banks have recently been reduced, there are no regulatory proposals for reducing
premium rates for savings associations in the near future (See "Regulation -
FDICIA - Deposit Insurance").
An insured institution is subject to periodic examination and regulators
may revalue the assets of an institution, based upon appraisals, and require
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets. SAIF insurance of deposits
may be terminated by the FDIC, after notice and hearing, and upon finding by the
FDIC that a savings institution has engaged in an unsafe or unsound practices,
or is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order or condition imposed by the OTS or
the FDIC. Management of the Company is not aware of any practice, condition or
violation that might lead to termination of the Savings Bank's deposit
insurance.
Investment Rules
FIRREA materially affected the permissible investments for savings
institutions. If a savings institution failed to meet the QTL test specified in
Section 10(m) of the Home Owners' Loan Act ("HOLA") then such savings
association would become subject to severe restrictions regarding activities and
other aspects of its operations. Until July 1, 1991, a savings association
and/or savings bank which sought to comply with the QTL test was required to
have maintained at least 60% of its tangible assets in investments which related
to domestic residential real estate ("Qualified Assets"), such as (a) loans and
securities which were related to domestic residential real estate or
manufactured housing, (b) properties used by the institution in its business,
(c) assets which qualified for liquidity purposes, and (d) 50% of residential
mortgage loans originated by the institution and sold within 90 days thereafter.
12
<PAGE>
A new QTL test requires 65% of an institution's "portfolio" assets to
consist of, primarily, certain housing-related assets. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans related to
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are related to residential
housing or manufactured housing); and direct or indirect obligations of the
FSLIC, FDIC, RTC or FSLIC Resolution Fund. In addition, the following assets may
be included in meeting the test subject to an overall limit of 20% of the
savings institution's portfolio assets: 50% of residential mortgage loans
originated and sold within 90 days of origination; 100% of investments in
service corporations that meet certain housing related standards; 200% of
certain loans in areas where credit needs of low and moderate income residents
are not being adequately met; 100% of certain loans to churches, schools,
nursing homes and hospitals; and 100% of consumer and educational loans (limited
to 10% of total portfolio assets).
Under FIRREA, the permissible amount of loans to one borrower now follows
the national bank standards for all loans made by savings institutions, as
compared to the pre-FIRREA rule that applied that standard only to commercial
loans made by federal savings institutions. The national bank standard generally
does not permit loans-to-one borrower to exceed 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities.
Savings institutions and their subsidiaries may not acquire or retain
investments in corporate debt securities that at the time of acquisition were
not rated in one of the four highest rating categories by at least one
nationally recognized organization. Investment in a savings institution's
portfolio not meeting this requirement had to be divested by July 1, 1994. The
Company sold its holdings of corporate debt securities in July 1991.
In addition, the permissible amount of commercial real estate loans for a
federal savings banks is reduced from the pre-FIRREA standard of 40% of assets
to an amount equal to four times capital. This limitation is not expected to
materially affect the Company.
Enforcement
Other provisions of FIRREA include substantial changes to enforcement
powers available to regulators. The OTS, as the primary regulator of savings
institutions, is primarily responsible for enforcement action, but the FDIC also
has authority to impose enforcement action independently after following certain
procedures.
FIRREA provides regulators with far greater flexibility to impose
enforcement action on an institution that fails to comply with its regulatory
requirements, particularly with respect to its capital requirements. Possible
enforcement actions include the imposition of a capital plan and termination of
deposit insurance. The FDIC also may recommend that the Director of OTS take
enforcement action. If action is not taken by the Director, the FDIC would have
authority to compel such action under certain circumstances.
Capital Standards
FIRREA substantially changed the capital requirements applicable to
savings institutions. On November 8, 1989, the Director of the OTS promulgated
final capital regulations that are "no less stringent than the capital standards
applicable to national banks" as required by FIRREA. The new capital regulations
provide for a tangible capital requirement, a core capital requirement and a
risk-based capital requirement. The final regulations became effective on
December 7, 1989.
13
<PAGE>
Tangible Capital Requirement
Each savings institution must maintain tangible capital equal to at least
1.5% of its adjusted total assets. Tangible capital includes common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, and minority interests in the equity
accounts of fully consolidated subsidiaries. In calculating tangible capital,
the following items are generally deducted from capital: (a) 100% of intangible
assets (other than purchased mortgage servicing rights); (b) the amount by which
purchased mortgage servicing rights exceed the lower of 90% of determinable fair
market value, 90% of original cost, or current amortized book value; and (c)
equity and debt investments in subsidiaries that are not "includable
subsidiaries," which are defined as subsidiaries engaged solely in activities
permissible for a national bank, engaged in activities impermissible for a
national bank but only as an agent for its customers, or engaged solely in
mortgage-banking activities. With respect to investments in nonincludable
subsidiaries that were engaged in impermissible activities before April 12,
1989, 100% of the institution's investments in and extensions of credit to such
a subsidiary as of April 12, 1989 or the date of calculation, whichever is less,
may be included in capital prior to July 1, 1990; thereafter, the amount that
may be included is reduced each year until July 1, 1994, when none of such
investments and extensions of credit may be included. This phaseout period may
be extended into 1996 based upon a case by case review and approval by OTS. The
Savings Bank has applied for and received such an extension to 1996 from the
OTS. At June 30, 1996, the Savings Bank had investments in or extensions of
credit to nonincludable subsidiaries amounting to $967,000.
In calculating adjusted total assets, adjustments are made to total assets
to give effect to the exclusion of certain assets from capital and to
appropriately account for the investments in and assets of both includable and
nonincludable subsidiaries.
At June 30, 1996 the Savings Bank's tangible capital amounted to
$58,581,000 or 7.87% of its adjusted total assets.
Core Capital Requirement
Each savings institution must maintain core capital equal to at least 3%
of its adjusted total assets. Core capital includes common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries.
Intangible assets are also subtracted from core capital, unless they have
an identifiable market value and may be sold separate from the institution, in
which event they are required to be deducted only to the extent they exceed 25%
of core capital. The other adjustments which are made to tangible capital are
also made to core capital. At June 30, 1996, the Savings Bank's core capital
amounted to $58,826,000 or 7.90% of its adjusted total assets.
Risk-Based Capital Requirement
Each savings institution must maintain total capital equal to at least
8.0% of risk-weighted assets. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed core
capital, as previously defined.
14
<PAGE>
Supplementary capital includes (a) permanent capital instruments such as
cumulative perpetual preferred stock, perpetual subordinated debt, and mandatory
convertible subordinated debt, (b) maturing capital instruments such as
subordinated debt, intermediate-term preferred stock and mandatory redeemable
preferred stock, subject to an amortization schedule, and (c) general valuation
loan and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of five risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and U.S. Government
securities that are backed by the full faith and credit of the U.S. Government
to 100% for certain assets including commercial real estate loans, consumer
loans and repossessed assets. Qualifying residential mortgage loans (including
multi-family mortgage loans) are assigned a 50% risk weight.
The book value of assets in each category is multiplied by the weighting
factor (from 0% to 100%) assigned to that category. These products are then
totalled to arrive at total risk-weighted assets. Off-balance sheet items are
included in risk-weighted assets by converting them to an approximate balance
sheet "credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included in risk-weighted assets.
At June 30, 1996, the Savings Bank's total capital amounted to $65,465,000
or 12.33% of its total risk-weighted assets.
In addition to the foregoing, the Director of the OTS is given the
authority to establish minimum capital requirements on a case-by-case basis.
The current risk-based capital regulation contains an interest rate risk
("IRR") component. The IRR regulation includes provisions for measuring "above
normal" interest rate risk and the amount of additional capital required for
such risk. An institution would have "above normal" risk if, according to an OTS
model, it would sustain a loss in net portfolio value ("NPV") of more than 2.0%
upon a 200 basis point change in interest rates. NPV is defined as the market
value of assets, less the market value of liabilities, plus the net market value
of off-balance sheet items. Interest rate risk is defined as the decline in an
institution's NPV resulting from a 200 basis point interest rate change,
expressed as a percent of the market value of assets. If an institution's IRR
exceeds 2.0%, it would be required to maintain additional capital equal to 50.0%
of that difference. The amount of additional capital required would be added to
the existing risk-based capital requirement. Institutions whose IRR is less than
or equal to 2.0% would not be required to maintain additional capital for
interest rate risk.
Capital Distributions
The OTS imposes uniform limitations on the ability of savings institutions
to engage in various distributions of capital such as dividends, stock
repurchases and cash-out mergers. The OTS regulation utilizes a tiered approach
which permits various levels of capital distributions based primarily upon a
savings institution's capital level.
Generally in the first tier, a savings institution that has net capital
exceeding its fully phased-in capital requirement is permitted (without
application) to make aggregate capital distributions during a year up to an
amount equal to 100% of its net income to date plus the amount that would reduce
by one-half its surplus capital ratio at the beginning of the year, as adjusted
to reflect the institution's net income to date during the year. Capital
distributions in excess of such amount require advance notice to the OTS with
the opportunity for objection by the OTS. The Savings Bank currently falls
within this tier.
15
<PAGE>
In the second tier, a savings institution with net capital above its
regulatory capital requirement but below its fully phased-in capital
requirement, is authorized to make capital distributions without OTS approval in
limited situations. Capital distributions in excess of these situations require
application to and approval of the OTS.
In the third tier, a savings institution with net capital below its
regulatory capital requirement is not authorized to make any capital
distributions except under very limited circumstances and upon prior written
approval of the OTS.
Federal Reserve System
The Federal Reserve Board has adopted regulations that require savings
institutions to maintain non-interest-earning reserves against transaction
accounts (primarily NOW accounts, Super NOW accounts and regular checking
accounts). Current regulations of the Federal Reserve Board generally require
that reserves of 3% must be maintained against aggregate transaction accounts of
$52.0 million with the first $4.3 million being exempt from reserve
calculations. A 10% reserve requirement is applied to that portion of total
transaction accounts in excess of $52.0 million.
Thrift institutions also have the ability to borrow from the Federal
Reserve Bank "discount window", but Federal Reserve Board regulations require
that associations exhaust all FHLB sources before borrowing from a Federal
Reserve Bank. For the authority to borrow from the discount window, thrift
institutions must have sufficient collateral pledged with the respective Federal
Reserve Bank and proper documentation signed.
Federal Deposit Insurance Corporation Improvement Act
The difficulties encountered nationwide by financial institutions during
1990 and 1991 prompted federal legislation designed to reform the banking
industry and to promote the viability of the industry and of the deposit
insurance system. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), which became effective on December 19, 1991, bolsters the
deposit insurance fund, tightens bank and thrift regulation and trims the scope
of federal deposit insurance as summarized below.
FDICIA requires each federal banking regulatory agency to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate exposure; (v) asset growth; (vi) compensation, fees and
benefits; and (vii) such other operational and managerial standards as the
agency determines to be appropriate. The compensation standards would prohibit
employment contracts, compensation or benefit arrangements, stock option plans,
fee arrangements or other compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material financial loss. In
addition, each federal banking regulatory agency must prescribe by regulation
standards specifying (i) a maximum ratio of classified assets to capital; (ii)
minimum earnings sufficient to absorb losses without impairing capital; (iii) to
the extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies; and (iv) such other standards relating to asset quality, earnings and
valuation as the agency determines to be appropriate. If an insured institution
fails to meet any of the standards promulgated by regulation, then such
institution will be required to submit a plan to its federal regulatory agency
specifying the steps it will take to correct the deficiency.
16
<PAGE>
Prompt corrective action measures adopted in FDICIA and which became
effective on December 19, 1992, impose significant new restrictions and
requirements on depository institutions that fail to meet their minimum capital
requirements. Under new Section 38 of the Federal Deposit Insurance Act ("FDI
Act"), the federal banking regulatory agencies have developed a classification
system pursuant to which all depository institutions are placed into one of five
categories based on their capital levels and other supervisory criteria: well
capitalized; adequately capitalized; undercapitalized; significantly
undercapitalized; and critically undercapitalized. The OTS's regulations which
implement the prompt corrective action provisions of FDICIA provide that a
savings association is (i) well capitalized if it has total risk-based capital
of 10% or more, Tier 1 risk-based capital (core or leveraged capital to
risk-weighted assets) of 6% or more, and core capital of 5% or more; (ii)
adequately capitalized if it has total risk-based capital of 8% or more, Tier 1
risk-based capital of 4% or more, and core capital of 4% or more; (iii)
undercapitalized if it has total risk-based capital of less than 8%, Tier 1
risk-based capital of less than 4%, or core capital of less than 4%; (iv)
significantly undercapitalized if it has total risk-based capital of less than
6%, Tier 1 risk-based capital of less than 3%, or core capital of less than 3%;
and (v) critically undercapitalized if it has tangible equity of less than 2%.
The Savings Bank exceeded all of its regulatory capital requirements and
met the requirements at June 30, 1996 to be classified as "well capitalized".
This classification is determined solely for the purposes of applying the prompt
corrective action regulations and may not constitute an accurate representation
of the Company's overall financial condition.
An undercapitalized depository institution is required to submit a capital
restoration plan to its principal federal regulator. The federal banking
agencies may not accept a capital plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital and is guaranteed by the parent
holding company. If a depository institution fails to submit an acceptable plan,
it will be treated as if it were significantly undercapitalized.
Unless its principal federal regulator has accepted its capital plan, an
undercapitalized bank may not increase its average total assets in any calendar
quarter. If an undercapitalized institution's capital plan has been accepted,
asset growth will be permissible only if the growth is consistent with the plan
and the institution's ratio of tangible equity to assets increases during the
quarter at a rate sufficient to enable the institution to become adequately
capitalized within a reasonable time.
An institution that is undercapitalized may not solicit deposits by
offering rates of interest that are significantly higher than the prevailing
rates on insured deposits in the institution's normal market areas or in the
market area in which the deposits would otherwise be accepted.
An undercapitalized institution may not branch, acquire an interest in
another business or institution or enter a new line of business unless its
capital plan has been accepted and its principal federal regulator approves the
proposed action.
An insured depository institution may not pay management fees to any
person having control of the institution nor may an institution, except under
certain circumstances and with prior regulatory approval, make any capital
distribution if, after making such payment or distribution, the institution
would be undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions are subject to appointment of a receiver or
conservator.
17
<PAGE>
If its principal federal regulator determines that an adequately
capitalized institution is in an unsafe or unsound condition or is engaging in
an unsafe or unsound practice, it may require the institution to submit a
corrective action plan, restrict its asset growth and prohibit branching, new
acquisitions and new lines of business. An institution's principal federal
regulator may deem it to be engaging in an unsafe or unsound practices if it
receives a less than satisfactory rating for asset quality, management, earnings
or liquidity in its most recent examination.
In addition, regulators must draft a new set of non-capital measures of
bank safety, such as loan underwriting standards and minimum earnings levels, to
take effect December 1, 1993. The legislation also requires regulators to
perform annual on-site bank examinations, place limits on real estate lending by
banks and tightens auditing requirements.
FDICIA - Deposit Insurance
FDICIA required the FDIC to develop a system of risk-based insurance
assessments and to maintain a designated reserve ratio for the SAIF. After
December 31, 1994, the FDIC has the authority to increase premiums by 0.075%
annually up to a maximum assessment rate of 0.325%, if it determines that the
reserve ratio of SAIF is expected to be less than the designated reserve ratio
of 1.25% (or such higher ratio not to exceed 1.5% as determined by the FDIC) of
all FDIC-insured deposits. Subsequent legislation eliminated the annual and
lifetime caps and authorized the FDIC to increase the premium rates to the
extent deemed necessary to protect the SAIF. Increased insurance premiums can
adversely affect the income of the Company and all savings institutions.
Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, thrifts and other financial institutions, are being
considered by the executive branch of the Federal government, Congress and
various state governments, including Virginia and Maryland. Certain of these
proposals, if adopted could significantly change the regulation of the financial
services industry. It cannot be predicted whether any of these proposals will be
adopted or, if adopted, how these proposals will affect the Company.
Federal And State Taxation
General
The following discussion of federal taxation is a summary of certain
pertinent federal income tax matters as they pertain to the Company. With some
exceptions, including particularly the reserve for bad debts discussed below,
the Company is subject to federal income tax under the Internal Revenue Code of
1986 (the "Code") in the same general manner as other corporations.
18
<PAGE>
Bad Debt Reserves
Savings institutions such as the Savings Bank, which meet certain
definitional tests primarily relating to their assets and the nature of their
businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions, may within specified formula
limits, be deducted in arriving at the Savings Bank's taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Savings Bank's loans are separated into "qualifying real property loans"
(generally those loans secured by interest in real property) and all other loans
("non-qualifying loans"). The deduction with respect to non-qualifying loans
must be computed under the experience method. The following methods may be used
to compute the bad debt deduction with respect to qualifying real property
loans: (1) actual loss experience, and (2) a percentage of taxable income.
Reasonable additions to the reserve for losses on non-qualifying loans must be
based upon actual loss experience and would reduce the current year's addition
to the reserve for losses on qualifying real property loans, unless that
addition is also determined under the experience method. The sum of the
additions to each reserve for each year is the Savings Bank's annual bad debt
deduction.
Under the experience method, the deductible annual addition is the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (1) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years or (2) the lower of (a)
the balance in the reserve account at the close of the last taxable year prior
to the most recent adoption of the experience method (the base year is the last
taxable year beginning before 1988), or (b) if the amount of loans outstanding
at the close of the taxable year is less than the amount of loans outstanding at
the close of the base year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance of the reserve at
the close of the base year bears to the amount of loans outstanding at the close
of the base year.
Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and with
certain adjustments. Any saving institution at least 60% of whose assets are
qualifying assets, as described in Section 7701(a)(19)(C) of the Code, is
eligible for the full 8% of taxable income deduction. As of June 30, 1996, at
least 60% of the Savings Bank's assets were "qualifying assets" described in
Section 7701(a)(19)(C) of the Code, and the Company anticipates that at least
60% of its assets will continue to be qualifying assets in the immediate future.
If this ceases to be the case, the Savings Bank may be required to restore some
portion of its bad debt reserve to taxable income in the future.
Under the percentage of taxable income method, the bad debt deduction for
an addition to the reserve for qualifying real property loans cannot exceed the
amount necessary to increase the balance in this reserve to an amount equal to
6% of such loans outstanding at the end of the taxable year. Based on
experience, it is not expected that this restriction will be a limiting factor
in the immediate future. The bad debt deduction is also limited to the amount
which when added to the addition to the reserve for loses on non-qualifying
loans, equals the amount by which 12% of deposits at the close of the year
exceeds the sum of surplus, undivided profits and reserves at the beginning of
the year. It is not expected that these restrictions will be a limiting factor
for the Savings Bank in the foreseeable future. In addition, the deduction for
qualifying real property loans is reduced by an amount equal to all or part of
the deduction for non-qualifying loans.
The experience and percentage of taxable income methods are not available
after fiscal year 1996; instead, bad debts after fiscal year 1996 will be
deductible at the time they are charged-off.
19
<PAGE>
Minimum Tax
A 20% corporate alternative minimum tax generally will apply to a base of
regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI") and will be payable to the extent such AMTI is in
excess of an exemption amount. The Code provides that an item of tax preference
is the excess of the bad debt deduction over the amount allowable under the
experience method. The other items of tax preference that constitute AMTI
include (a) tax-exempt interest on newly-issued (generally, issued on or after
August 8, 1986) private activity bonds other than certain qualified bonds and
(b) 75% of the excess (if any) of (i) 75% of adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses).
Other
For federal income tax purposes, the Company reports its income and
expenses on the accrual basis method of accounting and uses a year ending June
30 for filing its income tax returns. The Company may carry back net operating
losses to the preceding three taxable years and forward to the succeeding
fifteen taxable years.
The Commonwealth of Virginia imposes an income tax on corporations
domiciled in the state. The Virginia taxable income is based on the federal
taxable income with certain adjustments for interest and dividend income on
obligations of securities of the United States and states other than Virginia.
The tax rate is 6% of taxable income.
See Note 10 to the Consolidated Financial Statements, included as part of
the Annual Report to Stockholders, for additional information regarding the
income taxes of the Company.
