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, 1997 Number: 0-28408
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 executive offices) (Zip Code)
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, 1997, the aggregate market value of the Common Stock of the
Registrant outstanding on such date, excluding 1,717,515 shares held by all
directors and executive officers of the Registrant as a group, was $98,231,000.
This figure was calculated using the closing price of $24.00 per common share
quoted on the NASDAQ National Market System on August 31, 1997. There were
5,810,962 shares of Common Stock outstanding as of August 31, 1997.
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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 by reference information from the Registrant's
Annual Report to Stockholders for the fiscal year ended June 30, 1997.
(2) Part III incorporates by reference information from the Registrant's
Proxy Statement for its Annual Meeting of Stockholders currently
scheduled for November 26, 1997.
The exhibit index is located on page 23.
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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, 1997, the Company had total assets of $858,403,000,
deposits of $600,205,000, and net worth of $66,492,000.
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 ("SAIF") 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 three active subsidiaries: one is engaged in
real estate development, one is a title insurance agency, and one is a company
that originates residential mortgage loans via the Internet.
The Company operates twenty-four 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, 1997,
1996 and 1995 ("fiscal year 1997", "fiscal year 1996" and "fiscal year 1995",
respectively) reflect the Company's strategies of expanding its community
banking and mortgage banking operations.
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Pending Acquisition by BB&T Corporation
On May 6, 1997, the Company, Southern National Corporation (now known
as BB&T Corporation), a North Carolina corporation ("SNC"), and BB&T Financial
Corporation of Virginia, a Virginia corporation and wholly-owned subsidiary of
SNC ("BB&T"), entered into an Agreement and Plan of Reorganization and a related
Plan of Merger (the "Merger Agreement"), pursuant to which the Company will be
merged with and into BB&T, with BB&T as the surviving corporate entity (the
"Merger").
Under the terms of the Merger Agreement, each share of the Company's
common stock ("VFFC Common Stock") issued and outstanding immediately prior to
the consummation of the Merger will be converted into and will represent the
right to receive both shares of the common stock of SNC ("SNC Common Stock") and
cash (collectively, the "Merger Consideration"). Based upon certain price
protection features in the Merger Agreement, the value of the Merger
Consideration (based on the Closing Value of SNC Common Stock, as that term is
defined in the Merger Agreement) will not be less than $22.50 and will not be
more than $25.00. If the Closing Value of SNC Common Stock is less than $30.00,
the Company can elect to receive Merger Consideration with a value (based on the
Closing Value of SNC Common Stock) less than $22.50 or to terminate the Merger
Agreement. In addition, 30% of the Merger Consideration will be cash, and 70% of
the Merger Consideration will be shares of SNC Common Stock, with such
percentages being subject to adjustment in the event that the Closing Value of
SNC Common Stock is less than $33.75. On May 5, 1997, the day before the
announcement of the Merger, the closing price of SNC Common Stock was $40.83. A
copy of the Merger Agreement is filed as an exhibit to this report and is
incorporated herein by reference.
Also on May 6, 1997, the Company and SNC entered into a Stock Option
Agreement (the" Stock Option Agreement"). Under the terms of the Stock Option
Agreement, the Company granted to SNC an option to purchase up to 19.9% of the
total shares of VFFC Common Stock currently outstanding. The Stock Option
Agreement is exercisable only under certain circumstances. A copy of the Stock
Option Agreement is also filed as an exhibit to this report and is incorporated
herein by reference.
The Merger Agreement and Stock Option Agreement, and the transactions
contemplated therein, were approved by the Boards of Directors of the Company
and SNC and are subject to, among other things, the approval of the shareholders
of the Company and the approvals of federal and state banking regulators. The
Merger will be accounted for as a purchase and is expected to be consummated by
year end 1997.
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.
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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.
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 participation's secured by real estate located in any part of the United
States. During fiscal year 1997 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.
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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, 1997,
the Company's regulatory limit on loans to one borrower was $11.4 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, 1997, outstanding construction loans (net of undisbursed
funds) amounted to $141,982,000 or 20.7% of the Company's loans held for
investment. This compares to $121,375,000 or 19.4% of loans held for investment
as of June 30, 1996. 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.
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 totaled $46,796,000 or 6.8% of loans held for investment at June 30,
1997, compared to $48,722,000 or 7.8% of loans held for investment at June 30,
1996.
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 12.5% and 9.7% of the
Company's loans held for investment at June 30, 1997 and 1996, 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.
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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, 1997, the Company's mortgage-backed
securities portfolio had a carrying value of $12,551,000 or 1.5% of total
assets, compared to $15,694,000 or 2.1% of total assets at June 30, 1996. 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.
The Company had $6,226,000 and $6,278,000 invested in municipal bond
investments at June 30, 1997 and 1996, respectively. These investments
represented approximately 0.7% and 0.8% 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.
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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.