20
<PAGE>
Item 2. Properties
Branch Offices and Other Material Property
The following table sets forth certain information:
Owned Leased
Net Book Value
Net Book Lease of Leasehold
(In thousands) Value at Expiration Improvements at
Office Locations June 30, 1996 Date June 30, 1996
- ---------------- ------------- ---------- ---------------
Main Office
Franklin and Adams Streets
Petersburg, Virginia $ 961 - $ -
2048 South Sycamore Street
Petersburg, Virginia 73 - -
Southside Regional Medical Center
801 South Adams Street
Petersburg, Virginia - 1997 -
2609 Boulevard
Colonial Heights, Virginia 101 - -
105 North Main Street
Hopewell, Virginia 136 - -
North Main Street and Weaver Avenue
Emporia, Virginia 125 - -
1210 Westover Hills Boulevard
Richmond, Virginia 135 - -
Parham and Three Chopt Roads
Richmond, Virginia - 1997 3
4802 South Laburnum Avenue
Richmond, Virginia 276 - -
10051 Midlothian Turnpike
Richmond, Virginia 606 - -
1615 Willow Lawn Drive
Richmond, Virginia - 1999 19
21
<PAGE>
<TABLE>
<CAPTION>
Owned Leased
Net Book Value
Net Book Lease of Leasehold
(In thousands) Value at Expiration Improvements at
Office Locations June 30, 1996 Date June 30, 1996
---------------- ------------- ---------- ----------------
<S> <C>
Ashland-Hanover Shopping Center
Ashland, Virginia - 1999 9
Bermuda Square Shopping Center
Chester, Virginia - 1997 63
1620 Hershberger Road
Roanoke, Virginia 232 - -
316 South Jefferson Street
Roanoke, Virginia - 1999 147
3119 Chaparral Drive Southwest
Roanoke, Virginia 797 - -
203 Virginia Avenue
Vinton, Virginia 68 - -
303 East Burwell Street
Salem, Virginia 426 - -
3205 Plank Road
Fredericksburg, Virginia - 2008 38
History Junction
Appomattox, Virginia 200 - -
216 College Street
Rocky Mount, Virginia 156 - -
7114 Timberlake Road
Lynchburg, Virginia 254 - -
12451 Hedges Run Drive
Woodbridge, Virginia 349 - -
(1) 7331 Timberlake Road, Suite 306
Lynchburg, Virginia - 1997 -
(1) 1160 Pepsi Place, Suite 109
Charlottesville, Virginia - 1996 -
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Owned Leased
Net Book Value
Net Book Lease of Leasehold
(In thousands) Value at Expiration Improvements at
Office Locations June 30, 1996 Date June 30, 1996
---------------- ------------- ---------- ---------------
<S> <C>
(1) 9200 Arboretum Parkway
Suite 104
Richmond, Virginia - 2001 -
(1) 7010 Little River Turnpike, Suite 400
Annandale, Virginia - 1997 -
(1) 1308 Devil's Reach Road, Suite 200
Woodbridge, Virginia 1,548 - -
(1) 1401 Rockville Pike, Suite 110
Rockville, Maryland - 1996 -
------ -----
$6,443 $ 279
====== =====
</TABLE>
(1) Loan Production Centers only.
At the termination of the above listed leases, it is expected that they
will be either renewed or replaced by leases on other properties.
As of June 30, 1996, the total net book value in the premises and
equipment owned by the Company was $8,780,000.
Item 3. Legal Proceedings
The Company is not involved in any pending legal proceedings, other than
non-material legal proceedings undertaken in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended June 30, 1996.
23
<PAGE>
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information required herein is incorporated by reference from the
inside back cover of the Annual Report to Stockholders for the fiscal year ended
June 30, 1996.
At August 31, 1996, the Company had approximately 1,185 stockholders of
record.
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page 2
of the Annual Report to Stockholders for the fiscal year ended June 30, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information required herein is incorporated by reference from pages 8
to 33 of the Annual Report to Stockholders for the fiscal year ended June 30,
1996.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required herein are
incorporated by reference from pages 35 to 59 of the Annual Report to
Stockholders for the fiscal year ended June 30, 1996.
Item 9. Changes in Accountants and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
24
<PAGE>
Part III.
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference to "The Board
of Directors", "Executive Officers Who Are Not Directors", "Security Ownership
of Certain Beneficial Owners" and "Compliance With Filing Requirements Under the
Securities Exchange Act of 1934" contained in the definitive proxy statement for
the Registrant's 1996 Annual Meeting of Stockholders to be subsequently filed.
Item 11. Executive Compensation
The information required herein is incorporated by reference to
"Remuneration" contained in the definitive proxy statement for the Registrant's
1996 Annual Meeting of Stockholders to be subsequently filed.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference to "Security
Ownership of Management" and "Security Ownership of Certain Beneficial Owners"
contained in the definitive proxy statement for the Registrant's 1996 Annual
Meeting of Stockholders to be subsequently filed.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference to
"Indebtedness of Management" contained in the definitive proxy statement for the
Registrant's 1996 Annual Meeting of Stockholders to be subsequently filed.
25
<PAGE>
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The following financial statements are incorporated by
reference into Item 8 hereof from Exhibit 13 hereof:
Consolidated Statements of Financial Condition as of June 30,
1996 and 1995
Consolidated Statements of Operations for each of the years in
the three year period ended June 30, 1996
Consolidated Statements of Stockholders' Equity for each
of the years in the three year period ended June 30, 1996
Consolidated Statements of Cash Flows for each of the years in
the three year period ended June 30, 1996
Notes to Consolidated Financial Statements for June 30, 1996,
1995 and 1994
Independent Auditors' Report
(a) (2) There are no financial statement schedules required to be
filed herewith.
(a) (3) The following exhibits are filed as part of this report on
Form 10-K, and this list includes the Exhibit Index.
Exhibits
3a Amended and Restated Articles of Incorporation, incorporated
herein by reference from the Form S-4 Registration Statement
of the Registrant, filed with the Commission on August 20,
1993, File No. 33-67746, Exhibit 3.1.
3b Articles of Amendment of the Articles of Incorporation
effective November 6, 1995, incorporated herein by reference
from the Form 8-A Registration Statement of the Registrant,
filed with the Commission on May 1, 1996, File No. 0-28408,
Exhibit 4.2.
3c Articles of Amendment to the Articles of Restatement Amending
and Restating the Articles of Incorporation dated April 16,
1996, incorporated herein by reference from the Form 8-A
Registration Statement of the Registrant, filed with the
Commission on May 1, 1996, File No. 0-28408, Exhibit 4.3.
3d Bylaws, incorporated herein by reference from the Form S-4
Registration Statement of the Registrant, filed with the
Commission on August 20, 1993, File No. 33-67746, Exhibit 3.2.
4 Specimen Stock Certificate for common stock, $1.00 par value,
incorporated herein by reference from the Form 10-K of the
Registrant for the fiscal year ended June 30, 1994, filed with
the Commission on October 11, 1994, File No. 33-67746, Exhibit
4.
10a Supplemental Retirement Benefit Agreement dated September 9,
1993 between Virginia First Savings Bank, F.S.B. and William A
Patton, incorporated herein by reference from the Form 10-K of
the Registrant for the fiscal year ended June 30, 1994, filed
with the Commission on October 11, 1994, File No. 33-67746,
Exhibit 10a.
10b Supplemental Death Benefit Agreement dated October 1, 1993
between Virginia First Savings Bank, F.S.B. and William A
Patton, incorporated herein by reference from the Form 10-K of
the Registrant for the fiscal year ended June 30, 1994, filed
with the Commission on October 11, 1994, File No. 33-67746,
Exhibit 10b.
26
<PAGE>
10c 1992 Incentive Plan, incorporated herein by reference from the
Form S-8 Registration Statement of the Registrant filed with
the Commission on April 27, 1994, File No. 33-78180, Exhibit
4.3.
10d 1986 Stock Compensation Program, incorporated herein by
reference from the Form S-8 Registration Statement of the
Registrant filed with the Commission on April 27, 1994, File
No. 33-78184, Exhibit 4.3.
10e 1984 Incentive Stock Option Plan, incorporated herein by
reference from the Form S-8 Registration Statement of the
Registrant filed with the Commission on April 27, 1994, File
No. 33-78182, Exhibit 4.3.
10f Trust Agreement for the Incentive Security Plan, incorporated
herein by reference from the Form S-4 Registration Statement
of the Registrant filed with the Commission on August 20,
1993, File No. 33-67746, Exhibit 10.5.
10g Employment Agreement, dated January 1, 1996, between the
Registrant and William A. Patton.
10h Employment Agreement, dated January 1, 1996, between the
Registrant and Charles A. Patton.
11 Statement regarding computation of per share earnings is set
forth in Note 11 to the Consolidated Financial Statements,
included as part of the Annual Report to Stockholders, for the
fiscal year ended June 30, 1996.
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant -- Reference is made to Item 1,
"Business - Subsidiaries"
23 Consent of KPMG Peat Marwick LLP
(b) No reports on Form 8-K have been filed during the last quarter of
the period covered by this report.
(c) See (a) (3) above for all exhibits filed herewith and the Exhibit
Index.
(d) Separate financial statements are not applicable.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIRGINIA FIRST FINANCIAL CORPORATION
BY: /S/ Charles A. Patton
--------------------------
Date: September 17, 1996 Charles A. Patton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 19, 1995.
Signature Title
/S/ William A. Patton 9-17-96
---------------------
William A. Patton Date Chairman of the Board,
and Director
/S/ Charles A. Patton 9-17-96
---------------------
Charles A. Patton Date President, Chief Executive
Officer, and Director
/S/ Stephen R. Kinnier 9-17-96
----------------------
Stephen R. Kinnier Date Senior Vice President,
Chief Financial Officer
/S/ Frasier W. Brickhouse 9-17-96
-------------------------
Frasier W. Brickhouse Date Director
/S/ William L Eure, Jr. 9-17-96
-----------------------
William L. Eure, Jr Date Director
/S/ Benjamin S. Gill 9-17-96
--------------------
Benjamin S. Gill Date Director
/S/ Francis R. Payne 9-17-96
--------------------
Francis R. Payne Date Director
/S/ George R. Mercer 9-17-96
--------------------
George R. Mercer Date Director
/S/ John H. VanLandingham, Jr. 9-17-96
------------------------------
John H. VanLandingham, Jr. Date Director
/S/ Preston H. Cottrell 9-17-96
-----------------------
Preston H. Cottrell Date Director
28
Exhibit 10g
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of January,
1996, by and between VIRGINIA FIRST FINANCIAL CORPORATION, a
Virginia corporation, (the "Corporation"), and WILLIAM A. PATTON
(the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
Chairman of the Board of Directors and Chief Executive Officer of the
Corporation and, as such, is a key executive officer of the Corporation whose
continued dedication, availability, advice and counsel to the Corporation is
deemed important to the Board of Directors of the Corporation, the Corporation
and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on December 31, 2000,
which period of
<PAGE>
employment may be extended or terminated only upon the terms and conditions
hereinafter set forth.
2. RENEWAL TERM: This Agreement may be renewed and extended for
successive terms of 60 months each by an appropriate written instrument executed
by the Executive and on behalf of the Corporation. Any decision by the
Corporation to renew and extend this Agreement shall not bind the Corporation
unless such decision is reviewed and approved by the Board of Directors of the
Corporation. If this Agreement is neither renewed and extended in writing before
the end of its term or any renewal term nor expressly terminated, it shall
automatically renew for successive one year periods.
3. EXECUTIVE DUTIES: Executive agrees that, during the term of his
employment under this Agreement and in his capacity as Chairman of the Board of
Directors and Chief Executive Officer, he will devote his full business time and
energy to the business, affairs and interests of the Corporation and serve it
diligently and to the best of his ability. The services and duties to be
performed by Executive shall be those appropriate to his office and title as
currently and from time to time hereafter specified in the Corporation's by-laws
or otherwise specified by its Board of Directors.
4. COMPENSATION: The Corporation agrees to pay Executive, and Executive
agrees to accept, as compensation for all services rendered by him to the
Corporation during the period of his employment under this Agreement, base
salary at the annual rate of Two Hundred Fifty Thousand Dollars ($250,000),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. Such salary
may be increased in the sole and absolute discretion of the Corporation's Board
of Directors or Committee thereof duly authorized by the Board to so act;
provided, however, that said annual salary after being so increased, shall not
be decreased without prior written consent of Executive.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES
AND MOVING EXPENSES: (i) During the term of employment under this Agreement,
Executive shall be entitled to participate in any pension, group insurance,
hospitalization, deferred compensation or other benefit, bonus or incentive
plans of the Corporation presently in effect (including, without limitation, the
Corporation's stock option plans) or hereafter adopted by the Corporation and
generally available to any employees of senior executive status, and,
additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
2
<PAGE>
(ii) During the term of this Agreement, to the extent that such
expenditures are substantiated by the Executive as required by the Internal
Revenue Service and policies of the Corporation, the Corporation shall reimburse
the Executive promptly for all expenditures (including travel, entertainment,
parking, business meetings, and the monthly costs, including dues, of
maintaining memberships at appropriate clubs) made in accordance with rules and
policies established from time to time by the Board of Directors of the
Corporation in pursuance and furtherance of the Corporation's business and good
will.
(iii) During the term of this Agreement, in the event that the
Corporation relocates its principal executive offices to a location outside of
Petersburg, Virginia, or the Corporation's Board of Directors requires the
Executive to be based anywhere other than the Corporation's principal executive
offices, the Corporation shall pay (or reimburse the Executive for) all
reasonable moving expenses incurred by him relating to a change of his principal
residence in connection with such relocation and indemnify the Executive against
any loss realized in the sale of his principal residence in connection with any
such change of residence.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for a period of six (6) consecutive
months by reason of illness or other physical or mental disability, and at or
before the end of such period he does not return to work on a full-time basis,
the Corporation may terminate this Agreement without further or additional
compensation payment being due the Executive from the Corporation pursuant to
this Agreement, except benefits accrued through the date of such termination
under employee benefit plans of the Corporation. These benefits shall include
long-term disability and other insurance or other benefits then regularly
provided by the Corporation to disabled employees, as well as any other
insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's compensation from the
Corporation at the rate in effect at the time of Executive's death for a period
of twelve months (12) from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice
3
<PAGE>
to the Corporation. If the Corporation terminates the Executive's employment
without Cause or the Executive resigns for Good Reason, then in either event:
(i) The Executive shall be paid for the remainder of the then
current term of this Agreement, at such times as payment was theretofore made,
the salary required under Section 4 that the Executive would have been entitled
to receive during the remainder of the then current term of this Agreement had
such termination not occurred; and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program, and
(iii) A payment in cash on the date his employment terminates
equal to the amount of any cash bonus paid to him in respect of the fiscal year
of the Corporation prior to the fiscal year in which his employment terminates,
multiplied by a fraction, the numerator of which is the number of days that
elapse before the date his employment terminates in the fiscal year of the
Corporation in which his employment terminates and the denominator of which is
three hundred sixty-five (365).
(b) For purposes of this Agreement, "Good Reason" shall mean:
(i) The assignment of duties to the Executive by the
Corporation which (A) are materially different from the Executive's duties on
the date hereof, or (B) result in the Executive having significantly less
authority and/or responsibility than he has on the date hereof, without his
express written consent;
(ii) The removal of the Executive from or any failure to
re-elect him to the position of Chairman of the Board of Directors and Chief
Executive Officer of the Corporation, except in connection with a termination of
his employment by the Corporation for Cause or by reason of the Executive's
disability;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
4
<PAGE>
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof; or
(v) The failure of the Corporation to obtain the assumption of
and agreement to perform this Agreement by any successor as contemplated in
Section 11(c) hereof.
(c) Resignation by the Executive for Good Reason shall be communicated
by a written Notice of Resignation to the Corporation. A "Notice of Resignation"
shall mean a notice which shall indicate the specific provision(s) in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for a resignation for Good Reason.
(d) If within thirty (30) days after any Notice of Resignation is given
the Corporation notifies the Executive that a dispute exists concerning the
resignation for Good Reason and that it is requesting arbitration pursuant to
Section 18, the Corporation shall continue to pay the Executive his full salary
and benefits as described in Sections 4 and 5, as and when due and payable, at
least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then all sums paid by the Corporation to the Executive,
including but not limited to the cost to the Corporation of providing the
Executive such fringe benefits, from the date of such resignation to the date of
the resolution of such dispute shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE:
(a) Notwithstanding the provisions of Section 1 of this Agreement, the
Board of Directors of the Corporation may, in its sole discretion, terminate the
Executive's employment for Cause. For the purposes of this Agreement, "Cause"
shall mean the occurrence of either of the following:
5
<PAGE>
(i) The Executive's conviction of, or plea of guilty or nolo
contendere to, a felony or a crime of falsehood or involving
moral turpitude; or
(ii) The willful failure by the Executive to substantially perform
duties for the Corporation (other than a failure resulting
from the Executive's incapacity as a result of disability)
which willful failure results in demonstrable material injury
and damage to the Corporation. Notwithstanding the foregoing,
the Executive's employment shall not be deemed to have been
terminated for Cause if this termination took place as a
result of:
(A) Questionable judgment on the part of the
Executive;
(B) Any act or omission believed by the Executive in good
faith to have been in or not opposed to the best
interests of the Corporation; or
(C) Any act or omission in respect of which a
determination could properly be made that the
Executive met the applicable standard of conduct
prescribed for indemnification or reimbursement or
payment of expenses under either the Corporation's
Articles of Incorporation or the laws of Virginia as
in effect at the time of the act or omission.
No act or omission to act on the Executive's behalf in reliance upon an
opinion of counsel to the Corporation or counsel to the Executive shall be
deemed to be willful. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to him a copy of a certification by a majority of the non-officer
members of the Board of Directors of the Corporation finding that, in the good
faith opinion of such majority, the Executive was guilty of conduct which is
deemed to be Cause and specifying the particulars thereof in detail, after
reasonable notice to the Executive and an opportunity for him, together with his
counsel, to be heard before such majority.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
6
<PAGE>
If within ninety (90) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by the Corporation is challenged by the Executive and the
termination is ultimately determined to be justified, then all sums paid by the
Corporation to the Executive pursuant to this Section 9(b), plus the cost to the
Corporation of providing the Executive such fringe benefits from the date of
such termination to the date of the resolution of such dispute, shall be
promptly repaid by the Executive to the Corporation with interest at the rate
charged from time to time by Central Fidelity Bank, to its most substantial
customers for unsecured lines of credit. Should it ultimately be determined that
a termination by the Corporation pursuant Section 9(a) was not justified, then
the Executive shall be entitled to retain all sums paid to him pending the
resolution of such dispute and he shall be entitled to receive, in addition, the
payments and other benefits provided for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within ninety (90) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise voluntarily
terminates his employment by the Corporation, or his employment by the
Corporation's wholly owned subsidiary, Virginia First Savings Bank, F.S.B., at
any time (except a termination for Good Reason pursuant to Section 8 hereof), or
if the Corporation rightfully terminates the Executive's employment for Cause,
this Agreement shall terminate upon the date of such resignation or termination
of employment for Cause, and (subject to Section 9(b)) the Corporation
thereafter shall have no obligation to make any further payments under this
Agreement, provided that the Executive shall be entitled to receive any
benefits, insured or otherwise, that he would otherwise be eligible to receive
under any benefit plans of the Corporation or any affiliate of the Corporation.
10. CHANGE OF CONTROL: (a) If the Executive's employment terminates for
any reason other than for Cause during the term of this Agreement and any
renewal term following a Change of Control, on or before the Executive's last
day of employment with the Corporation (in addition to all other payments to
which the Executive is entitled under this Agreement) the Corporation shall pay
to the Executive as compensation for services rendered to it a cash amount
(subject to any applicable payroll or other taxes
7
<PAGE>
required to be withheld) equal to 1.5 times the Executive's cash compensation
including, but not limited to, salary, bonus and the payments described in
Section 5(i)(b), received during the twelve (12) months ending with the
Executive's termination, provided that, at the option of the Executive, the cash
amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the eighteen (18) months succeeding the date of
termination, payable on the first day of each such month.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors other than as a result of an issuance of securities
initiated by the Corporation, or open market purchases approved by the Board of
Directors, as long as the majority of the Board of Directors approving the
purchases is a majority at the time the purchases are made; or (ii) as the
direct or indirect result of, or in connection with, a tender or exchange offer,
a merger or other business combination, a sale of assets, a contested election,
or any combination of these events, the persons who were directors of the
Corporation before such events cease to constitute a majority of the
Corporation's Board, or any successor's board, within two years of the last of
such transactions.
(b) Upon a Change of Control, all stock options and restricted stock
awards granted to the Executive under any of the Corporation's stock option
plans, or any successor thereto, shall become immediately exercisable or (in the
case of shares of restricted stock) vested and non-forfeitable with respect to
all or any portion of the shares covered thereby regardless of whether such
options or shares of restricted stock are otherwise exercisable or vested;
provided, however, if the meaning of the term "Change of Control" hereunder
differs from the meaning of the same term or a similar term under any of the
Corporation's stock option plans, for purposes of this Section 10(b) only, the
meaning set forth in the stock option plan shall control. The Corporation shall
reimburse the Executive for any federal income tax liability incurred by the
Executive in connection with the exercise of such options which would not have
otherwise been incurred by the Executive in the absence of such options becoming
immediately exercisable upon a Change of Control, such reimbursement to be
submitted to the executive within ten (10) days of written notification to the
Corporation by the Executive of the exact amount of such additional tax
liability.