The following table sets forth the various types of accounts offered by
the Company at June 30, 1997:
<TABLE>
<CAPTION>
Minimum Amount
Balance in % of
Type of Account Term Deposit Thousands Total
--------------- ---- ------- --------- -----
<S> <C> <C> <C> <C>
Checking Accounts none $ -- $ 30,979 5.2%
Interest Checking Accounts none -- 34,359 5.7
Savings Accounts none -- 67,317 11.2
Money Market
Deposit Accounts none -- 63,477 10.6
Certificates with remaining maturities of:
1 to 30 days various various 27,686 4.6
31 to 90 days various various 45,157 7.5
91 to 180 days various various 49,119 8.2
181 days to 1 year various various 149,782 25.0
1 year to 2 years various various 51,586 8.6
2 years to 3 years various various 48,911 8.1
3 years to 5 years various various 30,398 5.1
Over 5 years various various 1,434 0.2
-------- ------
$600,205 100.00%
</TABLE>
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) 1997 1996 1995
-------------- --------- -------- --------
Increase (decrease) in deposits before
interest credited $ (976) $ 43,609 $ 26,405
Interest credited 27,645 26,260 20,542
--------- -------- --------
Net increase in deposits 26,669 69,869 46,947
--------- -------- --------
Total deposits at year end $ 600,205 $573,536 $503,667
========= ======== ========
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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) 1997 1996 1995
-------------- -------- -------- --------
Advances from FHLB $181,552 $102,052 $134,658
Other borrowings 611 639 557
--------- --------- --------
Total borrowings $182,163 $102,691 $135,215
======== ======== ========
Employees
The Company at June 30, 1997, had 426 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.
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.
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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, 1997, 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, 1997 consisted of stock ownership of
$100,000, additional paid in capital of $852,000 and accumulated deficit of
$7,000. At June 30, 1997, Southside's assets were $971,000 consisting primarily
of investments in real estate projects of $611,000, and a loan and interest
receivable from the Savings Bank of $338,000, 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, 1997, were $14,000 and
consisted primarily of cash. The Savings Bank's investment at June 30, 1997,
consisted of stock ownership of $1,500, additional paid-in capital of $207,000
and accumulated deficit of $195,000.
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,
1997, Colony had no assets.
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, 1997, were
$58,000 and consisted primarily of cash and unamortized organizational costs.
The Savings Bank's investment at June 30, 1997, consisted of stock ownership of
$1,000, additional paid-in capital of $24,000 and retained earnings of $33,000.
American Finance & Investment, Inc. was acquired on December 19, 1996,
in a cash transaction whereby the Company purchased a majority of the assets of
American Finance & Investment, Inc. ("AFI"). AFI is a provider of mortgage loans
through the Internet and through mass media advertising. The origination of
mortgage loans on an automated basis through a computer network is presently
available to potential customers in forty-four states. Headquartered in Fairfax,
Virginia, AFI had assets of $859,000 and capital consisting of $1,100 of common
stock, $1,115,190 of excess paid-in capital, and $362,691 of accumulated deficit
at June 30, 1997.
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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 FHLB 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.
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
11
<PAGE>
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.
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.
12
<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. At June 30, 1997, the
Savings Bank had investments in or extensions of credit to nonincludable
subsidiaries amounting to $908,000.
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, 1997, the Savings Bank's tangible capital amounted to
$63,218,000 or 7.38% 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, 1997, the Savings Bank's core capital
amounted to $63,340,000 or 7.39% 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.
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
13
<PAGE>
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 totaled 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, 1997, the Savings Bank's total risk-based capital amounted
to $70,995,000 or 11.61% 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.
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.
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
$44.9 million with the first $4.4 million being exempt from reserve
calculations. A 10% reserve requirement is applied to that portion of total
transaction accounts in excess of $44.9 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
14
<PAGE>
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.
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, 1997 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
15
<PAGE>
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.
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.
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. 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.
16
<PAGE>
Item 2. Properties
Branch Offices and Other Material Property
The following table sets forth certain information:
<TABLE>
<CAPTION>
Owned Leased
----- ------
Net Book Value
Net Book Lease of Leasehold
(In thousands) Value at Expiration Improvements at
Office Locations June 30, 1997 Date June 30, 1997
---------------- ------------- ---------- ----------------
<S> <C> <C> <C>
Main Office
Franklin and Adams Streets
Petersburg, Virginia $ 966 - $ -
2048 South Sycamore Street
Petersburg, Virginia 78 - -
Southside Regional Medical Center
801 South Adams Street
Petersburg, Virginia - 1998 0
2609 Boulevard
Colonial Heights, Virginia 170 - -
105 North Main Street
Hopewell, Virginia 180 - -
North Main Street and Weaver Avenue
Emporia, Virginia 119 - -
1210 Westover Hills Boulevard
Richmond, Virginia 126 - -
Parham and Three Chopt Roads
Richmond, Virginia - 2002 3
4802 South Laburnum Avenue
Richmond, Virginia 271 - -
10051 Midlothian Turnpike
Richmond, Virginia 594 - -
1615 Willow Lawn Drive
Richmond, Virginia - 2000 18
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Owned Leased
----- ------
Net Book Value
Net Book Lease of Leasehold
(In thousands) Value at Expiration Improvements at
Office Locations June 30, 1997 Date June 30, 1997
---------------- ------------- ---------- ----------------
<S> <C> <C> <C>
Ashland-Hanover Shopping Center
Ashland, Virginia - 2000 7
Bermuda Square Shopping Center
Chester, Virginia - 1998 61
1620 Hershberger Road
Roanoke, Virginia 226 - -
316 South Jefferson Street
Roanoke, Virginia - 2000 139
3119 Chaparral Drive Southwest
Roanoke, Virginia 772 - -
203 Virginia Avenue
Vinton, Virginia 65 - -
303 East Burwell Street
Salem, Virginia 409 - -
3205 Plank Road
Fredericksburg, Virginia - 2010 35
History Junction
Appomattox, Virginia 194 - -
216 College Street
Rocky Mount, Virginia 152 - -
7114 Timberlake Road
Lynchburg, Virginia 247 - -
12451 Hedges Run Drive
Woodbridge, Virginia 344 - -
305 Garrisonville Rd
Stafford, Virginia - 2002 18
American Finance & Investment
10306 Easton Pl
Fairfax, Virginia
(1) 7331 Timberlake Road, Suite 306
Lynchburg, Virginia - 1998 -
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Owned Leased
----- ------
Net Book Value
Net Book Lease of Leasehold
(In thousands) Value at Expiration Improvements at
Office Locations June 30, 1997 Date June 30, 1997
---------------- ------------- ---------- ----------------
<S> <C> <C> <C>
(1) 1160 Pepsi Place, Suite 109
Charlottesville, Virginia - 1998 0
(1) 9200 Arboretum Parkway
Suite 104
Richmond, Virginia - 2001 0
(1) 1308 Devil's Reach Road, Suite 200
Woodbridge, Virginia 1,512 - -
(1) 9515 Deeveco Rd.
Timonium, Virginia - Monthly 5
(1) 211 S. Jefferson St.
Frederick, Virginia - Monthly 7
(1) 10400 Eaton Pl.
Fairfax, Virginia - 2002 0
(1) 6550 Rock Spring Dr.
Bethesda, Maryland - 2003 0
(1) 8818 Centre Park Dr.
Columbia, Maryland - 1998 13
(1) 139 North Main St.
Bel Aire, Maryland - 1998 3
(1) 1401 Rockville Pike, Suite 110
Rockville, Maryland - 1996 -
------ -----
$6,425 $ 309
====== =====
</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, 1997, the total net book value in the premises and
equipment owned by the Company was $9,644,000.
Item3. Legal Proceedings
There are no material proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a party or of which any of their property is subject.
19
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
20
<PAGE>
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information required herein is incorporated by reference
to "Comparative Market Prices and Dividends" contained in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Stockholders to be
subsequently filed.
At August 31, 1997, the Company had approximately 951
stockholders of record.
Item 6. Selected Financial Data
The information required herein is incorporated by reference
to page 9 of the Annual Report to Stockholders for the fiscal year ended June
30, 1997.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information required herein is incorporated by reference
to pages 10 to 29 of the Annual Report to Stockholders for the fiscal year ended
June 30, 1997.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required
herein are incorporated by reference to pages 30 to 53 of the Annual Report to
Stockholders for the fiscal year ended June 30, 1997.
Item 9. Changes in Accountants and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
21
<PAGE>
Part III.
Item 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated by reference
to "Election of Directors; Security Ownership of Management and Certain
Beneficial Owners-The Board of Directors", "-Executive Officers Who Are Not
Directors", "-Section 16(a) Beneficial Ownership Reporting Compliance" contained
in the definitive Proxy Statement for the Company's 1997 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 Company's
1997 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 "Election of Directors; Security Ownership of Management and Certain
Beneficial Owners-Security Ownership of Management" and "-Security Ownership of
Certain Beneficial Owners" contained in the definitive Proxy Statement for the
Company's 1997 Annual Meeting of Stockholders to be subsequently filed.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference
to "Remuneration-Indebtedness of Management" contained in the definitive Proxy
Statement for the Company's 1997 Annual Meeting of Stockholders to be
subsequently filed.
22
<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, 1997 and 1996
Consolidated Statements of Earnings for each of the
years in the three year period ended June 30, 1997
Consolidated Statements of Changes in Stockolders'
Equity for each of the years in the three year period
ended June 30, 1997
Consolidated Statements of Cash Flows for each of the
years in the three year period ended June 30, 1997
Notes to Consolidated Financial Statements for June
30, 1997, 1996 and 1995
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 of the
Company, attached as Exhibit 3.1 to the Registration
Statement on Form S-4, Registration No. 33-67746,
filed with the Commission on August 20, 1993 (the
"Form S-4"), incorporated herein by reference.