8
<PAGE>
11. LITIGATION - OBLIGATIONS - SUCCESSORS:
(a) If litigation shall be brought or arbitration commenced to
challenge, enforce or interpret any provision of this Agreement, and such
litigation or arbitration does not end with judgment in favor of the
Corporation, the Corporation hereby agrees to indemnify the Executive for his
reasonable attorney's fees and disbursements incurred in such litigation or
arbitration, and hereby agrees to pay post-judgment interest on any money
judgment obtained by the Executive calculated at the rate charged from time to
time by the Corporation, to its most substantial customers for unsecured lines
of credit from the date that payment(s) to him should have been made under the
judgment to date of payment.
(b) The Corporation's obligation to pay the Executive the compensation
and benefits and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against him or anyone else. All amounts payable by the
Corporation hereunder shall be paid without notice or demand. Except as
expressly provided in Sections 8(d) and 9(b), each and every payment made
hereunder by the Corporation shall be final and the Corporation will not seek to
recover all or any part of such payment from the Executive or from whosoever may
be entitled thereto, for any reason whatsoever. The Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise.
(c) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Virginia First Financial Corporation and any
successor to its respective business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 11(c) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS:
If the independent accountants serving as auditors for the Corporation
on the date of a Change of Control (or the Internal Revenue Service upon
examination of the tax returns of the
9
<PAGE>
Corporation or the Executive) determine that some or all of the payments or
benefits scheduled under this Agreement, as well as any other payments or
benefits contingent on a Change of Control, constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the Code) and any regulations thereunder, thereby resulting in
a loss of an income tax deduction by the Corporation or the imposition of an
excise tax on the Executive under Section 4999 of the Code (the "Excise Tax"),
then at the election of the Executive, the payments scheduled under this
Agreement may be reduced to one dollar less than the maximum amount which may be
paid without causing any such payment or benefit to be nondeductible and subject
to the Excise Tax. If the Executive elects to reduce his payments or benefits,
he may designate which payments or benefits will be reduced.
However, if it is determined that any payments made by the Corporation
to the Executive pursuant to Section 8(a) of this Agreement are parachute
payments within the meaning of Section 280G of the Code and subject to the
Excise Tax, the Corporation shall pay to the Executive an additional sum (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes imposed with respect to such Gross-up Payment (including any income taxes,
FICA taxes and excise taxes and any interest and penalties imposed thereon) the
Executive retains an amount equal to the Excise Tax (including any interest and
penalties thereon) that would have been avoided if the payments under Section
8(a) had not been treated as parachute payments.
13. NOTICES: For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: 2066 Defense Road
Petersburg, Virginia 23805
If to the Corporation: Virginia First Financial
Corporation
Franklin & Adams Streets
Petersburg, Virginia 23804
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless
10
<PAGE>
such waiver, modification or discharge is agreed to in writing, signed by the
Executive and on behalf of the Corporation by such officer as may be
specifically designated by the Board of Directors of the Corporation. No waiver
by either party hereto at any time of any breach by the other party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provision
or conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability of
any provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect. Any provision in this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating or affecting
the remaining provisions hereof, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts would still be payable to him hereunder,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to his devisee, legatee or other designee or,
if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Richmond, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration,
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which shall include reasonable attorneys' fees and expenses of the parties, as
well as the arbitrator's fees and expenses, in such proportions as the
arbitrators deem just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first above written.
"EXECUTIVE"
ATTEST: ____________________ __________________________________
William A. Patton
VIRGINIA FIRST FINANCIAL
CORPORATION ("CORPORATION")
ATTEST: ____________________ By:
-----------------------------
AUTHORIZED OFFICER
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Exhibit 10h
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of January, 1996, by and
between VIRGINIA FIRST FINANCIAL CORPORATION, a Virginia corporation, (the
"Corporation"), and CHARLES A. PATTON (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
President and Chief Operating Officer of the Corporation and, as such, is a key
executive officer of the Corporation whose continued dedication, availability,
advice and counsel to the Corporation is deemed important to the Board of
Directors of the Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on December 31, 2000,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
<PAGE>
2. RENEWAL TERM: This Agreement may be renewed and extended for
successive terms of 60 months each by an appropriate written instrument executed
by the Executive and on behalf of the Corporation. Any decision by the
Corporation to renew and extend this Agreement shall not bind the Corporation
unless such decision is reviewed and approved by the Board of Directors of the
Corporation. If this Agreement is neither renewed and extended in writing before
the end of its term or any renewal term nor expressly terminated, it shall
automatically renew for successive one year periods.
3. EXECUTIVE DUTIES: Executive agrees that, during the term of his
employment under this Agreement and in his capacity as President and Chief
Operating Officer, he will devote his full business time and energy to the
business, affairs and interests of the Corporation and serve it diligently and
to the best of his ability. The services and duties to be performed by Executive
shall be those appropriate to his office and title as currently and from time to
time hereafter specified in the Corporation's by-laws or otherwise specified by
its Board of Directors.
4. COMPENSATION: The Corporation agrees to pay Executive, and Executive
agrees to accept, as compensation for all services rendered by him to the
Corporation during the period of his employment under this Agreement, base
salary at the annual rate of Two Hundred Four Thousand Dollars ($204,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. Such salary
may be increased in the sole and absolute discretion of the Corporation's Board
of Directors or Committee thereof duly authorized by the Board to so act;
provided, however, that said annual salary after being so increased, shall not
be decreased without prior written consent of Executive.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES
AND MOVING EXPENSES: (i) During the term of employment under this Agreement,
Executive shall be entitled (a) to participate in any pension, group insurance,
hospitalization, deferred compensation or other benefit, bonus or incentive
plans of the Corporation presently in effect (including, without limitation, the
Corporation's stock option plans) or hereafter adopted by the Corporation and
generally available to any employees of senior executive status, and,
additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers and (b) to continue to receive sixteen
thousand dollars ($16,000.00) per year, which is the amount of the annual
premium on a life insurance policy previously conveyed to the Executive by the
Corporation.
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(ii) During the term of this Agreement, to the extent that such
expenditures are substantiated by the Executive as required by the Internal
Revenue Service and policies of the Corporation, the Corporation shall reimburse
the Executive promptly for all expenditures (including travel, entertainment,
parking, business meetings, and the monthly costs, including dues, of
maintaining memberships at appropriate clubs) made in accordance with rules and
policies established from time to time by the Board of Directors of the
Corporation in pursuance and furtherance of the Corporation's business and good
will.
(iii) During the term of this Agreement, in the event that the
Corporation relocates its principal executive offices to a location outside of
Petersburg, Virginia, or the Corporation's Board of Directors requires the
Executive to be based anywhere other than the Corporation's principal executive
offices, the Corporation shall pay (or reimburse the Executive for) all
reasonable moving expenses incurred by him relating to a change of his principal
residence in connection with such relocation and indemnify the Executive against
any loss realized in the sale of his principal residence in connection with any
such change of residence.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for a period of six (6) consecutive
months by reason of illness or other physical or mental disability, and at or
before the end of such period he does not return to work on a full-time basis,
the Corporation may terminate this Agreement without further or additional
compensation payment being due the Executive from the Corporation pursuant to
this Agreement, except benefits accrued through the date of such termination
under employee benefit plans of the Corporation. These benefits shall include
long-term disability and other insurance or other benefits then regularly
provided by the Corporation to disabled employees, as well as any other
insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's compensation from the
Corporation at the rate in effect at the time of Executive's death for a period
of twelve months (12) from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice
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to the Corporation. If the Corporation terminates the Executive's employment
without Cause or the Executive resigns for Good Reason, then in either event:
(i) The Executive shall be paid for the remainder of the then
current term of this Agreement, at such times as payment was theretofore made,
the salary required under Section 4 and the payments required under Section
5(i)(b) that the Executive would have been entitled to receive during the
remainder of the then current term of this Agreement had such termination not
occurred; and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program, and
(iii) A payment in cash on the date his employment terminates
equal to the amount of any cash bonus paid to him in respect of the fiscal year
of the Corporation prior to the fiscal year in which his employment terminates,
multiplied by a fraction, the numerator of which is the number of days that
elapse before the date his employment terminates in the fiscal year of the
Corporation in which his employment terminates and the denominator of which is
three hundred sixty-five (365).
(b) For purposes of this Agreement, "Good Reason" shall mean:
(i) The assignment of duties to the Executive by the
Corporation which (A) are materially different from the Executive's duties on
the date hereof, or (B) result in the Executive having significantly less
authority and/or responsibility than he has on the date hereof, without his
express written consent;
(ii) The removal of the Executive from or any failure to
re-elect him to the position of President and Chief Operating Officer of the
Corporation, except in connection with a termination of his employment by the
Corporation for Cause or by reason of the Executive's disability;
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(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof; or
(v) The failure of the Corporation to obtain the assumption of
and agreement to perform this Agreement by any successor as contemplated in
Section 11(c) hereof.
(c) Resignation by the Executive for Good Reason shall be communicated
by a written Notice of Resignation to the Corporation. A "Notice of Resignation"
shall mean a notice which shall indicate the specific provision(s) in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for a resignation for Good Reason.
(d) If within thirty (30) days after any Notice of Resignation is given
the Corporation notifies the Executive that a dispute exists concerning the
resignation for Good Reason and that it is requesting arbitration pursuant to
Section 18, the Corporation shall continue to pay the Executive his full salary
and benefits as described in Sections 4 and 5, as and when due and payable, at
least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then all sums paid by the Corporation to the Executive,
including but not limited to the cost to the Corporation of providing the
Executive such fringe benefits, from the date of such resignation to the date of
the resolution of such dispute shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE:
(a) Notwithstanding the provisions of Section 1 of this Agreement, the
Board of Directors of the Corporation may, in its sole discretion, terminate the
Executive's employment for Cause.
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For the purposes of this Agreement, "Cause" shall mean the occurrence of either
of the following:
(i) The Executive's conviction of, or plea of guilty or nolo
contendere to, a felony or a crime of falsehood or involving
moral turpitude; or
(ii) The willful failure by the Executive to substantially perform
duties for the Corporation (other than a failure resulting
from the Executive's incapacity as a result of disability)
which willful failure results in demonstrable material injury
and damage to the Corporation. Notwithstanding the foregoing,
the Executive's employment shall not be deemed to have been
terminated for Cause if this termination took place as a
result of:
(A) Questionable judgment on the part of the
Executive;
(B) Any act or omission believed by the Executive in
good faith to have been in or not opposed to the
best interests of the Corporation; or
(C) Any act or omission in respect of which a
determination could properly be made that the
Executive met the applicable standard of conduct
prescribed for indemnification or reimbursement or
payment of expenses under either the Corporation's
Articles of Incorporation or the laws of Virginia as
in effect at the time of the act or omission.
No act or omission to act on the Executive's behalf in reliance upon an
opinion of counsel to the Corporation or counsel to the Executive shall be
deemed to be willful. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to him a copy of a certification by a majority of the non-officer
members of the Board of Directors of the Corporation finding that, in the good
faith opinion of such majority, the Executive was guilty of conduct which is
deemed to be Cause and specifying the particulars thereof in detail, after
reasonable notice to the Executive and an opportunity for him, together with his
counsel, to be heard before such majority.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and
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circumstances claimed to provide a basis for termination of employment for Cause
under the provision so indicated.
If within ninety (90) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by the Corporation is challenged by the Executive and the
termination is ultimately determined to be justified, then all sums paid by the
Corporation to the Executive pursuant to this Section 9(b), plus the cost to the
Corporation of providing the Executive such fringe benefits from the date of
such termination to the date of the resolution of such dispute, shall be
promptly repaid by the Executive to the Corporation with interest at the rate
charged from time to time by Central Fidelity Bank, to its most substantial
customers for unsecured lines of credit. Should it ultimately be determined that
a termination by the Corporation pursuant Section 9(a) was not justified, then
the Executive shall be entitled to retain all sums paid to him pending the
resolution of such dispute and he shall be entitled to receive, in addition, the
payments and other benefits provided for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within ninety (90) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise voluntarily
terminates his employment by the Corporation, or his employment by the
Corporation's wholly owned subsidiary, Virginia First Savings Bank, F.S.B., at
any time (except a termination for Good Reason pursuant to Section 8 hereof), or
if the Corporation rightfully terminates the Executive's employment for Cause,
this Agreement shall terminate upon the date of such resignation or termination
of employment for Cause, and (subject to Section 9(b)) the Corporation
thereafter shall have no obligation to make any further payments under this
Agreement, provided that the Executive shall be entitled to receive any
benefits, insured or otherwise, that he would otherwise be eligible to receive
under any benefit plans of the Corporation or any affiliate of the Corporation.
10. CHANGE OF CONTROL: (a) If the Executive's employment terminates
for any reason other than for Cause during the term of this Agreement and any
renewal term following a Change of Control, on or before the Executive's last
day of employment with the Corporation (in addition to all other payments to
which the
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Executive is entitled under this Agreement) the Corporation shall pay to the
Executive as compensation for services rendered to it a cash amount (subject to
any applicable payroll or other taxes required to be withheld) equal to 1.5
times the Executive's cash compensation including, but not limited to, salary,
bonus and the payments described in Section 5(i)(b), received during the twelve
(12) months ending with the Executive's termination, provided that, at the
option of the Executive, the cash amount required to be paid hereby shall be
paid by the Corporation in equal monthly installments over the eighteen (18)
months succeeding the date of termination, payable on the first day of each such
month.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors other than as a result of an issuance of securities
initiated by the Corporation, or open market purchases approved by the Board of
Directors, as long as the majority of the Board of Directors approving the
purchases is a majority at the time the purchases are made; or (ii) as the
direct or indirect result of, or in connection with, a tender or exchange offer,
a merger or other business combination, a sale of assets, a contested election,
or any combination of these events, the persons who were directors of the
Corporation before such events cease to constitute a majority of the
Corporation's Board, or any successor's board, within two years of the last of
such transactions.
(b) Upon a Change of Control, all stock options and restricted stock
awards granted to the Executive under any of the Corporation's stock option
plans, or any successor thereto, shall become immediately exercisable or (in the
case of shares of restricted stock) vested and non-forfeitable with respect to
all or any portion of the shares covered thereby regardless of whether such
options or shares of restricted stock are otherwise exercisable or vested;
provided, however, if the meaning of the term "Change of Control" hereunder
differs from the meaning of the same term or a similar term under any of the
Corporation's stock option plans, for purposes of this Section 10(b) only, the
meaning set forth in the stock option plan shall control. The Corporation shall
reimburse the Executive for any federal income tax liability incurred by the
Executive in connection with the exercise of such options which would not have
otherwise been incurred by the Executive in the absence of such options becoming
immediately exercisable upon a Change of Control, such reimbursement to be
submitted to the executive within ten (10) days of written notification to the
Corporation by the Executive of the exact amount of such additional tax
liability.
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11. LITIGATION - OBLIGATIONS - SUCCESSORS:
(a) If litigation shall be brought or arbitration commenced to
challenge, enforce or interpret any provision of this Agreement, and such
litigation or arbitration does not end with judgment in favor of the
Corporation, the Corporation hereby agrees to indemnify the Executive for his
reasonable attorney's fees and disbursements incurred in such litigation or
arbitration, and hereby agrees to pay post-judgment interest on any money
judgment obtained by the Executive calculated at the rate charged from time to
time by the Corporation, to its most substantial customers for unsecured lines
of credit from the date that payment(s) to him should have been made under the
judgment to date of payment.
(b) The Corporation's obligation to pay the Executive the compensation
and benefits and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against him or anyone else. All amounts payable by the
Corporation hereunder shall be paid without notice or demand. Except as
expressly provided in Sections 8(d) and 9(b), each and every payment made
hereunder by the Corporation shall be final and the Corporation will not seek to
recover all or any part of such payment from the Executive or from whosoever may
be entitled thereto, for any reason whatsoever. The Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise.
(c) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Virginia First Financial Corporation and any
successor to its respective business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 11(c) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS:
If the independent accountants serving as auditors for the Corporation
on the date of a Change of Control (or the Internal Revenue Service upon
examination of the tax returns of the
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Corporation or the Executive) determine that some or all of the payments or
benefits scheduled under this Agreement, as well as any other payments or
benefits contingent on a Change of Control, constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the Code) and any regulations thereunder, thereby resulting in
a loss of an income tax deduction by the Corporation or the imposition of an
excise tax on the Executive under Section 4999 of the Code (the "Excise Tax"),
then at the election of the Executive, the payments scheduled under this
Agreement may be reduced to one dollar less than the maximum amount which may be
paid without causing any such payment or benefit to be nondeductible and subject
to the Excise Tax. If the Executive elects to reduce his payments or benefits,
he may designate which payments or benefits will be reduced.
However, if it is determined that any payments made by the Corporation
to the Executive pursuant to Section 8(a) of this Agreement are parachute
payments within the meaning of Section 280G of the Code and subject to the
Excise Tax, the Corporation shall pay to the Executive an additional sum (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes imposed with respect to such Gross-up Payment (including any income taxes,
FICA taxes and excise taxes and any interest and penalties imposed thereon) the
Executive retains an amount equal to the Excise Tax (including any interest and
penalties thereon) that would have been avoided if the payments under Section
8(a) had not been treated as parachute payments.
13. NOTICES: For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: 11333 Beaver Castle Road
Hopewell, Virginia 23860
If to the Corporation: Virginia First Financial
Corporation
Franklin & Adams Streets
Petersburg, Virginia 23804
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing,
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signed by the Executive and on behalf of the Corporation by such officer as may
be specifically designated by the Board of Directors of the Corporation. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provision or conditions at the same or at any prior or subsequent
time. No agreements or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability of
any provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect. Any provision in this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating or affecting
the remaining provisions hereof, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and
be enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts would still be payable to him hereunder,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to his devisee, legatee or other designee or,
if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Richmond, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees and expenses of
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the parties, as well as the arbitrator's fees and expenses, in such proportions
as the arbitrators deem just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first above written.
"EXECUTIVE"
ATTEST: ____________________ __________________________________
Charles A. Patton
VIRGINIA FIRST FINANCIAL
CORPORATION ("CORPORATION")
ATTEST: ____________________ By:
-----------------------------
AUTHORIZED OFFICER
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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 fiscal years ended June 30, 1996, 1995 and 1994, and its consolidated
financial position at June 30, 1996 and 1995. This discussion should be reviewed
in conjunction with the consolidated financial statements and accompanying notes
and other statistical information presented elsewhere in this Annual Report.
RESULTS OF OPERATIONS
Results of operations for the years ended June 30, 1996, 1995 and 1994
("fiscal year 1996", "fiscal year 1995" and "fiscal year 1994", respectively)
reflect the Company's strategies of expanding its community banking and mortgage
banking operations.
The Company's results of operations for fiscal year 1996 reflect marked
differences from the previous fiscal year. The most significant change is the
Company's sale of substantially all of its servicing rights related to mortgage
loans serviced for others. This transaction generated a pre-tax gain of
$6,847,000. 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 $4,184,000 can be deployed more efficiently in other
areas, and will provide additional capital to enhance the Company's core
business activities.
As a result of rising market interest rates, originations of residential
mortgage loans 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 fiscal year 1995. This situation turned around in fiscal year 1996, as
market interest rates moderated and the Company realized higher loan
originations, sales and gains than in fiscal year 1995.
8
<PAGE>
Net interest income increased by 3.2% in fiscal year 1996, compared to fiscal
year 1995, and increased by 22.0% in fiscal year 1995, compared to fiscal year
1994. Increases in capital in recent years have permitted the Company to
increase both its assets and liabilities. Most of the increase in net interest
income in fiscal year 1995 was attributable to the increase in the size of the
balance sheet. In addition, yields earned on interest-earning assets increased
faster than the rates the Company was paying on its interest-bearing
liabilities. While the balance sheet continued to grow in fiscal year 1996, the
rates paid on interest-bearing liabilities increased at a faster rate than
yields earned on interest-earning assets. The fiscal year 1996 interest expense
increase is attributable to the general increase in prevailing rates and a
continued migration by depositors from lower-yielding savings deposits to
higher-yielding certificates of deposit.