3b Articles of Amendment of the Articles of
Incorporation of the Company effective November 6,
1995, attached as Exhibit 4.2 to the registration
statement on Form 8-A, File No. 0-28408, filed with
the Commission on April 30,1996 (the "Form 8-A"),
incorporated herein by reference.
3c Articles of Amendment to the Articles of Restatement
Amending and Restating the Articles of Incorporation
of the Company dated April 16, 1996, attached as
Exhibit 4.3 to the Form 8-A, incorporated herein by
reference.
3d Bylaws of the Company, attached as Exhibit 3.2 to the
Form S-4, incorporated herein by reference.
4a Specimen Stock Certificate for common stock, $1.00
par value, attached as Exhibit 4 to the Annual Report
on Form 10-K for the fiscal year ended June 30, 1994,
File No. 0- 28408, filed with the Commission on
October 11, 1994 (the"1994 Form 10-K"), incorporated
herein by reference.
23
<PAGE>
4b Rights Agreement between the Company and First Union
National Bank of North Carolina, dated as of April
19, 1996, attached as Exhibit 4.5 to the Form 8-A,
incorporated herein by reference.
4c First Amendment to the Rights Agreement between the
Company and First Union National Bank of North
Carolina, dated as of May 4, 1997, attached as
Exhibit 4.6 to Amendment No. 1 to the Form 8-A, File
No. 0-28408, filed with the Commission on June 4,
1997, incorporated herein by reference.
10a Supplemental Retirement Benefit Agreement dated
September 9, 1993 between Virginia First Savings
Bank, F.S.B. and William A. Patton, attached as
Exhibit 10a to the 1994 Form 10-K, incorporated
herein by reference.
10b Supplemental Death Benefit Agreement dated October 1,
1993 between Virginia First Savings Bank, F.S.B. and
William A. Patton, attached as Exhibit 10b to the
1994 Form 10-K, incorporated herein by reference.
10c 1992 Incentive Plan, as amended, attached as Exhibit
4.7 to the Registration Statement on Form S-8,
Registration No. 333-29215, filed with the Commission
on June 13, 1997, incorporated herein by reference.
10d 1986 Stock Compensation Program, attached as Exhibit
4.3 to the Registration Statement on Form S-8,
Registration No. 33-78184, filed with the Commission
on April 27, 1994, incorporated herein by reference.
10e 1984 Incentive Stock Option Plan, attached as Exhibit
4.3 to the Registration Statement on Form S-8,
Registration No. 33-78182, filed with the Commission
on April 27, 1994, incorporated herein by reference.
10f Trust Agreement for the Incentive Security Plan,
attached as Exhibit 10.5 to the Form S-4,
incorporated herein by reference.
10g Employment Agreement, dated January 1, 1996, between
the Registrant and William A. Patton, attached as
Exhibit 10g to the Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, File No. 0-28408,
filed with the Commission on September 30, 1996
(the"1996 Form 10-K"), incorporated herein by
reference.
10h Employment Agreement, dated January 1, 1996, between
the Registrant and Charles A. Patton, attached as
Exhibit 10h to the 1996 Form 10-K, incorporated
herein by reference.
10i Agreement and Plan of Reorganization, dated as of May
6, 1997, among the Company, BB&T Financial
Corporation of Virginia and Southern National
Corporation (now known as BB&T Corporation) ("SNC"),
attached as Exhibit 2 to the Current Report on Form
8-K filed with the Commission on May 13, 1997 (the
"Form 8-K"), incorporated herein by reference.
10j Stock Option Agreement, dated as of May 6, 1997, by
and between the Company and SNC, attached as Exhibit
99.1 to the Form 8-K, incorporated herein by
reference.
11 Statement regarding computation of per share
earnings, incorporated herein by reference to Note 11
to the Consolidated Financial Statements, included as
part of the Annual Report to Stockholders, for the
fiscal year ended June 30, 1997.
13 Annual Report to Stockholders for the fiscal year
ended June 30, 1997.
24
<PAGE>
21 Subsidiaries of the Company, incorporated herein by
reference to Item 1, "Business-Subsidiaries."
23 Consent of KPMG Peat Marwick LLP.
(b) A Current Report on Form 8-K, dated May 6, 1997, was filed on
May 13, 1997 and reported Item 5 to announce the merger of the
Company with and into BB&T Financial Corporation of Virginia,
a Virginia corporation and wholly-owned subsidiary of Southern
National Corporation, a North Carolina corporation.
(c) See (a)(3) above for all exhibits filed herewith and the
Exhibit Index.
(d) Separate financial statements are not applicable.
25
<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 19, 1997
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, 1997
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/S/ William A. Patton 9/19/97
-------------------------------
William A. Patton Date Chairman of the Board, and Director
/S/ Charles A. Patton 9/19/97
-------------------------------
Charles A. Patton Date President, Chief Executive
Officer, and Director
/S/ William J. Vogt 9/19/97
-------------------------------
William J. Vogt Date Senior Vice President,
Chief Financial Officer
/S/ Frasier W. Brickhouse 9/19/97
-------------------------------
Frasier W. Brickhouse Date Director
/S/ William L Eure, Jr. 9/19/97
-------------------------------
William L. Eure, Jr Date Director
/S/ Benjamin S. Gill 9/19/97
-------------------------------
Benjamin S. Gill Date Director
-------------------------------
Francis R. Payne, Jr. Date Director
/S/ George R. Mercer 9/19/97
-------------------------------
George R. Mercer Date Director
/S/ John H. VanLandingham, Jr. 9/19/97
-------------------------------
John H. VanLandingham, Jr. Date Director
/S/ Preston H. Cottrell 9/19/97
-------------------------------
Preston H. Cottrell Date Director
</TABLE>
26
<PAGE>
Exhibit Index
-------------
3a Amended and Restated Articles of Incorporation of the
Company, attached as Exhibit 3.1 to the Registration
Statement on Form S-4, Registration No. 33-67746,
filed with the Commission on August 20, 1993 (the
"Form S-4"), incorporated herein by reference.
3b Articles of Amendment of the Articles of
Incorporation of the Company effective November 6,
1995, attached as Exhibit 4.2 to the registration
statement on Form 8-A, File No. 0-28408, filed with
the Commission on April 30,1996 (the "Form 8-A"),
incorporated herein by reference.
3c Articles of Amendment to the Articles of Restatement
Amending and Restating the Articles of Incorporation
of the Company dated April 16, 1996, attached as
Exhibit 4.3 to the Form 8-A, incorporated herein by
reference.
3d Bylaws of the Company, attached as Exhibit 3.2 to the
Form S-4, incorporated herein by reference.
4a Specimen Stock Certificate for common stock, $1.00
par value, attached as Exhibit 4 to the Annual Report
on Form 10-K for the fiscal year ended June 30, 1994,
File No. 0- 28408, filed with the Commission on
October 11, 1994 (the"1994 Form 10-K"), incorporated
herein by reference.
4b Rights Agreement between the Company and First Union
National Bank of North Carolina, dated as of April
19, 1996, attached as Exhibit 4.5 to the Form 8-A,
incorporated herein by reference.
4c First Amendment to the Rights Agreement between the
Company and First Union National Bank of North
Carolina, dated as of May 4, 1997, attached as
Exhibit 4.6 to Amendment No. 1 to the Form 8-A, File
No. 0-28408, filed with the Commission on June 4,
1997, incorporated herein by reference.
10a Supplemental Retirement Benefit Agreement dated
September 9, 1993 between Virginia First Savings
Bank, F.S.B. and William A. Patton, attached as
Exhibit 10a to the 1994 Form 10-K, incorporated
herein by reference.
10b Supplemental Death Benefit Agreement dated October 1,
1993 between Virginia First Savings Bank, F.S.B. and
William A. Patton, attached as Exhibit 10b to the
1994 Form 10-K, incorporated herein by reference.
10c 1992 Incentive Plan, as amended, attached as Exhibit
4.7 to the Registration Statement on Form S-8,
Registration No. 333-29215, filed with the Commission
on June 13, 1997, incorporated herein by reference.
10d 1986 Stock Compensation Program, attached as Exhibit
4.3 to the Registration Statement on Form S-8,
Registration No. 33-78184, filed with the Commission
on April 27, 1994, incorporated herein by reference.
10e 1984 Incentive Stock Option Plan, attached as Exhibit
4.3 to the Registration Statement on Form S-8,
Registration No. 33-78182, filed with the Commission
on April 27, 1994, incorporated herein by reference.
10f Trust Agreement for the Incentive Security Plan,
attached as Exhibit 10.5 to the Form S-4,
incorporated herein by reference.
10g Employment Agreement, dated January 1, 1996, between
the Registrant and William A. Patton, attached as
Exhibit 10g to the Annual Report on Form 10-K for the
fiscal year ended June 30, 1996, File No. 0-28408,
filed with the Commission on September 30, 1996
(the"1996 Form 10-K"), incorporated herein by
reference.
10h Employment Agreement, dated January 1, 1996, between
the Registrant and Charles A. Patton, attached as
Exhibit 10h to the 1996 Form 10-K, incorporated
herein by reference.
10i Agreement and Plan of Reorganization, dated as of May
6, 1997, among the Company, BB&T Financial
Corporation of Virginia and Southern National
Corporation (now known as BB&T Corporation) ("SNC"),
attached as Exhibit 2 to the Current Report on Form
8-K filed with the Commission on May 13, 1997 (the
"Form 8-K"), incorporated herein by reference.
10j Stock Option Agreement, dated as of May 6, 1997, by
and between the Company and SNC, attached as Exhibit
99.1 to the Form 8-K, incorporated herein by
reference.