Net Earnings. The Company's net earnings for fiscal year 1996 were
$12,142,000, compared to net earnings of $7,550,000 for fiscal year 1995 and
$6,981,000 for fiscal year 1994. On a per share basis, earnings for fiscal year
1996 were $2.09, compared to $1.33 for fiscal year 1995 and $1.25 for fiscal
year 1994.
The per share figures for fiscal years 1995 and 1994 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:
<TABLE>
<CAPTION>
Fiscal Year 1996 Fiscal Year 1995 Fiscal Year 1994
Versus 1995 Versus 1994 Versus 1993
<S> <C>
Net earnings per share for fiscal years
1995, 1994 and 1993, respectively $1.33 $1.25 $1.17
Increase (decrease) attributable to:
Net interest income .14 .82 .49
Provision for loan losses (.18) (.05) .02
Noninterest income 1.46 (.96) .38
Noninterest expense (.28) .52 (.48)
Income taxes (.35) (.23) (.30)
Average shares outstanding (.03) (.02) (.03)
Net increase .76 .08 .08
Net earnings per share for fiscal years
1996, 1995 and 1994, respectively $2.09 $1.33 $1.25
</TABLE>
Net Interest Income. Net interest income before the provision for loan losses
for fiscal year 1996 was $26,719,000, an increase of $825,000, or 3.2%, compared
to fiscal year 1995. For fiscal year 1995, net interest income before the
provision for loan losses was $25,894,000, an increase of $4,678,000, or 22.0%,
compared to 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.
9
<PAGE>
The following table reflects the average yields earned and rates paid
by the Company as of June 30, 1996, and the average yields earned and
rates paid during the last three fiscal years. In computing the average
yields and rates, the accretion of loan fees are considered an adjustment
to yield.
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1996 1995
Interest Yield/Rate Interest
Average Income/ For End of Average Income/ Yield/
Balance Expense Year Year Balance Expense Rate
<S> <C>
Interest-earnings assets:
Loans receivable (1)(2) $626,313 $56,368 9.00% 8.79% $566,965 $50,685 8.94%
Mortgage-backed securities and
collateralized mortgage obligations 9,960 563 5.65 6.53 10,548 665 6.30
Investments 23,742 1,416 5.96 5.98 28,528 1,711 6.00
Other interest-earning assets 13,558 694 5.12 5.35 8,627 464 5.38
Total interest-earning assets 673,573 59,041 8.77 8.60 614,668 53,525 8.71
Noninterest-earning assets:
Cash and due from banks 8,417 8,494
Office properties and equipment, net 8,847 8,589
Other assets 12,571 9,923
Allowance for loan losses (6,118) (6,126)
Total assets $697,290 $635,548
Interest-bearing liabilities:
Checking and money market
deposit accounts $ 88,089 3,375 3.83 3.76 $ 85,395 3,081 3.61
Savings deposits 68,512 2,349 3.43 3.35 89,537 3,087 3.45
Certificates 348,664 20,609 5.91 5.77 267,934 14,511 5.41
Federal Home Loan Bank advances 98,365 5,968 6.07 5.55 105,173 6,414 6.10
Other borrowings 375 21 5.60 5.16 8,875 538 6.06
Total interest-bearing liabilities 604,005 32,322 5.35 5.16 556,914 27,631 4.96
Noninterest-bearing liabilities:
Deposits 30,189 25,503
Other 9,103 7,608
Total liabilities 643,297 590,025
Stockholders' equity 53,993 45,523
Total liabilities and
stockholders' equity $697,290 $635,548
Average dollar difference between
interest-earning assets
and interest-bearing liabilities $ 69,568 $ 57,754
Net interest income $26,719 $25,894
Interest rate spread (3) 3.42% 3.44% 3.75%
Net yield on average interest-earning
assets (4) 3.97% 4.21%
</TABLE>
1994
Interest
Average Income/ Yield/
Balance Expense Rate
Interest-earnings assets:
Loans receivable (1)(2) $485,454 $40,387 8.32%
Mortgage-backed securities and
collateralized mortgage obligations 16,116 836 5.19
Investments 20,596 872 4.23
Other interest-earning assets 9,910 308 3.11
Total interest-earning assets 532,076 42,403 7.97
Noninterest-earning assets:
Cash and due from banks 13,737
Office properties and equipment, net 8,446
Other assets 13,082
Allowance for loan losses (5,074)
Total assets $562,267
Interest-bearing liabilities:
Checking and money market
deposit accounts $101,312 3,129 3.09
Savings deposits 99,886 3,459 3.46
Certificates 217,379 11,086 5.10
Federal Home Loan Bank advances 65,546 3,474 5.30
Other borrowings 962 39 4.05
Total interest-bearing liabilities 485,085 21,187 4.37
Noninterest-bearing liabilities:
Deposits 30,991
Other 7,813
Total liabilities 523,889
Stockholders' equity 38,378
Total liabilities and
stockholders' equity $562,267
Average dollar difference between
interest-earning assets
and interest-bearing liabilities $ 46,991
Net interest income $21,216
Interest rate spread (3) 3.60%
Net yield on average interest-earning
assets (4) 3.99%
(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 less the average rate paid on
total interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
10
<PAGE>
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 $5,516,000 in
fiscal year 1996 and increased by $11,122,000 in fiscal year 1995, as compared
to the previous fiscal years. Total interest expense increased by $4,691,000 in
fiscal year 1996 and increased by $6,444,000 in fiscal year 1995, as compared to
the previous fiscal years. The fiscal year 1996 and 1995 increases in both
interest income and interest expense, compared to the respective previous years,
were due primarily to increases in average interest-earning assets and
interest-bearing liabilities, and increases in the market rates on loans and
deposits. Deposit rates increased in fiscal year 1996, while asset yields
remained flat. By contrast, asset yields increased more rapidly than deposit
rates in fiscal year 1995.
The following table shows 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 past two
fiscal years. 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 $825,000 increase in net interest income in fiscal year 1996 was the net
result of a growing balance sheet adversely affected by rising deposit rates and
flat asset yields, while the $4,678,000 increase in net interest income in
fiscal year 1995 was the combined result of rising asset yields and deposit
rates and a growing balance sheet.
<TABLE>
<CAPTION>
Fiscal Year 1996 Versus 1995 Fiscal Year 1995 Versus 1994
Increase (Decrease) Due to Increase (Decrease) Due to
(In thousands) Volume Rate Total Volume Rate Total
<S> <C>
Loans receivable $ 5,339 $ 344 $ 5,683 $ 7,131 $ 3,167 $ 10,298
Mortgage-backed securities and
collateralized mortgage obligations (36) (66) (102) (454) 283 (171)
Investments (285) (10) (295) 403 436 839
Other interest-earning assets 251 (21) 230 (34) 190 156
Total interest-earning assets 5,269 247 5,516 7,046 4,076 11,122
Checking and money market
deposit accounts 99 196 295 680 (48)
Savings deposits (721) (17) (738) (357) (15) (372)
Certificates 4,679 1,418 6,097 2,704 721 3,425
Federal Home Loan Bank advances (413) (33) (446) 2,354 586 2,940
Other borrowings (479) (38) (517) 471 28 499
Total interest-bearing liabilities 3,165 1,526 4,691 5,852 592 6,444
Net interest income $ 2,104 $(1,279) $ 825 $ 1,194 $ 3,484 $ 4,678
</TABLE>
11
<PAGE>
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 June 30, 1996, as well as the amount of
fixed rate and variable rate loans due after June 30, 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 $38,979,000 of fixed rate
residential mortgage loans receivable held for sale and $7,502,000 adjustable
rate residential mortgage loans held for sale as of June 30, 1996.
<TABLE>
<CAPTION>
Balance Principal Repayment Contractually Due in
Outstanding 12-Month Period Ending June 30
June 30, 2000- 2002- 2007 and
(In thousands) 1996 1997 1998 1999 2001 2006 Thereafter
<S> <C>
Residential and commercial
real estate $484,041 $ 37,868 $17,786 $23,462 $46,466 $64,707 $293,752
Construction 118,139 93,336 22,649 1,804 350 -- --
Consumer and other loans 59,855 15,586 11,009 8,195 15,435 1,815 7,815
Total $662,035 $146,790 $51,444 $33,461 $62,251 $66,522 $301,567
</TABLE>
<TABLE>
<CAPTION>
Fixed Variable
(In thousands) Rate Rate Total
<S> <C>
Residential and commercial real estate $132,951 $313,222 $446,173
Construction 2,148 22,655 24,803
Consumer and other loans 41,369 2,900 44,269
Total due after June 30, 1997 $176,468 $338,777 $515,245
</TABLE>
Contractual principal repayments of loans do not necessarily reflect the
actual term of the Company's loan portfolio. The average life of mortgage loans
is 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.
12
<PAGE>
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 9.83% of total assets at June 30, 1996, as
follows:
<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) $669,562 $399,772 $ 129,448 $ 28,918 $111,424
Mortgage-backed securities and
collateralized mortgage obligations 15,694 1,393 2,209 1,542 10,550
Investments 19,661 7,206 625 2,572 9,258
Other interest-earning assets 12,270 12,270 -- -- --
Total interest-earning assets 717,187 $420,641 $ 132,282 $ 33,032 $131,232
Noninterest-earning assets 37,207
Allowance for loan losses (7,527)
Total assets $ 746,867
Interest-bearing liabilities:
Checking and money market
deposit accounts (2) $ 97,593 $ 37,193 $ - $ - $ 60,400
Savings deposits (3) 68,824 17,206 9,635 8,259 33,724
Certificates 367,586 232,176 81,553 52,018 1,839
Federal Home Loan Bank Advances 102,052 60,000 27,500 11,500 3,052
Other borrowings 639 639 -- -- --
Total interest-bearing liabilities 636,694 $347,214 $ 118,688 $ 71,777 $ 99,015
Noninterest-bearing liabilities 49,177
Total liabilities 685,871
Stockholders' equity 60,996
Total liabilities and stockholders'
equity $ 746,867
Maturity/repricing gap $ 73,427 $ 13,594 $(38,745) $ 32,217
Cumulative gap $ 73,427 $ 87,021 $ 48,276 $ 80,493
As percent of total assets 9.83% 11.65% 6.46% 10.78%
</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 $176,410,000 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.
13
<PAGE>
The Company's portfolio of loans held for investment totalled $615,554,000
at June 30, 1996, representing 82.4% 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>
(In thousands) June 30 1996 1995 1994 1993 1992
Percent Percent Percent Percent Percent
of of of of of
Gross Gross Gross Gross Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C>
First mortgage loans:
Residential - fixed rate $ 77,266 12.3% $ 74,592 12.6% $ 79,979 16.1% $ 38,882 10.4% $ 52,458 14.1%
Residential - adjustable rate 270,374 43.2 256,463 43.4 190,490 38.4 179,331 47.8 204,751 55.0
Total residential 347,640 55.5 331,055 56.0 270,469 54.5 218,213 58.2 257,209 69.1
Commercial - fixed rate 16,633 2.7 14,678 2.5 17,970 3.6 17,786 4.8 20,862 5.6
Commercial - adjustable rate 32,089 5.1 45,630 7.7 54,067 10.9 61,975 16.5 59,660 16.0
Total commercial 48,722 7.8 60,308 10.2 72,037 14.5 79,761 21.3 80,522 21.6
Construction - fixed rate 20,185 3.2 9,640 1.6 -- -- -- -- -- --
Construction - adjustable rate 101,190 16.2 100,477 17.0 90,456 18.3 36,531 9.8 13,918 3.7
Total construction (1) 121,375 19.4 110,117 18.6 90,456 18.3 36,531 9.8 13,918 3.7
Total first mortgage loans 517,737 82.7 501,480 84.8 432,962 87.3 334,505 89.3 351,649 94.4
Second mortgage loans (2):
Fixed rate 18,201 2.9 14,981 2.6 9,180 1.8 6,204 1.7 2,887 0.8
Adjustable rate 29,233 4.7 24,845 4.2 20,679 4.2 14,658 3.9 6,182 1.7
Total second mortgage loans 47,434 7.6 39,826 6.8 29,859 6.0 20,862 5.6 9,069 2.5
Loans on savings accounts 1,691 0.3 1,363 0.2 970 0.2 1,038 0.3 924 0.2
Installment loans:
Fixed rate 55,910 8.9 44,977 7.6 31,787 6.4 17,622 4.7 10,292 2.8
Adjustable rate 3,275 0.5 3,481 0.6 639 0.1 415 0.1 414 0.1
Total installment loans 59,185 9.4 48,458 8.2 32,426 6.5 18,037 4.8 10,706 2.9
Gross loans 626,047 100.0% 591,127 100.0% 496,217 100.0% 374,442 100.0% 372,348 100.0%
Less:
Unearned discount 301 1,361 1,555 1,847 2,158
Deferred income 2,665 2,886 3,012 2,290 1,886
Allowance for loan losses 7,527 6,373 5,611 4,616 3,570
Total adjustments 10,493 10,620 10,178 8,753 7,614
Total net loans held for
investment $615,554 $ 580,507 $486,039 $365,689 $364,734
</TABLE>
(1) Construction loans are shown net of undisbursed loan funds.
(2) Includes home equity lines of credit.
14
<PAGE>
Provision for Loan Losses. The Company provided $2,429,000 during fiscal year
1996 as additions to the allowance for loan losses, compared to $1,390,000 in
fiscal year 1995 and $1,090,000 in fiscal year 1994. 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.
The following table presents the activity in the Company's allowance for loan
losses and selected loan loss data for the past five fiscal years:
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1996 1995 1994 1993 1992
<S> <C>
Balance at beginning of year $6,373 $5,611 $ 4,616 $ 3,570 $ 2,109
Provision charged to expense 2,429 1,390 1,090 1,171 1,859
Loans charged off:
Residential real estate 23 9 68 9 200
Commercial real estate 1,056 458 -- -- --
Construction -- -- -- -- --
Consumer and other loans 257 205 71 222 367
Total gross charge-offs 1,336 672 139 231 567
Recoveries of loans previously
charged off:
Residential real estate -- -- -- -- --
Commercial real estate -- -- -- -- --
Construction -- -- -- -- --
Consumer and other loans 61 44 44 106 169
Total recoveries 61 44 44 106 169
Net charge-offs 1,275 628 95 125 398
Balance at end of year $ 7,527 $ 6,373 $ 5,611 $ 4,616 $ 3,570
Average loans held
for investment (1) $594,653 $ 550 $485,454 $437,253 $393,645
Loans held for investment at
year end (1) 623,081 586,880 491,650 370,305 368,304
Ratio of provision for loan
losses to average loans
held for investment 0.41% 0.25% 0.22% 0.27% 0.47%
Ratio of net charge-offs
to average loans held
for investment 0.21% 0.11% 0.02% 0.03% 0.10%
Ratio of allowance for loan
losses to loans held for
investment at year end 1.21% 1.09% 1.14% 1.25% 0.97%
</TABLE>
(1) Loans receivable shown gross of allowance for loan losses, net of
premiums/discounts.
While the Company's management believes that its present allowance for loan
losses is adequate, future adjustments may be necessary.
15
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 charge-offs in fiscal year 1997 will occur in
these amounts, or proportions, or that the allocation indicates future trends.
The allocation of the allowance at June 30 for the years indicated and the ratio
of the related outstanding loan balances to total loans held for investment are
as follows:
<TABLE>
<CAPTION>
(In thousands)
Years Ended June 30 1996 1995 1994 1993 1992
Ratio of Ratio of Ratio of Ratio of Ratio of
Loans to Loans to Loans to Loans to Loans to
Total Loans Total Loans Total Loans Total Loans Total Loans
Held for Held for Held for Held for Held for
Allowance Investment Allowance Investment Allowance Investment Allowance Investment Allowance Investment
<S> <C>
Residential
real estate $1,425 63.1% $1,055 62.8% $ 807 60.5% $ 594 63.8% $ 534 71.6%
Commercial
real estate 2,552 7.8 2,958 10.2 3,099 14.5 3,170 21.3 2,582 21.6
Construction 2,200 19.4 1,150 18.6 730 18.3 272 9.8 84 3.7
Consumer and
other loans 1,350 9.7 1,210 8.4 975 6.7 580 5.1 370 3.1
Total $7,527 100.0% $6,373 100.0% $5,611 100.0% $4,616 100.0 $3,570 100.0%
</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 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
Fiscal Years Ended Increase Increase Increase
June 30 1996 1995 (Decrease) 1996 1995 (Decrease) 1996 1995 (Decrease)
<S> <C>
Net interest income $13,404 $13,970 $ (566) $13,315 $11,924 $ 1,391 $26,719 $25,894 $ 825
Provision for loan losses 536 396 140 1,893 994 899 2,429 1,390 1,039
Noninterest income 1,999 2,227 (228) 12,914 4,223 8,691 14,913 6,450 8,463
Noninterest expense 10,639 9,603 1,036 9,390 8,809 581 20,029 18,412 1,617
Income taxes 1,683 2,467 (784) 5,349 2,525 2,824 7,032 4,992 2,040
Net earnings $ 2,545 $ 3,731 $(1,186) $ 9,597 $ 3,819 $ 5,778 $12,142 $ 7,550 $ 4,592
</TABLE>
16
<PAGE>
Net earnings generated by the retail banking division were $2,545,000 in
fiscal year 1996, a decrease of 31.8% from the $3,731,000 of net earnings in
fiscal year 1995. Net interest income from retail banking declined by 4.1%, 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 accounts. Noninterest income declined by
10.2%, due in part to the decline in earnings from non-deposit products such as
mutual funds. Noninterest expense increased by 10.8%, due in part to the
expansion of the Company's retail branch network by a net of one branch. The
Company opened branches in February 1995 and September 1995 and closed a branch
in June 1995.
Net earnings from mortgage banking increased by 152.2% to $9,597,000 in fiscal
year 1996, when compared to net earnings of $3,819,000 in fiscal year 1995. Net
earnings were positively affected by an 11.7% increase in the mortgage banking
net interest margin. Higher loan production volume produced higher loan sale
gains in fiscal year 1996, as did the selling of most mortgage loans on a
servicing-released basis. However, most of the 205.8% increase in noninterest
income was due to the sale of substantially all of the Company's portfolio of
mortgage loans serviced for others. Higher mortgage loan production was the
principal factor behind the 6.6% increase in noninterest expenses.
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's "Community Banking" focus operates most successfully and
efficiently in residential communities, and management believes that in some
instances metropolitan locations no longer match management's philosophy of
operation. The Company sold the deposit liabilities of its office located on
Main Street in Richmond, Virginia, on June 23, 1995. The transaction represented
the Company's exit from Richmond's downtown. The Company's noninterest income
for fiscal year 1995 includes a net gain of $211,000 related to this
transaction.
On September 11, 1995, the Company opened a full-service retail branch 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. In fiscal year 1995, the
Company opened a full-service retail banking branch at 1650 Willow Lawn Drive in
Richmond, Virginia, directly across from "The Shops at Willow Lawn" shopping
center. The branch's February 6, 1995 Grand Opening festivities emphasized the
Company's "Community Banking" theme.
As of June 30, 1996, the Company operated twenty-three full service retail
facilities throughout Virginia.
The Company originated $22,808,000 of residential equity lines of credit and
fixed-rate second mortgages during fiscal year 1996, compared to $17,070,000 in
fiscal year 1995 and $21,488,000 in fiscal year 1994. The Company originated
$24,705,000 of consumer and installment loans during fiscal year 1996, compared
to $25,527,000 in fiscal year 1995 and $24,664,000 in fiscal year 1994. 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 $6,930,000 of fixed-rate
second mortgage loans in fiscal year 1996, compared to $10,172,000 of loans in
fiscal year 1995 ($3,170,000 of fixed rate second mortgage loans and $7,002,000
of manufactured home loans) and $1,031,000 of manufactured home loans in fiscal
year 1994.
17
<PAGE>
The following table summarizes retail banking loan originations and purchases
by type of loan for fiscal years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1996 1995 1994
% of % of % of
Amount Total Amount Total Amount Total
<S> <C>
Residential equity lines of credit (1) $10,997 20.2% $10,250 19.5% $16,338 34.6%
Fixed-rate second mortgages 18,741 34.4 9,990 18.9 5,150 10.9
Consumer loans 24,705 45.4 32,529 61.6 25,695 54.5
Total originations and purchases $54,443 100.0% $52,769 100.0% $47,183 100.0%
</TABLE>
(1) Reflects loan balances prior to deduction of undisbursed loan amounts.
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.
During fiscal year 1996 the Company consolidated three of its loan production
centers into other offices. As of February 1, 1996, the mortgage loan office in
Arnold, Maryland was consolidated with the office in Rockville, Maryland. Then
on March 1, 1996, the office in Sterling, Virginia was consolidated with the
office in Annandale, Virginia. And in May 1996, the mortgage loan office in
Petersburg, Virginia was consolidated with the relocated office in Chesterfield
County, Virginia.
The consolidations in fiscal year 1996 continued a process of realignment of
the Company's mortgage loan resources. 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
divisions. The divisions were merged into a single unit based in Woodbridge,
Virginia and 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. During fiscal
year 1994 the Company closed its office in Chesapeake Beach, Maryland and opened
the Sterling, Virginia office which was subsequently closed.
At June 30, 1996, the Company operated eight mortgage loan production centers
in Virginia and Maryland. In August 1996, the Company opened mortgage loan
centers in the Maryland communities of Columbia, Frederick, Timonium and Bel
Air. 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 and close or consolidate existing centers,
depending on market conditions.
On June 28, 1996, the Company announced its intention to purchase American
Finance and Investments, Inc. ("AFI"), a provider of residential mortgage loans
through the Internet. AFI generates mortgage loans on an automated basis through
a sophisticated computer network presently available to potential customers in
forty-four states. Headquartered in Fairfax, Virginia, AFIis a recognized leader
in the evolving market for electronic commerce. During the past twelve months
AFI has expanded rapidly by means of proprietary software uniquely designed to
facilitate "on line" mortgage loan originations. The acquisition of AFI provides
the Company with a unique springboard for the expansion of electronic commerce
to the retail banking customer base. The Company's introduction to the Internet
as a medium of product delivery will logically expand to other bank-related
products and services. The acquisition of AFI allows the Company to keep pace
with expanding technology involving financial service companies. The acquisition
of AFI, scheduled to be completed in September 1996, is subject to the approval
of AFI stockholders and appropriate bank regulatory authorities.
18
<PAGE>
The Company's present operating strategy is to originate fixed rate 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 three
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 sale of substantially all of its
servicing rights related to mortgage loans serviced for others, in a transaction
effective as of April 1, 1996.
Origination and Purchase of Mortgage Loans. The Company originated
$431,069,000 of fixed rate conventional, Federal Housing Administration ("FHA"),
and Veterans Administration ("VA") residential mortgage loans during fiscal year
1996, compared to $252,254,000 in fiscal year 1995 and $644,341,000 in fiscal
year 1994. The 60.9% decline in originations in fiscal year 1995 compared to
fiscal year 1994 was due to over saturation in the refinance market and the rise
in market interest rates. The 70.9% increase in originations in fiscal year 1996
compared to 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 originated $81,741,000 of adjustable rate residential mortgage
loans during fiscal year 1996, compared to $82,534,000 in fiscal year 1995 and
$87,747,000 in fiscal year 1994. The 5.9% decrease in fiscal year 1995, compared
to fiscal year 1994, is attributed to higher market interest rates reducing the
attractiveness of mortgage loan financing. Despite the increase in overall loan
originations in fiscal year 1996, adjustable rate originations in fiscal year
1996 were 1.0% less than in fiscal year 1995, as moderating interest rates
shifted consumer interest back to fixed rate products. Nevertheless, adjustable
rate mortgage loan originations were 14.2% of total permanent mortgage loan and
construction loan originations in fiscal year 1996, compared to 20.3% in fiscal
year 1995 and 10.3% in fiscal year 1994.
In addition to originating residential mortgage loans, the Company may
purchase loans periodically to obtain geographic diversity and yields not
obtainable in the Company's normal lending areas. However, no adjustable rate
residential mortgage loans were purchased during fiscal years 1996, 1995 and
1994.
The Company originated $57,973,000 of construction loans during fiscal year
1996, compared to $70,277,000 in fiscal year 1995 and $116,612,000 in fiscal
year 1994. Construction loans were 10.1% of total permanent mortgage loan and
construction loan originations in fiscal year 1996, compared to 17.3% in fiscal
year 1995 and 13.6% in fiscal year 1994. 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
underserved markets. The Company believes that its construction lending
underwriting standards do not expose the Company to additional 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 also 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 three 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 three years has been
substantial, management is committed to retaining a conservative credit risk
profile, and is willing to forego market share to new or returning competitors
who
19
<PAGE>
may be willing to sacrifice quality to achieve volume goals. Management's
adherence to its credit 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 1997 is not expected to exceed the levels seen in fiscal year 1996. The
Company continues to evaluate the feasibility of sustaining or expanding the
present construction lending levels.
The following table summarizes permanent first mortgage and construction loan
originations by type of loan for fiscal years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1996 1995 1994
% of % of % of
Amount Total Amount Total Amount Total
<S> <C>
Permanent mortgage loans:
Fixed rate residential:
Conventional $317,884 55.4% $167,204 41.2% $430,647 50.3%
FHA/VA 113,185 19.7 85,050 21.0 213,694 25.0
Total fixed rate residential 431,069 75.1 252,254 62.2 644,341 75.3
Adjustable rate residential:
One year 46,635 8.1 71,307 17.5 62,446 7.3
Three year 35,106 6.1 11,227 2.8 25,301 3.0
Total adjustable rate residential 81,741 14.2 82,534 20.3 87,747 10.3
Fixed rate commercial 3,283 0.6 - - 244 -
Adjustable rate commercial:
One year - - 804 0.2 3,300 0.4
Other - - - - 3,463 0.4
Total adjustable rate commercial - - 804 0.2 6,763 0.8
Construction loans (1):
Residential construction 41,121 7.2 47,451 11.7 83,408 9.7
Acquisition, development
and commercial construction 16,852 2.9 22,826 5.6 33,204 3.9
Total construction 57,973 10.1 70,277 17.3 116,612 13.6
Total originations and purchases $574,066 100.0% $405,869 100.0% $855,707 100.0%
</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 retire 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 counterparty at a specific
price for a specific period of time. In this instance, the commodity or
financial asset would generally consist of mortgage-backed 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.
20
<PAGE>
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 loans have been sold 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 loan sales during the second half of fiscal
year 1996 were on a servicing-released basis. Of total sales of $399,562,000
during fiscal year 1996, the Company sold $82,598,000, or 20.7%, on a
servicing-retained basis. By comparison, 38.6% of sales in fiscal year 1995 and
49.2% of sales in fiscal year 1994 were on a servicing-retained basis. See the
discussion under "Mortgage Loan Servicing" regarding the Company's sale of
substantially all of its servicing rights related to loans serviced for others,
in a transaction effective as of April 1, 1996.
Gains from the sales of mortgage loans and securitized loans were $2,865,000
in fiscal year 1996, an increase of $1,968,000, or 219.4%, over the gains in
fiscal year 1995. Gains from such sales in fiscal year 1995 were $897,000, a
decrease of $3,923,000, or 81.4%, from the gains of $4,820,000 in fiscal year
1994. The substantially higher gains in fiscal year 1996 reflect both the higher
loan origination volume and 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 in fiscal year 1996
include $170,000 from the servicing-released sale of $8,184,000 of mortgage
loans from the Company's portfolio. There were no such portfolio sales in fiscal
years 1995 or 1994.
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 Home
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
June 30, 1996, 1995 or 1994. 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 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 $331,434,000 of fixed rate mortgage loans and securitized
loans during fiscal year 1996, compared to $180,454,000 in fiscal year 1995 and
$602,676,000 in fiscal year 1994. 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 $68,128,000 of adjustable rate mortgage loans and securitized
loans during fiscal year 1996, compared to $79,556,000 in fiscal year 1995 and
$114,103,000 in fiscal year 1994. The sizable proportion of adjustable rate loan
and securitized loan sales to total sales in fiscal years 1996, 1995 and 1994 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 each of the three fiscal years exceeded the Company's
capacity to add such loans to its loan portfolio.
21
<PAGE>
The following table summarizes mortgage loan sales by type of loan for the
past three fiscal years. The table does not reflect commitments sold for which
mortgage loans had not been delivered and funded at period end.
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1996 1995 1994
% of % of % of
Amount Total Amount Total Amount Total
<S> <C>
Fixed rate $331,434 82.9% $180,454 69.4% $602,676 84.1%
Adjustable rate 68,128 17.1 79,556 30.6 114,103 15.9
Total mortgage loans sold $399,562 100.0% $260,010 100.0% $716,779 100.0%
</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 totalled $117,913,000 in fiscal year
1996, $51,905,000 in fiscal year 1995 and $25,793,000 in fiscal year 1994.
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. Due to substantial mortgage loan prepayments
during fiscal year 1994, the Company recorded write-downs totalling $600,000
against the carrying value of its capitalized excess servicing in addition to
scheduled amortization. No such write-downs were taken in fiscal years 1996 or
1995.
It has not been the Company's practice to purchase mortgage loan servicing
rights ("PMSRs"). The purchased servicing included in the Company's consolidated
statements of financial condition totalled $16,000 at June 30, 1995 and $17,000
at June 30, 1994. The Company had no PMSRs as of June 30, 1996. PMSRs and
capitalized excess servicing have similar risk and return characteristics. The
Company structures its mortgage loan sales transactions in order to minimize the
creation of capitalized excess servicing. The Company added $2,000 of new
capitalized excess servicing in fiscal year 1996, compared to $11,000 in fiscal
year 1995 and $199,000 in fiscal year 1994. The amount of capitalized excess
servicing included in the Company's consolidated statements of financial
condition was $836,000 at June 30, 1995, compared to $1,034,000 at June 30,
1994. The Company had no capitalized excess servicing as of June 30, 1996.
See the discussion under "Mortgage Loan Servicing" regarding the Company's
sale of substantially all of its servicing rights related to mortgage 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 were written off against the sales proceeds.
22
<PAGE>
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 level-yield 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 decreased by $130,000 to $3,056,000 during fiscal year
1996, increased by $580,000 to $3,186,000 during fiscal year 1995, and increased
by $505,000 to $2,606,000 during fiscal year 1994. The increases in mortgage
loan servicing income in fiscal years 1995 and 1994 were due to the increases in
mortgage loans serviced for others and the decreases in amortization of excess
servicing. The decrease in such income in fiscal year 1996 was due to lower
income in the fourth fiscal quarter under the subservicing arrangement described
below. The average daily balance of mortgage loans serviced for others,
including loans under subservicing arrangements, was approximately $764.7
million in fiscal year 1996, compared to $733.6 million in fiscal year 1995 and
$720.8 million in 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 sells a portion of its conventional loan production on a
servicing-released basis, primarily mortgage loans with original balances above
the limit for purchase by FNMA and FHLMC ($207,000 at June 30, 1996). As the
Company expanded its mortgage banking operations and the volume of mortgage
loans that it services for others, production and other related operating
expenses increased substantially. Expenses that the Company incurs in servicing
loans are charged to operations. Although the Company sought to increase the
volume of loans that it services 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. During fiscal year 1995, the Company sold the rights to
service $1.6 million of mortgage loans for pre-tax gains of $14,000, and
recorded sales of $160.2 million of servicing rights with pre-tax gains of
$2,014,000 in fiscal year 1994.
Beginning January 1, 1996, the Company shifted its business strategy with
respect to mortgage loan servicing, and most of the loan sales in the second
half of fiscal year 1996 were on a servicing-released basis. Effective as of
April 1, 1996, the Company sold substantially all of its servicing rights
related to mortgage loans serviced for others. The transaction generated a
pre-tax gain of $6,847,000. The amount of the gain is net of the write-off of
the remaining $14,000 of unamortized PMSRs and $767,000 of unamortized
capitalized excess servicing. 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 $4,184,000 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 continued to service the
loans subject to the rights sale agreement under a subservicing arrangement. The
subservicing fees earned in the fourth fiscal quarter were less than the Company
would have earned had the servicing rights not been sold. During this period,
the necessary loan documents were 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
continue to be made on a servicing-released basis.
23
<PAGE>
Prior to the sale transaction on April 1, 1996, the Company's portfolio of
mortgage loans serviced for others had grown by $17,378,000 in fiscal year 1996,
and grew by $40,428,000 during fiscal year 1995 and by $51,672,000 in fiscal
year 1994. The modest growth realized in fiscal years 1996 and 1995 is
attributable to the Company's strategy of selling a larger proportion of loan
originations on a servicing-released basis as compared to fiscal year 1994. The
following table indicates the components of the Company's mortgage loan
servicing portfolio at the indicated dates:
<TABLE>
<CAPTION>
(Dollars in thousands) June 30 1996 1995 1994
No. of No. of No. of
Amount Loans Amount Loans Amount Loans
<S> <C>
Company's mortgage loan portfolio $440,062 4,841 $ 429,438 4,940 $ 365,509 4,115
Serviced for others:
FNMA 7,252 154 655,073 7,623 635,462 7,372
FHLMC 13,528 626 30,406 835 24,908 859
Other investors 7,056 73 60,214 792 44,895 579
Total serviced for others 27,836 853 745,693 9,250 705,265 8,810
Total mortgage loans serviced $467,898 5,694 $1,175,131 14,190 $1,070,774 12,925
</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 8.09%
at June 30, 1996, compared to 7.81% at June 30, 1995 and 7.67% at June 30, 1994.
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 $8,341,000, $8,078,000 and $8,132,000
during fiscal years 1996, 1995 and 1994, 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 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 Company'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.
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 provided implementation guidance and
a one-time opportunity for companies to reassess their intent with regard to
securities and reclassify a portion of all of them as deemed appropriate. Such
one-time reclassifications, which were expected to affect securities classified
as held to maturity most significantly, could 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.
24
<PAGE>
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.
The table below shows the carrying value of investment securities and
mortgage-backed securities at the dates indicated:
(In thousands) June 30 1996 1995 1994
Held to maturity:
U.S. government agencies $ - $15,839 $ 5,333
State and municipal 6,278 7,630 7,893
Other 374 214 596
Total held to maturity 6,652 23,683 13,822
Available for sale:
U.S. government agencies 3,051 3,585 4,178
Other 18,654 5,193 13,722
Total available for sale 21,705 8,778 17,900
Total $28,357 $32,461 $31,722
The table below shows the weighted average expected yields, maturities and
expected principal repayments, at carrying value, of investment securities and
mortgage-backed securities at June 30, 1996:
<TABLE>
<CAPTION>
(In thousands)
Maturity or Expected After One But After Five But
Principal Repayment Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C>
Held to maturity:
State and municipal $ 208 4.98% $1,250 4.98% $1,561 4.98% $ 3,259 4.98% $ 6,278 4.98%
Other 63 8.46 251 8.46 60 8.46 - - 374 8.46
Total held to maturity 271 5.79 1,501 5.56 1,621 5.11 3,259 4.98 6,652 5.18
Available for sale:
U.S. government agencies 631 6.60 1,980 6.60 440 6.59 - - 3,051 6.60
Other 699 5.73 3,467 6.48 4,884 6.95 9,604 6.59 18,654 6.63
Total available for sale 1,330 6.14 5,447 6.53 5,324 6.92 9,604 6.59 21,705 6.63
Total $ 1,601 6.08% $6,948 6.32% $6,945 6.50% $12,863 6.18% $28,357 6.29%
</TABLE>
Noninterest Income. The Company recorded $37,000 of net losses from the
sales and revaluation of mortgage backed securities and collateralized mortgage
obligations held for investment during fiscal year 1995, compared to net losses
of $19,000 during fiscal year 1994. No such losses were recorded in fiscal year
1996. The losses in fiscal years 1995 and 1994 were related to the "other than
temporary" decline in the carrying value of certain residual investments in
collateralized mortgage obligations held in the investment portfolio.
Financial service fees increased by $265,000, or 13.1%, in fiscal year 1996,
and by $360,000, or 21.6%, in fiscal year 1995, compared to the respective
previous years. These year-to-year 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 fiscal
year 1996 include $52,000 earned from the Company's relationship with INVEST
Financial Services, Inc.
25
<PAGE>
("INVEST"), compared to $155,000 in fiscal year 1995 and $238,000 in fiscal
year 1994. Pursuant to a contractual arrangement, INVEST leases office space in
certain of the Company's facilities through which stocks, bonds, mutual funds
and investment counseling are provided. Such fees are lower in the fiscal year
1996, as compared to the previous year, since rising market interest rates in
fiscal year 1995 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. The Company recorded
$3,000 from its new relationship with CoreLink during the fourth quarter of
fiscal year 1996.
Sales of real estate owned yielded net gains of $279,000, $282,000 and
$170,000 in fiscal years 1996, 1995 and 1994, respectively. The Company recorded
losses on the revaluation of real estate owned of $777,000, $192,000 and
$277,000 in fiscal years 1996, 1995 and 1994, respectively. 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 $12,000, $2,000 and $9,000 in fiscal years 1996, 1995 and
1994, 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 mortgage loan customers. Its
headquarters is based at the Virginia First Mortgage Division in Woodbridge,
Virginia. Century Title generated $192,000 and $28,000 of gross title fee income
in fiscal years 1996 and 1995, respectively.
Other noninterest income in fiscal year 1995 includes a nonrecurring item in
the amount of $211,000, which represents the net gain on the sale of the deposit
liabilities and subsequent closing of the Company's retail banking branch office
located on Main Street in Richmond, Virginia on June 23, 1995.
Other noninterest income in fiscal years 1996 and 1994 include nonrecurring
items in the amount of $77,000 and $344,000, respectively. These two items
represents interest received on income tax refunds for the fiscal year ended
June 30, 1980. The tax refunds of $154,000 and $316,000 were used to reduce
income tax expense in fiscal years 1996 and 1994, respectively. Due to
uncertainty about the amount and timing of the refunded taxes and related
interest, they had not been accrued into income prior to receipt.
Noninterest Expense. Personnel and related employee benefits expense is the
Company's largest non-interest expense. Personnel expense for fiscal year 1996
was $10,188,000, compared to $9,802,000 in fiscal year 1995 and $12,418,000 in
fiscal year 1994. The 21.1% decrease in personnel costs in fiscal year 1995, as
compared to fiscal year 1994, reflects the discontinuation of temporary support
as well as some permanent staff reductions. 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.
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 3.9% increase in personnel expense in fiscal year
1996, as compared to fiscal year 1995, was due in part to the increase in the
Company's loan origination volume.
26
<PAGE>
Occupancy expense for the past three fiscal years was $1,594,000, $1,451,000
and $1,335,000, respectively. Some of the 9.9% increase for fiscal year 1996 and
the 8.7% increase for fiscal year 1995 was attributable to the addition of two
retail banking branch offices.
Data processing expense for the past three fiscal years was $1,753,000,
$1,515,000 and $1,599,000, respectively. The fiscal year 1996 increase of 15.7%
was due to increased loan and deposit account volume, a mortgage loan tracking
system, and local area networking. While the number of customer accounts also
grew in fiscal year 1995, data processing expense declined by 5.3% compared to
fiscal year1994 due to revised contract provisions with the Company's data
processing service bureau.
Income Taxes. Income tax expense for fiscal year 1996 was $7,032,000,
resulting in an effective tax rate of 36.7%. By comparison, the Company had
income tax expense of $4,992,000 for an effective tax rate of 39.8% in fiscal
years 1995 and $3,681,000 in fiscal year 1994 for an effective tax rate of
34.5%.
The effective tax rates for the three fiscal years 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. As noted earlier, the effective tax rates for fiscal years 1996
and 1994 were also reduced by the receipt of income tax refunds related to the
fiscal year ended June 30, 1980.
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 totalled $573,536,000 at June 30, 1996, an increase of $69,869,000, or
13.9%, over the $503,667,000 at June 30, 1995. Certificates of deposit grew by
$51,674,000 and checking and money market deposit accounts increased by a total
of $20,718,000 in fiscal year 1996, while savings deposits declined by
$2,523,000. Rising market interest rates in fiscal years 1996 and 1995 increased
the attractiveness of certificates compared to savings products, on which
interest rates have risen more slowly. Certificate accounts totalling
$232,176,000 will mature in the twelve-month period ending June 30, 1997. The
Company's management believes that most of the maturing liabilities will be
reinvested with the Company.
Advances from the FHLB decreased by $32,606,000 to $102,052,000 at June 30,
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 will sometimes borrow from other sources using mortgage-backed
securities as collateral. However, no such borrowings were outstanding at June
30, 1996 and 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
June 30, 1996 were 13.7% of assets, compared to 19.5% of assets at June 30, 1995
and 13.8% of assets at June 30, 1994.
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 the
lending operations.
27
<PAGE>
The primary use of funds by the Company is loan originations. The Company's
loan portfolio, including loans held for sale, totalled $662,035,000 at June 30,
1996, compared to $616,049,000 at June 30, 1995, an increase of $45,986,000, or
7.5%. The Company's loans held for investment and for sale represented 88.6% of
assets at June 30, 1996, compared to 88.8% of assets at June 30, 1995.