11 Statement regarding computation of per share
earnings, incorporated herein by reference to Note 11
to the Consolidated Financial Statements, included as
part of the Annual Report to Stockholders, for the
fiscal year ended June 30, 1997.
13 Annual Report to Stockholders for the fiscal year
ended June 30, 1997.
21 Subsidiaries of the Company, incorporated herein by
reference to Item 1, "Business-Subsidiaries."
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule (filed electronically only).
Exhibit 13
VIRGINIA FIRST FINANCIAL CORP.
1997
Annual Report
<PAGE>
ABOUT THE COVER
Virginia First has been building its company - and the fortunes of its customers
- - for more than a century. Through the years, quite a story has developed.
Within these pages, we'll share it with you.
CONTENTS
Financial Highlight 1
- ---------------------------------------------------------------
Letter to Stockholders 2
- ---------------------------------------------------------------
The History of Virginia First Financial Corp. 4
- ---------------------------------------------------------------
Financial Contents 8
- ---------------------------------------------------------------
Offices and Loan Centers 54
- ---------------------------------------------------------------
Locations, Products and Services 55
- ---------------------------------------------------------------
Directors & Officers 56
- ---------------------------------------------------------------
Stockholders Information Inside Back Cover
- ---------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended June 30
-------------------
1997 1996 % Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Net interest income $30,520 $26,719 14%
Provision for loan losses 2,347 2,429 (3%)
Noninterest income 8,739 14,913 (41%)
Noninterest expense 28,924 20,029 44%
Net Income 5,112 12,142 (58%)
BALANCE SHEET AT YEAR-END
Assets 858,403 $746,867 15%
Investment securities 34,249 35,355 (3%)
Loans 685,366 623,081 10%
Loans held for sale 92,495 46,481 99%
Deposits 600,205 573,536 5%
Stockholders' equity 66,492 60,966 9%
Shares outstanding 5,810 5,741 1%
PER SHARE DATA
Net income per share $0.87 $ 2.09 (58%)
Cash dividends declared 0.10 .07 43%
Book Value 11.44 10.63 8%
Weighted Average Shares Outstanding 5,855 5,809 1%
SELECTED RATIOS
Return on average assets 0.64% 1.74% (63%)
Return on average equity 7.90 22.49 (65%)
Allowance for loan losses to total loans 1.36 1.21 12%
Net charge offs to average loans outstanding 0.09 0.21 (57%)
</TABLE>
[TOTAL ASSETS BAR GRAPH]
1993 $561,239
1994 $583,580
1995 $693,549
1996 $746,867
1997 $858,403
Fiscal Year Ended June 30
[STOCKHOLDERS' EQUITY BAR GRAPH]
1993 $34,512
1994 $41,079
1995 $48,772
1996 $60,966
1997 $66,492
Fiscal Year Ended June 30
[JUNE 30, 1997 CAPITAL RATIOS BAR GRAPH]
Tangible Capital 7.38%
Core Capital 7.39%
Total Risk-Based Capital 11.61%
1
<PAGE>
LETTER TO STOCKHOLDERS
Dear Fellow Stockholders,
Over the last five years, Virginia First has undergone tremendous expansion
in an environment of radical change in both the financial services industry and
in the communities where we do business. In the midst of these changes, your
bank has continually adapted to the times, responding with innovations in
technology, processes and in our corporate strategy.
Virginia First has always striven to operate in the best interests of its
employees, customers and shareholders. Often, this determination has led us to
make acquisitions and expansions to bolster our strength in crucial areas,
preparing us for the times ahead. For example, our acquisition of Southern
Atlantic Mortgage in 1991 gave us a key expansion point in the dynamic mortgage
banking industry. In 1996, we formed Freedom Financial Services, Inc., our
consumer finance subsidiary, to ease our expansion into non-traditional lending
markets.
Most recently, our acquisition of American Finance and Investment, Inc.
during 1996 to offer mortgage origination services over the Internet continues
to provide exciting potential. AFI is generating substantial volume,
approximately $20 million on a monthly basis, and continues to refine the
technology to offer mortgage services electronically. We've also expanded our
mortgage banking activities, in the state of Maryland, making Virginia First a
major player in the mortgage banking industry throughout the Mid-Atlantic region
and beyond.
It's ironic that the growth and success of the bank has led us to a
crossroad that would determine the bank's course into the future. We're now at
the point where we feel it is necessary to dramatically increase our investments
in both technology and more traditional delivery methods such as branch
facilities in order to maintain our competitive edge as we move toward the year
2000. To that extent, we've examined the possibilities of partnering Virginia
First with a larger entity that embodies and shares our philosophy and values,
allowing us to vault forward to the next level without engaging in a lengthy and
expensive process of change.
2
<PAGE>
As we approach $1 billion in assets, we enter a competitive arena where it
would become relatively inefficient for us to compete directly with much larger
banks. It is our perspective that growing outside of our normal parameters as a
"community bank" into a mid-level or larger bank is important for Virginia
First; but at the same time, it places us in a position that makes it difficult
to offer the variety of products and services that top-tier organizations can
provide.
As you are probably already aware, the pending merger into BB&T presents a
timely and unique solution to Virginia First that allows our bank to generate
the "critical mass" necessary to operate efficiently and to sustain the revenue
growth experienced in recent years. Just as important, we believe that BB&T
offers a perfect fit with our philosophy and values, in addition to the
longer-term strategies we have envisioned for Virginia First.
Throughout its history, BB&T has embodied many of the same attributes that
have set Virginia First apart for all of these years. Theirs is truly a
"community bank" philosophy within the context of a much larger entity. In fact,
BB&T is largely an amalgamation of community banks just like ours. At BB&T,
clients don't represent mere numbers; they represent relationships. We believe
that expanding and solidifying those relationships is crucial for success in the
years ahead - especially as the battleground becomes increasingly more
competitive, and "non-banks" continue to erode the market share of traditional
financial institutions. Developing a structure that will provide and satisfy all
the financial needs of a customer is an absolute necessity to maintain
relationships, and BB&T can make this possible.
We believe that this is the best and most effective way for our bank to
continue to thrive in the years to come. In addition, the range of products and
services we can offer as part of BB&T is dramatically greater than we've ever
been able to provide. I'm certain that you'll notice and appreciate the
difference.
Throughout the years, and especially throughout our deliberations on the
best course for Virginia First, we have been mindful of your support for our
endeavors. Thank you for your great contributions to the success of Virginia
First, and for your constant confidence in us. This is a bank to be proud of,
and the best is yet to come.
Sincerely,
/s/ Charles A. Patton
Charles A. Patton
President and Chief Executive Officer
3
<PAGE>
THE HISTORY OF VIRGINIA FIRST
1888
During the rebuilding period following the War Between The States, the
Richmond/Petersburg area - which had seen more than its share of destruction -
became the birthplace for The Virginia Mutual Savings and Loan Association: a
bank that would play an instrumental role for the area in the years to come.
1919
In the boom years after World War I, the Petersburg Mutual Building and
Loan Association is chartered to serve the financial needs of individuals and
businesses.
1930
Both the Virginia Mutual Savings and Loan Association and the
Petersburg Mutual Building and Loan Association survive the stock market crash
and Great Depression.
1956
William A. Patton is hired by Petersburg Savings and Loan, beginning
the career of the single person who has the greatest impact on the Institution's
growth spanning the next four decades.
1963
While the war in Vietnam dominates the headlines, the Petersburg area
benefits from the upturn in military facilities and personnel. The Defense
General Supply Center, Fort Pickett and Fort Lee all have a major effect on the
financial fortunes of Virginia Mutual Savings and Loan Association and
Petersburg Savings and Loan.
4
<PAGE>
For more than 110 years, our goal has been to serve the varied and
changing needs of our customers and shareholders as effectively and efficiently
as possible.
FINANCIAL CORP.
1971
Petersburg Savings and Loan Association, a founder of Data Systems
Corporation, automates its processes and places the bank in a leadership role in
meeting customer needs in a cost-effective way.
1973
To pool their strengths and serve clients in the best way possible,
Petersburg Savings and Loan agrees to be merged into Virginia Mutual Savings and
Loan Association.
1978
Virginia Mutual becomes the first bank in Virginia to convert from
mutual status to stock ownership, setting the trend for the stock ownership of
banks in the years to come. The Company changes its name to Virginia First.
1980
Virginia First converts from a state to a federal charter.
1981
Colony Savings Bank is bought by Virginia First, the bank's first
expansion beyond the tri-cities area. Adding three branches in the Roanoke
Valley to Virginia First's six, the bank is better positioned for growth.
5
<PAGE>
In many ways throughout the years, we have succeeded in our quest.
1985
The real estate crisis of the mid-eighties signals the demise of many
banks - but not Virginia First. While the effect was certainly felt, the bank
was able to demonstrate its ability to manage its way through the difficulties
and emerge as a financially strong, well-managed bank.
1991
Virginia First dramatically expands its mortgage banking capabilities
by purchasing Southern Atlantic Mortgage. This adds mortgage and construction
lending expertise outside of the bank's home markets to the bank's growing list
of capabilities. This new division - Virginia First Mortgage - is to become a
major contributor to the organization's growth through the nineties.
1992
A corporate culture is formed that fosters coaching as a management
style. It sets a tone of teamwork for the company Virginia First would become
over the next few years. Working hand-in-hand. Virginia First branches also
develop a retail mission statement that focuses on the specific needs of the
customer, empowering employees to take a leadership role in service delivery.
1993
Drawing upon its financial strength in the wake of the real estate
crisis. Virginia First buys former Coreast Savings Bank branch locations in
Lynchburg, Midlothian, Laburnum. Appomattox and Rocky Mount from the Resolution
Trust Company.