The Company had outstanding fixed rate loan origination commitments of
$2,900,000 and outstanding adjustable rate loan commitments of $1,436,000 at
June 30, 1996.
The Company had no outstanding loan purchase commitments in effect at June 30,
1996. The Company had outstanding commitments to fund $28,436,000 of
construction loans at June 30, 1996. In addition, the Company had $28,067,000
outstanding in lines of credit extended to its customers at June 30, 1996. The
Company's management does not anticipate any difficulties in satisfying these
commitments.
Standby letters of credit are conditional commitments issued by the Company.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. At June 30, 1996, the Company was
conditionally committed under standby letters of credit aggregating $19,677,000.
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) totalled $28,357,000 at June 30, 1996 and
$32,461,000 at June 30, 1995. Such balances represented 3.8% 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%. At June 30, 1996 and 1995, the
Company had liquidity ratios of 5.2% and 5.1%, respectively. The Company's
management anticipates that it will be able to maintain its current level of
regulatory liquidity during fiscal year 1997.
At June 30, 1996, the Savings Bank's net worth under generally accepted
accounting principles ("GAAP") was $60,955,000. 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 June 30, 1996, the Savings Bank satisfied all of the
regulatory capital requirements.
The Company has addressed 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.
28
<PAGE>
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 half 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 retained the $0.23 to
$0.31 per $100 of deposits premium rate structure for all SAIF-insured
institutions. In response to concerns raised regarding the disparity in BIF and
SAIF insurance rates, the FDIC, the OTS, the Treasury Department, and the thrift
industry have been considering a number of legislative solutions to the problem
that would recapitalize the SAIF and either reduce or eliminate the disparity
between BIF and SAIF insurance rates once the SAIF becomes fully capitalized.
The Congress and the Clinton Administration are negotiating a bill to
authorize the Board of Directors of the FDIC to impose a one-time 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 0.68% of March 31, 1995 insured 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 loan and deposit 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 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.
29
<PAGE>
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 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) June 30 1996 1995 1994 1993 1992
<S> <C>
Non-accrual loans:
Residential mortgage $ 5,029 $ 3,415 $ 3,705 $ 4,544 $ 3,343
Commercial mortgage 1,827 2,068 2,718 2,287 2,497
Construction 2,747 3,259 - - 150
Consumer non-mortgage 1,342 545 346 347 229
Total non-accrual loans 10,945 9,287 6,769 7,178 6,219
Specific loss allowances (646) (768) (1,046) (518) (279)
Total non-accrual loans, net 10,299 8,519 5,723 6,660 5,940
Real estate acquired through foreclosure:
One to four family residential units 2,319 2,576 3,359 1,789 1,468
Residential lots or projects 2,004 106 137 141 558
Shopping/retail centers 1,727 672 672 4,426 3,459
Office buildings - 188 - 1,005 1,968
Commercial land 192 351 350 159 158
Total real estate acquired through foreclosure 6,242 3,893 4,518 7,520 7,611
Specific and general allowances for losses (889) (637) (615) (2,134) (1,763)
Total real estate acquired through
foreclosure, net 5,353 3,256 3,903 5,386 5,848
Total non-performing assets $15,652 $11,775 $ 9,626 $12,046 $11,788
Non-accrual loans to gross loans 1.63% 1.49% 1.30% 1.53% 1.48%
Total non-performing assets to sum of
gross loans and net real estate acquired
through foreclosure 2.32% 1.88% 1.84% 2.53% 2.77%
Total non-performing assets
to total assets 2.10% 1.70% 1.65% 2.15% 2.28%
</TABLE>
The net amount of interest income foregone during fiscal years 1996, 1995 and
1994 on loans classified as non-performing was $263,000, $250,000, $83,000 and,
respectively.
In addition, 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 June 30, 1996, the Company had no restructured
loans subject to special reporting rules.
30
The following table summarizes all non-accrual loans, by loan type, at June
30, 1996:
Net
(Dollars in thousands) Loans Balance Allowances Investment
Residential mortgage 75 $ 5,029 $ - $ 5,029
Commercial mortgage 7 1,827 - 1,827
Construction 5 2,747 - 2,747
Consumer non-mortgage 89 1,342 (646) 695
Total non-accrual loans, net 176 $10,945 $ (646) $10,299
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 14, 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.
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 at June 30, 1996 were comprised of $3,048,000 of commercial
loans and $2,086,000 of construction loans. None of the Company's impaired loans
had a valuation allowance at June 30, 1996. Collateral dependent loans, which
are measured at the fair value of the collateral, constituted 100% of impaired
loans at June 30, 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. For the year ended June 30, 1996, the average recorded investment in
impaired loans was approximately $4,703,000. Total interest income recognized on
impaired loans was $458,000, all of which was recognized on a cash basis.
31
<PAGE>
The balance of impaired loans as of July 1, 1995 totalled $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 June 30,
1996 and for fiscal year 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.
The following table summarizes all real estate acquired through foreclosure,
by property type, at June 30, 1996:
Number
of Original Net
(Dollars in thousands) Units Basis Allowances Investment
One to four family residential units 24 $2,319 $ (222) $2,097
Residential lots or projects 5 2,004 (205) 1,799
Shopping/retail centers 2 1,727 (12) 1,715
Commercial land 1 192 - 192
32 6,242 (439) 5,803
General loss allowance - - (450) (450)
Total real estate acquired through
foreclosure 32 $6,242 $ (889) $5,353
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 June 30, 1996, such potential problem loans that are not included in the
above tables as nonperforming amounted to approximately $5.6 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
(i) represent or result from trends or uncertainties that management reasonably
expects will materially impact future operating results, liquidity or capital
resources or (ii) 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 fiscal year 1996, the Company modified the financing for a strip
shopping center located in Marietta, Georgia. Prior to June 30, 1995, management
had been 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 the
current 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.
Management subsequently reached an agreement with the owners to accept the net
proceeds from the sale of the project to a third party. The transaction was
concluded in August 1995 and resulted in a charge-off 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.
32
<PAGE>
NEW ACCOUNTING STANDARDS
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. The Company adopted
SFAS 122 effective July 1, 1996. The new accounting standard has had no material
adverse effect on the Company's operations or financial condition.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation", was
issued. SFAS 123 prescribes accounting and reporting standards for all
stock-based compensation plans. The new standard allows companies to continue to
follow present accounting rules which often result in no compensation expense
being recorded or to adopt the SFAS 123 fair-value-based method. The
fair-value-based method will generally result in higher compensation expense
based on the estimated fair value of stock-based awards on the grant date.
Companies electing to continue following present accounting rules will be
required to provide pro-forma disclosures of net earnings and earnings per share
as if the fair-value-based method had been adopted. The Company intends to
continue following present accounting rules and to implement the new disclosure
requirements in fiscal year 1997 as required. The adoption of SFAS, therefore,
will not impact the financial condition and results of operations of the
Company.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued. The new
standard is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Specific transition provisions apply to servicing contracts in existence before
January 1, 1997 and certain financial assets subject to prepayment. SFAS 125
provides accounting and reporting standards based on consistent application of
the "financial-components approach" that focuses on control. Under the approach,
after a transfer of assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. It provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Implementation guidance is provided for assessing isolation of transferred
assets and for accounting for transfers of partial interests, servicing of
financial assets, securitizations, transfers of sales-type and direct financing
lease receivables, securities lending transactions, repurchase agreements,
including "dollar rolls", "wash sales", loan syndications and participations,
risk recourse, and extinguishments of liabilities. The Company's adoption of
SFAS 125 is not expected to have a material adverse effect on the financial
condition and results of operations of the Company.
Impact of Inflation and Changing Prices. The consolidated financial statements
and related data presented in this Annual 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.
33
<PAGE>
STANDARDS OF FINANCIAL REPORTING
The accompanying consolidated financial statements of Virginia First Financial
Corporation and subsidiaries ("the Company") have been prepared by management.
Management is responsible for the accuracy and reliability of the financial
statements presented in this Annual Report. These statements have been prepared
in conformity with generally accepted accounting principles appropriate in the
circumstances and, of necessity, include certain amounts that are based on
management's best judgments and estimates. Also, management is responsible for
the consistency of all representations and financial information contained in
this Annual Report.
Management depends upon the Company's system of internal accounting controls
in meeting its responsibility for reliable financial information. There are
inherent limitations in the effectiveness of any system of internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even an effective internal control system can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of an internal
control system may vary over time. The internal control system contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
Due regard has been given to maintaining an appropriate balance between the
costs of the internal control structure and the benefits derived.
The Company's year-end financial statements are audited by KPMG Peat Marwick
LLP. The annual audit includes consideration of the Company's internal controls
to the extent required by generally accepted auditing standards in establishing
the scope of their audit of the financial statements.
The Audit Committee of the Board of Directors, to whom the internal auditor
reports, is comprised entirely of directors who are not officers or employees of
Virginia First Financial Corporation or its subsidiaries. The committee meets
periodically with the independent auditors, the internal auditor and management
to discuss planned audit scope and results, internal accounting control and
financial reporting matters and to ensure that each is properly discharging its
responsibilities. Both the independent auditors and the internal auditor have
free access to the committee, without management being present, to discuss
appropriate matters.
/s/ CHARLES A. PATTON /s/ STEPHEN R. KINNIER
------------------ -------------------
Charles A. Patton Stephen R. Kinnier
President and Senior Vice President
Chief Executive Officer and Chief Financial Officer
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Virginia First Financial Corporation
Petersburg, Virginia
We have audited the accompanying consolidated statements of financial
condition of Virginia First Financial Corporation and subsidiaries (the
"Company") as of June 30, 1996 and 1995, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the financial position of Virginia
First Financial Corporation and subsidiaries at June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1996 in conformity with generally accepted
accounting principles.
Effective June 30, 1994, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
August 2, 1996
35
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(In thousands, except share data) June 30 1996 1995
<S> <C>
ASSETS
Cash and cash equivalents (includes interest bearing deposits of
$12,270 in 1996 and $6,218 in 1995) $ 24,575 $ 16,638
Investment securities (fair value $12,663 in 1996
and $23,062 in 1995) (note 2) 12,663 23,090
Mortgage-backed securities and collateralized mortgage obligations
(fair value $15,702 in 1996 and $9,383 in 1995) (notes 3 and 8) 15,694 9,371
Loans receivable held for investment, net (notes 4 and 9) 615,554 580,507
Loans receivable held for sale 46,481 35,542
Real estate owned, net (note 5) 5,353 3,256
Accrued interest receivable, net (notes 2, 3 and 4) 5,292 4,117
Federal Home Loan Bank stock, at cost (note 9) 6,998 7,333
Office properties and equipment, net (note 6) 8,780 8,867
Other assets 5,477 4,828
Total assets $ 746,867 $ 693,549
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 7) $ 573,536 $ 503,667
Notes payable and other borrowings (note 8) 639 557
Advances from Federal Home Loan Bank (note 9) 102,052 134,658
Advance payments by borrowers for taxes and insurance 2,169 2,254
Accrued interest payable 716 934
Accrued expenses and other liabilities 6,759 2,707
Total liabilities 685,871 644,777
Stockholders' equity (notes 10, 11, and 13):
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 5,740,503 shares in 1996 and 5,569,636 shares in 1995 5,740 5,570
Additional paid-in capital 8,439 8,078
Retained earnings-substantially restricted 46,943 35,219
Net unrealized loss on securities available for sale (126) (95)
Total stockholders' equity 60,996 48,772
Commitments and contingencies (notes 6, 10, 12, and 15)
Total liabilities and stockholders' equity $ 746,867 $ 693,549
</TABLE>
See accompanying notes to consolidated financial statements
36
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data) Years Ended June 30 1996 1995 1994
<S> <C>
INTEREST INCOME
Loans receivable $ 56,368 $ 50,685 $ 40,387
Mortgage-backed securities and
collateralized mortgage obligations 563 665 836
Investment securities 1,416 1,711 872
Other interest-earning assets 694 464 308
Total interest income 59,041 53,525 42,403
INTEREST EXPENSE
Deposits (note 7) 26,333 20,679 17,674
Borrowings 5,989 6,952 3,513
Total interest expense 32,322 27,631 21,187
Net interest income 26,719 25,894 21,216
Provision for loan losses (note 4) 2,429 1,390 1,090
Net interest income after provision for loan losses 24,290 24,504 20,126
NONINTEREST INCOME
Gain on sale of loans and securitized loans, net 2,865 897 4,820
Loan servicing income 3,056 3,186 2,606
Gain on sale of loan servicing rights 6,847 14 2,014
Gain (loss) on sale of investment securities (note 2) 4 (103) (17)
Loss on sale and revaluation of mortgage-backed securities
and collateralized mortgage obligations (note 3) -- (37) (19)
Financial service fees 2,293 2,028 1,668
Gain on sale of real estate owned 279 282 170
Loss on revaluation of real estate owned (note 5) (777) (192) (277)
Other 346 375 913
Total noninterest income 14,913 6,450 11,878
NONINTEREST EXPENSE
Personnel 10,188 9,802 12,418
Occupancy, net 1,594 1,451 1,335
Equipment 1,216 1,125 973
Advertising 366 269 246
Federal deposit insurance premiums 1,173 1,047 1,094
Data processing 1,753 1,515 1,599
Amortization of intangibles 247 247 369
Other 3,492 2,956 3,308
Total noninterest expense 20,029 18,412 21,342
Earnings before income tax expense 19,174 12,542 10,662
Income tax expense (note 10) 7,032 4,992 3,681
Net earnings $ 12,142 $ 7,550 $ 6,981
Net earnings per share (note 11) $ 2.09 $ 1.33 $ 1.25
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(In thousands, except share data) Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Retained Loss on
Additional Earnings - Securities Total
Common Stock Paid-in Substantially Available Stockholders'
Shares Amount Capital Restricted for Sale Equity
<S> <C>
Balance, June 30, 1993 5,250,948 $5,250 $7,876 $ 21,386 $ -- $ 34,512
Net earnings -- -- -- 6,981 -- 6,981
Cash dividends ($.05 per share) -- -- -- (263) -- (263)
Common stock issued due to
exercise of stock options 116,500 118 91 (59) -- 150
Cumulative effect of change
in accounting for securities
available for sale, net of
income taxes of $183 -- -- -- -- (301) (301)
Balance, June 30, 1994 5,367,448 5,368 7,967 28,045 (301) 41,079
Net earnings -- -- -- 7,550 -- 7,550
Cash dividends ($.05 per share) -- -- -- (275) -- (275)
Common stock issued due to
exercise of stock options 202,188 202 111 (101) -- 212
Change in net unrealized
loss on securities
available for sale, net of
income taxes of $125 -- -- -- -- 206 206
Balance, June 30, 1995 5,569,636 5,570 8,078 35,219 (95) 48,772
Net earnings -- -- -- 12,142 -- 12,142
Cash dividends ($.07 per share) -- -- -- (395) -- (395)
Common stock issued due to
exercise of stock options 145,370 145 179 (10) -- 314
Common stock issued under
incentive compensation plan 25,314 25 180 (13) -- 192
Common stock issued under
dividend reinvestment
and stock purchase plan 183 -- 2 -- -- 2
Change in net unrealized
loss on securities
available for sale, net of
income taxes of $19 -- -- -- -- (31) (31)
Balance, June 30, 1996 5,740,503 $5,740 $8,439 $ 46,943 $(126) $ 60,996
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1996 1995 1994
<S> <C>
OPERATING ACTIVITIES
Net earnings $ 12,142 $ 7,550 $ 6,981
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,143 1,044 1,068
Provision for loan losses and losses on real estate
owned 3,206 1,582 1,367
Loans and securitized loans held for sale:
Originations and purchases (386,178) (231,122) (655,261)
Gain on sales (2,865) (911) (5,043)
Proceeds from sales 378,104 224,434 732,173
Losses (gains) on securities available for sale (4) 103 99
Increase in other assets (1,716) (3,281) (1,212)
(Increase) decrease in accrued expenses and other
liabilities 3,834 228 (615)
Other net 506 383 (619)
Net cash provided by operating activities 8,172 10 78,938
INVESTING ACTIVITIES
Net increase in loans receivable held for investment (42,850) (97,343) (121,959)
Mortgage-backed securities:
Purchases (9,938) -- (5,264)
Net proceeds from sales of available for sale securities -- -- 8,797
Principal collected 3,525 2,609 7,888
Investment securities:
Purchases (17,438) (13,757) (33,123)
Net proceeds from sales of available for sale securities3,974 7,252 21,334
Principal collected 23,485 3,137 --
Proceeds from sale of real estate owned 2,439 1,896 1,681
Office properties and equipment:
Purchases (818) (1,030) (2,625)
Proceeds from sales 13 1 1
Net cash used in investing activities (37,608) (97,235) (123,270)
FINANCING ACTIVITIES
Net increase (decrease) in savings, checking and
money market deposit accounts 18,194 (48,778) 2,783
Net increase (decrease) in certificates of deposit 51,675 95,725 (294)
Borrowings resulting from:
Securities sold under agreements to repurchase 5,962 18,661 11,300
Advances from Federal Home Loan Bank 292,544 185,478 171,87
Other 13,379 12,745 11,615
Repayments of borrowings attributable to:
Securities sold under agreements to repurchase (5,962) (18,661) (11,300)
Advances from Federal Home Loan Bank (325,150) (130,692) (158,000)
Other (13,297) (12,738) (11,703)
Net increase (decrease) in mortgage escrow funds (85) 308 116
Proceeds from issuance of common stock 508 212 150
Cash dividends paid (395) (275) (263)
Net cash provided by financing activities 37,373 101,985 16,276
Net increase (decrease) in cash and cash equivalents 7,937 4,760 (28,056)
Cash and cash equivalents at beginning of year 16,638 11,878 39,934
Cash and cash equivalents at end of year $ 24,575 $ 16,638 $ 11,878
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments of interest $ 33,972 $ 27,154 $ 21,111
Cash payments of income taxes $ 4,782 $ 4,924 $ 3,702
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Virginia First Financial Corporation and its wholly-owned subsidiaries (the
"Company"). Virginia First Financial Corporation (the "Parent Company") was
incorporated in Virginia in 1993 to serve as the holding company for Virginia
First Savings Bank (the "Savings Bank").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Description of Business
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. All of the retail banking offices are located in
Virginia, while the mortgage loan origination offices are in Virginia and
Maryland. 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.
Use of Estimates
Generally accepted accounting principles require management to make estimates
and assumptions when preparing financial statements. Actual results could differ
from those estimates.
Investment Securities and Mortgage-Backed Securities
The Company classifies its debt and marketable equity securities as either
held to maturity, available for sale or trading.
Securities classified as "held to maturity" are stated at cost and adjusted
for amortization of premiums or accretion of discounts using the level yield
method. The carrying value of these assets is not adjusted for temporary
declines in fair value since the Company has the positive intent and ability to
hold them to their maturities.
Securities classified as "available for sale" are stated at fair value with
unrealized holding gains and losses excluded from earnings and reported as a net
amount, net of related income taxes, as a separate component of stockholders'
equity until realized. Such identification as available for sale is made at time
of purchase. Adjustments to fair value, below amortized or accreted cost, that
are deemed other than temporary are charged to earnings resulting in the
establishment of a new cost basis. Realized gains and losses are derived using
the specific identification method for determining the cost of securities sold.
Securities classified as "trading" are stated at fair value. Unrealized
holding gains and losses for trading securities are included in earnings.
Mortgage-backed securities are comprised of mortgage participation
certificates guaranteed by the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC"), and also include
Collateralized Mortgage Obligations ("CMO").
The Company's investment in the stock of the Federal Home Loan Bank ("FHLB")
of Atlanta is stated at cost.
40
<PAGE>
Loans Receivable
Loans receivable held for investment consist primarily of long-term real
estate loans secured by first deeds of trust on single family residences, other
residential property and commercial property located predominantly in the states
of Virginia and Maryland. Loans receivable held for investment are recorded at
cost. The Company has the positive intent and ability to hold these loans to
maturity. Discounts and premiums on purchased loans are amortized over their
estimated remaining lives using the level yield method. Interest on loans is
recognized based on the level yield method.
The Company defers loan origination and commitment fees, net of certain direct
loan origination costs. The net deferred fees or costs are amortized into
interest income over the lives of the related loans as yield adjustments. Any
unamortized fees or costs on loans fully repaid or sold are recognized in
earnings in the year of repayment or sale. Deferred fees on permanent
adjustable-rate loans are amortized into income over the period necessary to
adjust the yield on the loans to market rates using the level yield method.
At the time of origination or purchase, the Company identifies loans
receivable which may be sold prior to maturity. These loans have been classified
as held for sale and are recorded at the lower of cost, adjusted for
amortization of premiums and accretion of discounts, or market value.
Adjustments to market value, below amortized or accreted cost are reflected in
the consolidated statements of operations as gains and losses on the sale of
loans held for sale. Gain or loss on the sale of loans is based on the specific
identification method.
Loan Sales and Servicing
The Company sells loans receivable on an individual loan basis or securitizes
loans through the creation of FNMA and FHLMC mortgage-backed securities. The
securities created by securitized loans originated by the Company are
immediately sold to various investors. In the event the Company holds such a
security as of the end of an accounting period, it is treated as a trading
security and is recorded at fair value with unrealized holding gains and losses
included in earnings.
When the Company sells loans and securitized loans it recognizes both a cash
and a present value gain or loss. A cash gain or loss is recognized to the
extent that the sale proceeds of the mortgage loans or loan participations sold
exceed or are less than the book value at the time of sale. A present value gain
or loss is calculated based on the difference between the loan interest rate and
the net yield to the investor excluding a normal loan servicing fee and
considering estimated prepayments on such loans. Capitalized excess servicing,
resulting from sales of loans, represents the present value of the difference
between the interest rate charged to the borrower and the interest rate paid to
the investor over the estimated lives of the loans, after deducting a normal
servicing fee and, in the case of mortgage-backed securities, an agency
guarantee fee. Capitalized excess servicing is amortized against loan servicing
income using a method that approximates the interest method over the life of the
related loans, adjusted for estimated prepayments. Actual prepayment experience
is reviewed periodically and the capitalized excess servicing is adjusted, if
necessary. Other adjustments to the carrying value of capitalized excess
servicing are charged against the gain on sale of loans receivable held for
sale. Fees for servicing loans for investors are recorded when earned. Loan
servicing costs are charged to expense as incurred.
Nonaccrual of Interest
The Company places loans on a nonaccrual status after being more than ninety
days delinquent, or earlier in situations in which the loans have developed
inherent problems that indicate payment of principal and/or interest will not be
made in full. Whenever the accrual of interest is stopped, previously accrued
but uncollected interest income is reversed. Thereafter, interest is recognized
only as cash is received. The loan is reinstated to an accrual basis after it
has been brought current as to principal and interest under the contractual
terms of the loan.
41
<PAGE>
Valuation Allowances
It is management's policy to establish allowances for estimated losses on
loans and real estate owned. These allowances are based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are reported in
operations in the periods in which they become known.
The Company has implemented and adheres to an internal asset review system and
loan loss methodology designed to detect problem assets and provide for an
adequate allowance for loan losses inherent in its portfolio. Provisions for
loan losses are charged to operations when, based upon management's evaluation
of various factors, such as historical loss experience, independent appraisals,
current economic conditions, and the financial condition of borrowers, it is
determined that the investment in such assets is greater than the estimated fair
value of the underlying collateral.
Impaired Loans
Effective July 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114") and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures". SFAS 114, as amended
by SFAS 118, requires that an impaired loan be measured based upon the present
value of expected future cash flows discounted at the effective interest rate of
the loan, or at the fair value of the collateral if the loan is collateral
dependent. 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. The initial adoption of SFAS 114 and 118 did not require an
addition to the allowance for loan losses. Interest income is recognized on the
cash basis for impaired loans.
Securities Sold Under Agreements to Repurchase
The Company periodically enters into sales of securities under agreements to
repurchase. Fixed-coupon agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as a liability in the
consolidated statements of financial condition. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are typically delivered to the dealers who arrange the
transactions. The dealers may have sold, loaned, or otherwise disposed of such
securities to other parties in the normal course of their operations, and have
agreed to resell the Company identical or substantially the same securities at
the maturities of the agreements. There were no such agreements in effect at
June 30, 1996 or 1995.
Financial Options and Forward Sales Contracts
Premiums relating to options transactions consummated in an effort to reduce
the Company's interest rate risk (hedged transactions) are recorded as an
adjustment to the underlying asset or liability. For other financial options,
premiums are recorded as income or expense upon expiration of the option, and
the underlying option contract is marked to market during the term of the
option.
The Company enters into forward contracts for the sale of mortgage-backed
securities for the purpose of hedging its portfolio of closed loans held for
sale and its pipeline of loans expected to close. As loans are closed, they are
typically pooled, securitized and the resulting securities are delivered to
national securities firms at prices specified in the forward contracts. Gains or
losses may arise if the yields of the loans delivered vary from those specified
in the forward contracts. Unrealized gains and losses on the contracts are
included in cost values used in adjusting the carrying value of loans held for
sale to the lower cost or market value. Realized gains or losses and adjustments
to the lower of cost or market value are included in gain on sale of loans and
securitized loans in the consolidated statements of operations.
42
<PAGE>
Real Estate Owned
Real estate owned was acquired through foreclosure or by deed in lieu of
foreclosure and is recorded at the lower of cost, or fair value less estimated
costs to sell, at the time of acquisition. Specific valuation allowances on real
estate owned are recorded through a charge to earnings if there is a further
deterioration in fair value. Costs relating to development and improvement of
real estate are capitalized, whereas those related to holding the real estate
are expensed as incurred. Recognition of gains on sale of real estate is
dependent upon the transaction meeting certain criteria relating to the nature
of property sold and the terms of the sale. Under certain circumstances, the
gain, or a portion thereof, is deferred until the necessary criteria are met.
Depreciation and Amortization
Office properties and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the respective assets. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of their estimated useful lives or the term of the lease. Estimated
useful lives are five to ten years for furniture, fixtures, equipment and
vehicles and ten to 33 years for buildings and improvements.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect of deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date.
Excess of Cost Over Fair Value of Tangible Net Assets Acquired
Included in other assets is the excess of cost over the estimated fair value
of tangible net assets acquired in business combinations and branch purchases
totalling $1,983,000 and $2,168,000 at June 30, 1996 and 1995, respectively.
Such amounts are amortized using the straight-line method over the periods
estimated to be benefited, 11 years for identifiable intangibles and 15 to 20
years for unidentifiable intangibles.
Cash and Cash Equivalents
The Company considers cash on hand, amounts due from banks, certificates of
deposit, and federal funds sold as cash equivalents.
Reclassifications
Certain amounts in the consolidated financial statements for fiscal years 1995
and 1994 have been reclassified to conform to classifications adopted in fiscal
year 1996.
43
<PAGE>
2. INVESTMENT SECURITIES
The amortized cost, fair value and gross unrealized gains and losses of the
Company's investment securities are as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C>
June 30, 1996
Held to maturity: Municipal bonds $ 6,278 $ - $ - $ 6,278
Available for sale: FHLB notes 6,440 - 55 6,385
Total 12,718 $ - $ 55 $12,663
Available for sale net unrealized loss (55)
$12,663
June 30, 1995
Held to maturity:
FHLB notes $13,500 $ - $ 56 $13,444
FHLB bonds 1,960 28 - 1,988
Municipal bonds 7,630 - - 7,630
Total $23,090 $ 28 $ 56 $23,062
</TABLE>
Investment securities with an amortized cost of $1,900,000 were pledged as
of June 30, 1995; none were pledged as of June 30, 1996. There was $198,000 and
$354,000 interest receivable on investment securities at June 30, 1996 and 1995,
respectively.
The table below shows the maturities or expected principal repayments of
investment securities at June 30, 1996 (in thousands):
Amortized Fair
Cost Value
Held to maturity:
Within one year $ 208 $ 208
After one but within five years 1,250 1,250
After five but within ten years 1,561 1,561
After ten years 3,259 3,259
Total held to maturity 6,278 6,278
Available for sale:
After one but within five years 1,972 1,947
After five but within ten years 4,468 4,438
Total available for sale 6,440 6,385
Total $12,718 $12,663
Proceeds from the sale of investment securities available for sale during
fiscal year 1996 were $3,974,000 resulting in gross gains of $4,000. Proceeds
from such sales during fiscal year 1995 were $7,252,000 resulting in gross
losses of $103,000, and proceeds from such sales during fiscal year 1994 were
$21,334,000 resulting in gross gains of $21,000 and gross losses of $38,000.
Included in the proceeds from the sale of securities for fiscal years 1995 and
1994 were proceeds from sales of positions in an adjustable rate mortgage mutual
fund of $7,252,000 and $21,124,000, respectively.
44
<PAGE>
3. MORTGAGE-BACKED SECURITIES
The amortized cost, fair value, and gross unrealized gains and losses of the
Company's mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C>
June 30, 1996
Held to maturity: FHLMC $ 374 $ 8 $ -- $ 382
Available for sale:
FNMA 3,066 -- 15 3,051
CMO 12,402 -- 13 12,269
Total available for sale 15,468 -- 148 15,320
Total 15,842 $ 8 $148 $15,702
Available for sale net unrealized loss (148)
$15,694
June 30, 1995
Held to maturity:
FHLMC $ 379 $12 $ -- $ 391
Other 214 -- -- 214
Total held to maturity 593 12 -- 605
Available for sale:
FNMA 3,616 -- 31 3,585
CMO 5,315 -- 122 5,193
Total available for sale 8,931 -- 153 8,778
Total 9,524 $12 $153 $ 9,383
Available for sale net unrealized loss (153)
$ 9,371
</TABLE>
The effective yield at June 30, 1996 on the CMOs that will be used to accrue
interest income in fiscal year 1997 was 6.39%.
Interest receivable on mortgage-backed securities was $80,000 and $50,000 at
June 30, 1996 and 1995, respectively. Mortgage-backed securities in the amount
of $2,381,000 and $5,705,000 have been pledged as collateral for certain deposit
liabilities as of June 30, 1996 and 1995, respectively.
45
<PAGE>
The table below shows the maturities or expected principal repayments of
mortgage-backed securities at June 30, 1996 (in thousands):
Amortized Fair
Cost Value
Held to maturity:
Within one year $ 63 $ 65
After one but within five years 251 257
After five but within ten years 60 60
Total held to maturity 374 382
Available for sale:
Within one year 1,339 1,330
After one but within five years 3,523 3,500
After five but within ten
years 893 886
After ten years 9,713 9,604
Total available for sale 15,468 15,320
Total $15,842 $15,702
No mortgage-backed securities available for sale were sold during fiscal years
1996 and 1995. Proceeds from sales of such securities during fiscal year 1994
were $8,797,000 resulting in gross gains of $36,000. Additionally,
mortgage-backed securities held to maturity were written down by a net $37,000,
and $55,000 in fiscal years 1995 and 1994, respectively, to reflect other than
temporary declines in value.
4. LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment are summarized as follows:
(In thousands) June 30 1996 1995
First mortgage loans:
Residential $347,640 $331,055
Commercial 48,722 60,308
Construction 121,375 110,117
Total first mortgage loans 517,737 501,480
Second mortgage loans 47,434 39,826
Loans on savings accounts 1,691 1,363
Installment loans 59,185 48,458
Gross loans 626,047 591,127
Less:
Unearned discount 301 1,361
Deferred income 2,665 2,886
Allowance for loan losses 7,527 6,373
Total adjustments 10,493 10,620
Total loans $615,554 $580,507
At June 30, 1996 and 1995, there were 87 and 63 mortgage loans held for
investment with unpaid principal balances totaling $9,603,000 and $8,742,000,
respectively, that were contractually delinquent as to principal or interest for
ninety days or more. The Company also had commercial real estate loans totalling
$8,354,000 at June 30, 1995, the terms of which had previously been modified by
reducing the interest rate or extending the payment period because of credit
deterioration of the borrowers. These loans were reclassified as performing
loans as of September 30, 1995. As of June 30, 1996,
46
<PAGE>
the Company had no restructured loans subject to special reporting rules. There
were no material commitments to lend additional funds to customers whose loans
were classified as non-performing at June 30, 1996.
Construction loans and commercial real estate mortgage loans on which the
recognition of interest has been discontinued amounted to $4,574,000 at June 30,
1996, $5,327,000 at June 30, 1995 and $2,718,000 at June 30, 1994. Interest
income that would have been recorded under the original terms of such loans and
the interest income actually recognized for the past three fiscal years are
summarized below:
(In thousands) Years Ended June 30 1996 1995 1994
Interest income that would have been recorded $411 $583 $239
Interest income recognized 207 378 88
Interest income foregone $204 $205 $151
Interest due on first mortgage loans held for investment sixty days or more
delinquent at June 30, 1996 and 1995 amounted to $626,000 and $526,000,
respectively. An allowance of $549,000 and $499,000 at June 30, 1996 and 1995,
respectively, was provided for the potential loss of interest on such mortgage
loans contractually delinquent for more than ninety days.
Net interest receivable on all loans held for investment and sale totalled
$4,909,000 and $3,596,000 at June 30, 1996 and 1995, respectively.
At June 30, 1996, 1995, and 1994, the amounts of loans serviced for the
benefit of others was $27,836,000, $745,693,000, and $705,265,000, respectively.
Non-cash additions to mortgage loans in connection with sales of real estate
owned totalled $3,408,000, $908,000, and $4,359,000 in fiscal years 1996, 1995
and 1994, respectively.
Activity in the allowance for losses on installment loans and real estate
loans is summarized as follows:
Real
Installment Estate
(In thousands) Loans Loans Total
Balance, June 30, 1993 $ 580 $4,036 $4,616
Provision 422 668 1,090
Charge-offs (71) (68) (139)
Recoveries 44 - 44
Balance, June 30, 1994 975 4,636 5,611
Provision 396 994 1,390
Charge-offs (205) (467) (672)
Recoveries 44 - 44
Balance, June 30, 1995 1,210 5,163 6,373
Provision 336 2,093 2,429
Charge-offs (257) (1,079) (1,336)
Recoveries 61 - 61
Balance, June 30, 1996 $1,350 $6,177 $7,527
47
<PAGE>
At June 30, 1996 and July 1, 1995, the recorded investment in loans which have
been identified as impaired, in accordance with SFAS 114, totalled $5,134,000
and $5,327,000, respectively. SFAS 114 does not apply to larger groups of
homogenous loans such as consumer installment and residential mortgage loans,
which are collectively evaluated for impairment. 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 at June 30, 1996 were comprised of
$3,048,000 of commercial loans and $2,086,000 of construction loans. None of the
Company's impaired loans had a valuation allowance at June 30, 1996. All
impaired loans were measured based on the fair value of the collateral.
For the year ended June 30, 1996, the average recorded investment in impaired
loans was $4,703,000. Total interest income recognized on impaired loans was
$458,000, all of which was recognized on a cash basis.
5. REAL ESTATE OWNED, NET
Real estate owned is summarized as follows:
(In thousands) June 30 1996 1995
Residential properties $4,323 $2,682
Commercial properties 1,919 1,211
6,242 3,893
Less allowance for losses (889) (637)
Total real estate owned, net $5,353 $3,256
Activity in the allowance for losses on real estate owned is summarized as
follows:
Residential Commercial
(In thousands) Properties Properties Total
Balance, June 30, 1993 $ 350 $1,784 $2,134
Provision 303 (26) 277
Charge-offs (225) (1,571) (1,796)
Balance, June 30, 1994 428 187 615
Provision 152 40 192
Charge-offs (170) - (170)
Balance, June 30, 1995 410 227 637
Provision 771 6 777
Charge-offs (404) (121) (525)
Balance, June 30, 1996 $ 777 $ 112 $ 889
Non-cash additions to real estate owned were $8,721,000, $2,349,000, and
$4,834,000 in the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
48
<PAGE>
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment are summarized as follows:
(In thousands) June 30 1996 1995
Land $ 2,275 $ 2,275
Buildings and improvements 7,589 7,470
Furniture, fixtures and equipment 5,155 4,509
Vehicles 128 123
15,147 14,377
Less accumulated depreciation and amortization (6,367) (5,510)
Total $ 8,780 $ 8,867
Depreciation and amortization expense on office properties and equipment
totaled $896,000, $797,000, and $699,000 for the years ended June 30, 1996,
1995 and 1994, respectively.
The Company occupies certain properties under long-term operating lease
agreements. Rental expenses under these agreements approximated $594,000,
$578,000, and $564,000 for fiscal years 1996, 1995 and 1994, respectively.
Scheduled minimum rental payments on these noncancelable long-term operating
lease commitments at June 30, 1996 were as follows (in thousands):
Minimum
Year Ending Rental
June 30 Payments
1997 $ 513
1998 329
1999 335
2000 273
2001 228
Later years 1,925
Total $ 3,603
7. DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
(In thousands) June 30 1996 1995
Weighted Weighted
Average Range of Average Range of
Interest Interest Interest Interest
Cost Rate Rates Cost Rate Rates
<S> <C>
Checking accounts $ 69,878 1.14% 0.00%-5.00% $ 77,979 2.07% 0.00%-5.00%
Money market deposit accounts 67,248 4.28 2.45%-4.50% 38,429 4.19 2.45%-4.35%
Savings deposits 68,824 3.35 1.00%-3.50% 71,347 3.41 2.50%-3.50%
Certificates 367,586 5.77 2.25%-9.50% 315,912 5.91 2.60%-9.50%
Total deposits $573,536 4.74% $503,667 4.83%
</TABLE>
49
<PAGE>
Money market deposit accounts include $7,878,000 and $8,384,000 at June 30,
1996 and 1995, respectively, of accounts placed by a regional stockbrokerage
company for the benefit of its customers. At June 30, 1996 and 1995,
respectively, 2.54% and 2.28% of deposits were from outside the State of
Virginia.
Scheduled maturities of certificates of deposit at June 30, 1996 were as
follows (in thousands):
Year Ending
June 30 Amount
1997 $232,176
1998 59,118
1999 22,435
2000 42,313
2001 9,705
Later years 1,839
Total $367,586
Certificates of deposit with balances greater than $100,000 at June 30, 1996
and 1995 were $46,779,000 and $39,808,000, respectively. A summary of such
certificates of deposit by maturity at June 30,1996 follows (in thousands):
Amount
Within three months $ 9,328
After three but within six months 7,592
After six but within twelve months 13,519
After twelve months 16,340
Total $46,779
Interest expense on deposits is summarized as follows:
(In thousands) Years Ended June 30 1996 1995 1994
Checking and money market deposit accounts $ 3,376 $ 3,082 $ 3,128
Savings deposits 2,349 3,087 3,459
Certificates 20,608 14,510 11,087
Total interest expense on deposits $26,333 $20,679 $17,674
50
<PAGE>
8. NOTES PAYABLE AND OTHER BORROWINGS
At June 30, 1996 and 1995, notes payable and other borrowings consisted of
U.S. Treasury tax and loan notes, collateralized by FNMA and FHLMC participation
certificates. At June 30, 1996, the FNMA and FHLMC participation certificates
had an aggregate carrying value of $672,000 and a fair value of $688,000.
During the fiscal years ended June 30, 1996, 1995 and 1994, the Company sold
securities under agreements to repurchase. The securities were surrendered to a
financial intermediary during the periods in which the repurchase agreements
were in effect. However, there were no outstanding obligations to repurchase
securities as of June 30, 1996 or 1995. Selected information on agreements to
repurchase follows:
(In thousands)
Daily Maximum Amount Weighted Average
Years Average Amount Outstanding at Interest Rate
Ended Outstanding Any Month-End For the
June 30 For the Year During the Year Year
1996 $ 16 $ - 5.35%
1995 8,547 13,996 6.04
1994 463 2,741 4.56
Interest expense on notes payable and other borrowings totalled $21,000,
$538,000, and $39,000 in fiscal years 1996, 1995 and 1994, respectively.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank ("FHLB") of Atlanta are summarized
below by maturity date:
<TABLE>
<CAPTION>
(In thousands)
Due in Years June 30, 1996 June 30, 1995
Ending June 30 Amount Interest Rates Amount Interest Rates
<S> <C>
1996 $ - - $113,750 4.60% - 8.55%
1997 60,000 5.47% - 7.15% 9,000 6.39% - 7.15%
1998 2,500 5.26% 2,500 5.26%
1999 25,000 4.75% - -
2000 6,500 5.79% - 7.20% 6,500 5.79% - 7.20%
Later years 8,052 2.00% - 6.23% 2,908 2.00% - 6.10%
Total $102,052 $134,658
Weighted Average
Interest Rate 5.55% 6.40%
</TABLE>
At June 30, 1996, the Company has pledged its FHLB stock and qualifying
residential loans with an aggregate balance of $230,888,000 as collateral for
such Federal Home Loan Bank advances under a specific collateral agreement.
Interest is computed based on the lender's prime rate of interest and the cost
of overnight funds.
Interest expense on FHLB advances totalled $5,968,000, $6,414,000, and
$3,474,000 in the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
51
<PAGE>
10. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
(In thousands) Years Ended June 30 1996 1995 1994
Current: Federal $6,949 $4,480 $3,213
State 823 495 677
Total current 7,772 4,975 3,890
Deferred: Federal (630) 14 (176)
State (110) 3 (33)
Total deferred (740) 17 (209)
Total: Federal 6,319 4,494 3,037
State 713 498 644
Total $7,032 $4,992 $3,681
The differences between the statutory federal income tax rate and the effective
rate of income tax are as follows:
Years Ended June 30 1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest (0.4) (0.6) (0.7)
State income taxes 2.6 2.7 4.1
Other (0.5) 2.7 (3.9)
Effective income tax rate 36.7% 39.8% 34.5%
Fiscal year 1996 and 1994 income tax expense have been reduced by tax refunds of
$154,000 and $316,000, respectively, related to the fiscal year ended June 30,
1980.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and 1995 are as follows:
(In thousands) June 30 1996 1995
Deferred tax assets:
Allowance for loan losses $2,061 $1,618
Deferred compensation 907 663
Other, net 112 92
Total gross deferred tax assets 3,080 2,373
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 270 388
Depreciation and amortization 350 377
Deferred loan fees 544 386
Other, net 561 607
Total gross deferred tax liabilities 1,725 1,758
Net deferred tax asset $1,355 $ 615
52
<PAGE>
The Company believes that a valuation allowance with respect to the
realization of the total gross deferred tax assets is not necessary. Based on
the Company's historical earnings, future expectations of taxable income and the
reversal of gross deferred tax liabilities and potential net operating loss
carrybacks, management believes it is more likely than not that the Company will
realize the gross deferred tax assets existing at June 30, 1996. However, there
can be no assurances that the Company will generate taxable income in any future
period or that the reversal of temporary differences attributable to gross
deferred tax liabilities will occur during the future tax periods as currently
expected.
The Company has qualified under provisions of the Internal Revenue Code that
permit it to deduct from taxable income a provision for bad debts based on
either a percentage of taxable income or an experience formula. In determining
its income tax bad debt deduction, the Company used the percentage of taxable
income method in fiscal years 1996 and 1995, and used the experience method in
fiscal year 1994. The percentage of taxable income and experience methods are
not available after fiscal year 1996; instead, bad debts after fiscal year 1996
will be deductible at the time they are charged-off. The retained earnings at
June 30, 1996 and 1995 are deemed to include approximately $7,249,000 of bad
debt reserves for income tax purposes for which deferred tax has not been
provided and which would be subject to tax if removed from such status for
purposes other than absorbing losses. As of June 30, 1996, the Company does not
expect that this portion of retained earnings will be used in a manner that will
create any additional income tax liability.
11. STOCKHOLDERS' EQUITY
On November 17, 1995, the Company issued a two-for-one stock split in the form
of a 100% common stock dividend (the "stock split"). This transaction resulted
in the issuance of 2,807,725 additional shares of common stock. All share and
per share data in these consolidated financial statements have been restated to
reflect the stock split.
The Company has adopted three incentive plans to assist in the recruitment and
retention of managers and other key full-time employees. The Company adopted the
Incentive Stock Option Plan in fiscal year 1985 and the Key Employee Stock
Compensation Program in fiscal year 1987. All of the shares authorized by these
two plans have previously been granted. During fiscal year 1993, the Company
adopted the 1992 Incentive Plan authorizing the issuance of up to 375,000
shares. The plan was amended in fiscal year 1995 to add 300,000 shares. During
fiscal year 1994, options to purchase 228,000 shares were granted under the
plan. During fiscal year 1996, 25,314 shares of restricted stock were issued,
leaving 421,686 shares still available under the plan for grant or issuance. The
option prices under these plans equaled the market values of the Company's stock
at the dates of grant, and the options became immediately exercisable with
expiration ten years after the dates of grant.
Information regarding shares subject to outstanding options follows:
<TABLE>
<CAPTION>
Years Ended June 30 1996 1995 1994
Number Number Number
of Grant of Grant of Grant
Shares Price Shares Price Shares Price
<S> <C>
Beginning of year 363,350 $1.17-7.00 574,890 $1.17-7.00 463,390 $1.17-2.21
Granted - - - - 228,000 7.00
Exercised (145,370) 1.17-7.00 (211,540) 1.17-7.00 (116,500) 1.17-2.21
End of year 217,980 $7.00 363,350 $1.17-7.00 574,890 $1.17-7.00
</TABLE>
During fiscal year 1995, outstanding shares totalling 9,352 were surrendered
in connection with the exercise of options, resulting in a net issuance of
202,188 new shares.
53
<PAGE>
Earnings per share are computed based on the weighted average number of common
and common equivalent shares outstanding during each period. Stock options are
treated as common stock equivalents using the treasury stock method during each
period in which their effects are dilutive. Stock options had dilutive effects
in fiscal years 1996, 1995 and 1994. The weighted average number of shares of
common stock used to compute earnings per share for fiscal years 1996, 1995 and
1994 were 5,809,410, 5,676,406 and 5,614,154, respectively.
In April 1996, the Company adopted the Preferred Share Purchase Rights Plan
(the "Rights Plan"). The Rights Plan provides for a dividend distribution of one
right for each share of common stock of the Company to holders of record as of
the close of business on April 26, 1996. The rights will become exercisable only
in the event, with certain exceptions, an acquiring party accumulates 10 percent
or more of the Company's common stock or announces an offer to acquire 10
percent or more of the common stock. The rights have an exercise price of $45.00
and will expire on April 19, 2006. Upon the occurrence of certain events,
holders of the rights will be entitled to purchase the Company's preferred
shares or shares in an acquiring company at half of market price. Prior to the
acquisition by a person or group of beneficial ownership of 10 percent or more
of the Company's common stock, the rights are redeemable for one cent per right
at the option of the Board of Directors.
12. EMPLOYEE BENEFIT PLANS
The Company maintains a qualified plan under Section 401(a) of the Internal
Revenue Code which includes a qualified cash or deferred arrangement under
Section 401(k) of the Internal Revenue Code. The plan allows employees who meet
minimum service requirements to make contributions by salary deduction up to a
maximum of 16% of their salary. For fiscal years 1996, 1995 and 1994, the
Company made contributions on behalf of eligible employees equal to 50% of the
employees' contributions to a maximum 6% of salary. The Company's contributions
to the plan were $197,000, $166,000, and $229,000 for fiscal years 1996, 1995
and 1994, respectively.
The Company does not provide any benefits that are subject to the
provisions of SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions" and SFAS No. 112, "Employers' Accounting
for Post-Employment Benefits".
Under an agreement with its Chairman and former Chief Executive Officer, the
Company will pay a retirement benefit for life to supplement the benefits under
the former defined benefit pension plan, which was terminated in 1989. The
amount of the annual benefit will be equal to 80% of the average salary for the
final three years of employment, reduced by Social Security and benefit received
in respect of the amount accumulated under such defined benefit plan. The
estimated annual benefit under the agreement is $66,000 and the Company's
obligation has been accrued in its consolidated financial statements.
13. REGULATORY CAPITAL
Savings institutions must maintain specific capital standards that are no less
stringent than the capital standards applicable to national banks. Regulations
of the Office of Thrift Supervision (the "OTS") currently maintain three capital
standards: a tangible capital requirement, a core capital requirement, and a
risk-based capital requirement.
The tangible capital standard requires the Savings Bank to maintain tangible
capital in an amount not less than 1.5% of total adjusted assets. As it applies
to the Savings Bank, "tangible capital" means core capital (as defined below)
less any intangible assets (including goodwill).
The core capital standard requires the Savings Bank to maintain "core capital"
of not less than 3.0% of total adjusted assets. However, since any institution
with less than 4.0% core capital is considered "undercapitalized", the Savings
Bank considers its minimum core capital requirement to be 4.0%. Core capital
includes the Savings Bank's common stockholders' equity, less certain intangible
assets (including goodwill).
54
The risk-based capital standard requires the Savings Bank to maintain capital
equal to 8.0% of risk-weighted assets. The rules provide that the capital ratio
applicable to an asset will be adjusted to reflect the degree of credit risk
associated with such asset, and the asset base used for computing the capital
requirement includes off-balance sheet assets.
As of June 30, 1996, the Savings Bank was classified as a "well capitalized"
institution as determined by the OTS and satisfied all regulatory capital
requirements, as shown in the following table reconciling the Savings Bank's
GAAP capital to regulatory capital:
Risk-
Tangible Core Based
(In thousands) Capital Capital Capital
GAAP capital $ 60,955 $ 60,955 $ 60,955
Non-allowable assets:
Goodwill (1,676) (1,676) (1,676)
Other intangible assets (245) -- --
Equity in subsidiaries (579) (579) (579)
Additional capital items:
Unrealized loss on debt securities, net 126 126 126
General loss allowances -- -- 6,639
Regulatory capital - computed 58,581 58,826 65,465
Minimum capital requirement 11,167 29,789 42,492
Excess regulatory capital $ 47,414 $ 29,037 $ 22,973
Ratios:
Regulatory capital - computed 7.87% 7.90% 12.33%
Minimum capital requirement 1.50 4.00 8.00
Excess regulatory capital 6.37% 3.90% 4.33%
The Savings Bank is a member of the Savings Association Insurance Fund. The
current legislative proposal to fully capitalize that FDIC-administered fund is
a special assessment which is expected to approximate 0.68% of March 31, 1995
insured deposits. Although such a one-time special assessment would reduce the
Savings Bank's capital, management believes the Savings Bank will continue to
exceed all regulatory capital requirements.
The payment of cash dividends by the Savings Bank is subject to regulation by
the OTS. The OTS measures an institution's ability to make capital
distributions, which includes the payment of dividends, according to the
institution's capital position. For institutions, such as the Savings Bank, that
meet their fully phased-in capital requirements, the OTS has established "safe
harbor" amounts of capital distributions that institutions can make after
providing notice to the OTS, but without needing prior approval. Institutions
can distribute amounts in excess of the safe harbor without the prior approval
of the OTS. The Savings Bank paid cash dividends of $455,000, $478,000 and
$263,000 in fiscal years 1996, 1995 and 1994, respectively. See note 14 for
limitations on the payment of dividends by the Savings Bank to the Parent
Company.
55
<PAGE>
14. PARENT COMPANY FINANCIAL INFORMATION
The Parent Company was organized in 1993 and became the holding company of the
Savings Bank on January 14, 1994. Condensed financial information of the Parent
Company is presented below:
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
(In thousands) June 30 1996 1995
<S> <C>
ASSETS
Investment in subsidiary, at equity $ 60,955 $ 48,714
Other assets 41 58
Total assets $ 60,996 $ 48,772
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ -- $ --
Stockholders' equity:
Stockholders' equity before unrealized loss 61,122 48,867
Net unrealized loss on securities available for sale (126) (95)
Total stockholders' equity 60,996 48,772
Total liabilities and stockholders' equity $ 60,996 $ 48,772
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(In thousands) Years Ended June 30 1996 1995
<S> <C>
Noninterest expense $ 126 $ 177
Income tax benefit 48 66
Loss before equity in undistributed net earnings of subsidiary (78) (111)
Equity in undistributed net earnings of subsidiary 12,220 7,661
Net earnings $ 12,142 $ 7,550
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(In thousands) Years Ended June 30 1996 1995
<S> <C>
Operating Activities
Net earnings $ 12,142 $ 7,550
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization 14 14
Equity in undistributed net earnings of subsidiary (12,220) (7,661)
Increase in other assets -- (7)
(Increase) decrease in accrued expenses and other liabilities 4 (99)
Net cash used in operating activities (60) (203)
Investing Activities
Purchases of subsidiary stock (508) (212)
Cash dividends received 455 478
Net cash provided by (used in) investment activities (53) 266
Financing Activities
Proceeds from issuance of common stock 508 212
Cash dividends paid (395) (275)
Net cash provided by (used in) financing activities 113 (63)
Net increase in cash and cash equivalents -- --
Cash and cash equivalents at beginning of year -- --
Cash and cash equivalents at end of year $ -- $ --
</TABLE>
56
<PAGE>
The Parent Company and its subsidiaries are affiliates within the meaning of
Section 23A of the Federal Reserve Act. Accordingly, they are subject to the
limitations specified in such section on the making of loans or extension of
credit to, or purchase of securities under repurchase agreement from, any of the
subsidiaries within the affiliate group. Therefore, substantially all of the net
assets of the affiliated group are restricted from use by the Parent Company in
the form of loans or advances. Dividends, however, may be paid to the Parent
Company by the Savings Bank under formulas established by the appropriate
regulatory authorities. Substantially all of the retained earnings of the Parent
Company are represented by undistributed earnings of subsidiaries.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
The Company is a party to financial instruments with off-balance-sheet-risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, financial guarantees,
financial options and forward sales contracts. These instruments involve, to
varying degrees, elements of credit and interest rate risk that are not
recognized in the consolidated statements of financial condition.
Exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and financial
guarantees written is represented by the contractual notional amount of those
instruments. The Company generally requires collateral to support such financial
instruments in excess of the contractual notional amount of those instruments
and, therefore, is in a fully secured position. The Company uses the same credit
policies in making commitments as it does for on-balance-sheet instruments. The
Company controls the credit risk of its financial options and forward sales
contracts through credit approvals, limits and monitoring procedures; however,
it does not generally require collateral for such financial instruments.
There were no financial guarantees or options outstanding at June 30, 1996 and
1995. Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained by the Company upon extension of credit is based on management's credit
evaluation of the counterparty and consists of real estate with estimated market
values of at least 110-115% of the commitment amount.
To reduce the risk associated with a possible decline in the value of
residential mortgage loans originated for sale, the Company executes forward
contracts for the delivery of loans generally up to 90 days thereafter at a
specified price and yield. Risks may arise from the possible inability of the
Company to originate loans to fulfill the contracts, in which case securities
would be purchased in the open market for delivery under the terms of the
contracts. Contracts outstanding at June 30, 1996 and 1995 totalled $77,275,000
and $39,250,000, respectively.
The Company had outstanding fixed rate loan origination commitments
aggregating $2,900,000 and outstanding adjustable rate loan commitments
aggregating $1,436,000 at June 30, 1996. Fixed interest rate commitments are at
market rates as of the application date and generally expire within 60 days.
The Company had no outstanding loan purchase commitments in effect at June 30,
1996. The Company had outstanding commitments to fund $28,436,000 of
construction loans at June 30, 1996. In addition, the Company had $28,067,000
outstanding in lines of credit extended to its customers at June 30, 1996.
Standby letters of credit are conditional commitments issued by the Company.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. At June 30, 1996, the Company was
conditionally committed under standby letters of credit aggregating $19,677,000.
57
<PAGE>
The Company originates primarily residential real estate loans and a lesser
amount of installment loans to customers throughout the states of Virginia and
Maryland . In order to diversify its geographic risk, the Company buys and sells
loans to/from other financial institutions operating in other states. The
Company estimates that more than 90% of its loan portfolio is based in the
states of Virginia and Maryland.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Listed below are the carrying amount and fair value of financial instruments
at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands) June 30 1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C>
Cash and cash equivalents $ 24,575 $ 24,575 $ 16,638 $ 16,638
Investment securities 12,663 12,663 23,090 23,062
Mortgage-backed securities and
collateralized mortgage obligations 15,694 15,702 9,371 9,383
Loans receivable, net, including
loans receivable held for sale 662,035 668,912 616,049 621,093
Federal Home Loan Bank stock 6,998 6,998 7,333 7,333
Deposits (573,536) (577,205) (503,667) (518,042)
Notes payable and other borrowings (639) (639) (557) (557)
Advances from Federal Home Loan Bank (102,052) (100,646) (134,658) (137,036)
</TABLE>
The majority of the Company's assets and liabilities are financial
instruments; however, most of these financial instruments lack an available
trading market. Significant estimates, assumptions and present value
calculations were therefore used for purposes of this disclosure, resulting in a
greater degree of subjectivity inherent in the indicated fair value amounts.
Comparability among financial institutions may be difficult due to the wide
range of permitted valuation techniques and the numerous estimates and
assumptions which must be made.
The fair value of cash and cash equivalents is the carrying amount. The fair
value of investment securities and mortgage-backed securities is determined by
reference to quoted market prices, where available. The fair value of loans
receivable is determined by discounting the future cash flows, using the current
rates at which similar loans would be made to borrowers with similar credit
ratings, and for the same remaining terms to maturity. The carrying amount of
construction, equity line, and installment loans approximates fair value. The
fair value of loans held for sale is determined by outstanding sale commitments,
or current investor yield requirements. For stock in the Federal Home Loan Bank,
the fair value is the carrying amount.
For demand deposits, savings accounts, and certain money market deposits, the
carrying amount approximates fair value. For fixed-maturity certificates of
deposit, fair value is determined by discounting the future cash flows, using
the rates currently offered for deposits with similar remaining terms to
maturities. The carrying amount of notes payable and other borrowings
approximates fair value. The fair value of advances from the Federal Home Loan
Bank is determined using the rates currently offered for similar remaining
maturities.
The majority of the Company's commitments to extend credit and letters of
credit carry current market interest rates if converted to loans. Because
commitments to extend credit and letters of credit are generally not assignable
by either the Company or the borrower, they only have value to the Company and
the borrower. The estimated fair value of such instruments approximates the
recorded deferred fee amounts, included above as a component of net loans
receivable.
58
<PAGE>
17. QUARTERLY FINANCIAL DATA
(Unaudited)
The following is a summary of selected quarterly operating results for each
of the four quarters in fiscal years 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands, except per share data) Sept. 30 Dec. 31 Mar. 31 Jun. 30
<S> <C>
1996
Total interest income $14,832 $14,402 $14,481 $15,326
Total interest expense 8,193 8,133 7,904 8,092
Net interest income 6,639 6,269 6,577 7,234
Provision for loan losses 482 449 413 1,085
Noninterest income 1,742 1,830 2,513 8,828
Noninterest expense 4,471 4,684 5,255 5,619
Earnings before income tax expense 3,428 2,966 3,422 9,358
Income tax expense 1,324 1,062 1,231 3,415
Net earnings $ 2,104 $ 1,904 $ 2,191 $ 5,943
Net earnings per share $ .36 $ .33 $ .38 $ 1.02
1995
Total interest income $12,300 $13,251 $13,735 $14,239
Total interest expense 5,956 6,576 7,160 7,939
Net interest income 6,344 6,675 6,575 6,300
Provision for loan losses 248 327 373 442
Noninterest income 1,284 1,629 1,557 1,980
Noninterest expense 4,780 4,837 4,347 4,448
Earnings before income tax expense 2,600 3,140 3,412 3,390
Income tax expense 1,044 1,304 1,359 1,285
Net earnings $ 1,556 $ 1,836 $ 2,053 $ 2,105
Net earnings per share $ .27 $ .33 $ .36 $ .37
</TABLE>
59
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Virginia First Financial Corporation:
We consent to incorporation by reference in Registration Statement No. 33-78180
on Form S-8, in Registration Statement No. 33-78182 on Form S-8, in Registration
Statement No. 33-78184 on Form S-8 and in Registration Statement No. 33-04308 on
Form S-3 of Virginia First Financial Corporation of our report dated August 2,
1996, relating to the consolidated balance sheets of Virginia First Financial
Corporation and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended June 30, 1996, which
report is incorporated by reference in the June 30, 1996 annual report on Form
10-K of Virginia First Financial Corporation. Our report refers to changes in
accounting for certain investments in debt and equity securities in fiscal year
1994.
/s/ KPMG Peat Marwick LLP
---------------------
KPMG PEAT MARWICK LLP
Richmond, Virginia
September 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,305
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,270
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,705
<INVESTMENTS-CARRYING> 6,652
<INVESTMENTS-MARKET> 6,660
<LOANS> 669,562
<ALLOWANCE> 7,527
<TOTAL-ASSETS> 746,867
<DEPOSITS> 573,536
<SHORT-TERM> 60,639
<LIABILITIES-OTHER> 9,644
<LONG-TERM> 42,052
0
0
<COMMON> 60,996
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 746,867
<INTEREST-LOAN> 56,368
<INTEREST-INVEST> 2,673
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 59,041
<INTEREST-DEPOSIT> 26,333
<INTEREST-EXPENSE> 32,322
<INTEREST-INCOME-NET> 26,719
<LOAN-LOSSES> 2,429
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 20,029
<INCOME-PRETAX> 19,174
<INCOME-PRE-EXTRAORDINARY> 12,142
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,142
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
<YIELD-ACTUAL> 3.97
<LOANS-NON> 10,945
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,643
<ALLOWANCE-OPEN> 6,373
<CHARGE-OFFS> 1,336
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 7,527
<ALLOWANCE-DOMESTIC> 7,527
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,639
</TABLE>