6
<PAGE>
Throughout the history of the banks that would merge to form Virginia
First Financial Corporation, one purpose remained constant: to always act in the
best interest of its customers and shareholders. This purpose remains as true
today as it did in the bank's humble beginnings so long ago.
Throughout the decades, Virginia First has always been at the vanguard
of banking and finance, always testing new ideas and shaping the financial
fortunes of Petersburg and the surrounding areas. In many ways, the history of
Virginia First has been a reflection of the areas where the bank has conducted
business, growing during times of growth, remaining steadfast in the times when
a steady hand has been required.
The story of Virginia First, therefore, has been a story of sage
management and dynamic strength. It has guided us for more than a century, and
it is a story we're proud to claim as our own.
1996
Freedom Financial is formed as a consumer finance subsidiary to allow
the bank to offer new products to its existing customer base while forming a
platform for expansion beyond traditional bank markets and distribution
channels.
1996
Charles A. Patton, the son of William A. Patton, succeeds his father as
Chief Executive Officer of Virginia First. Virginia First also enters the arena
of electronic commerce and the Internet through its acquisition of American
Finance and Investment, a mortgage banking company that originates mortgages
throughout a nationwide market via telemarketing and the World Wide Web.
1997
BB&T
Virginia First Financial Corporation enters into an agreement with BB&T
to merge Virginia First into the BB&T family, giving it a stronger foothold
entry in the Central Virginia market-place and a point of entry into Western
Virginia.
7
<PAGE>
FINANCIAL CONTENTS
Five Year Summary of Selected Financial Data 9
Management's Discussion and Analysis 10
Standards of Financial Reporting 30
Independent Auditors' Report 31
Consolidated Financial Statements 32
Notes to Consolidated Financial Statements 36
8
<PAGE>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended June 30 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Total interest income $ 66,131 $ 59,041 $ 53,525 $ 42,403 $ 40,307
Total interest expense 35,611 32,322 27,631 21,187 21,850
Net interest income 30,520 26,719 25,894 21,216 18,457
Provision for loan losses 2,347 2,429 1,390 1,090 1,171
Noninterest income 8,739 14,913 6,450 11,878 9,735
Noninterest expense 28,924 20,029 18,412 21,342 18,640
Income tax expense 2,876 7,032 4,992 3,681 3,127
Net earnings 5,112 12,142 7,550 6,981 6,404
SELECTED YEAR-END BALANCES
Assets $858,403 $746,867 $693,549 $583,580 $561,239
Securities 34,249 35,355 39,794 36,647 36,005
Loans 685,366 615,554 580,507 486,039 365,689
Loans held for sale 92,495 46,481 35,542 27,943 99,812
Deposits 600,205 573,536 503,667 456,720 454,231
Advances from Federal Home Loan Bank 181,552 102,052 134,658 79,872 66,000
Stockholders' equity 66,492 60,966 48,772 41,079 34,512
PER SHARE DATA
Net earnings $ .87 $ 2.09 $ 1.33 $ 1.25 $ 1.17
Cash dividends declared .10 .07 .05 .05 -
Book value 11.44 10.63 8.76 7.66 6.58
SELECTED RATIOS
Return on average assets .64% 1.74% 1.19% 1.24% 1.00%
Return on average equity 7.90 22.49 16.58 18.19 16.26
Average equity to average assets 8.14 7.74 7.16 6.83 6.13
Stockholders' equity to total assets 7.75 8.17 7.03 7.04 6.15
Nonperforming assets to total assets 2.30 2.10 1.70 1.65 2.15
Allowance for loan losses to loans 1.36 1.21 1.09 1.14 1.25
===========================================================================================================================
</TABLE>
9
<PAGE>
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, 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 three active subsidiaries; one is engaged in real estate
development, one is a title insurance agency, and the third is a company that
originates mortgage loans via the Internet.
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, 1997, 1996 and 1995, and its
consolidated financial position at June 30, 1997 and 1996. 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, 1997, 1996 and 1995
("fiscal year 1997", "fiscal year 1996" and "fiscal year 1995", respectively)
reflect the Company's strategies of expanding its community banking and mortgage
banking operations.
A number of events have occurred during the Company's 1997 fiscal year that
affect the comparability of operations between years. These events are:
o In September, 1996, Congress passed legislation allowing for a one-time
assessment to recapitalize the Savings Association Insurance Fund (the "SAIF").
The Company's assessment charged to earnings was $3,149,000. Following the
assessment, the annual deposit insurance premium paid by the Company declined
from $.23 per $100 of insured deposits to $.065 per $100 of insured deposits.
10
<PAGE>
o On December 19, 1996, the Company acquired American Finance and
Investment Inc. ("AFI") in a cash transaction. AFI is a mortgage banking company
originating mortgage loans on an automated basis through the Internet. It is
available to potential customers in forty-four states. During fiscal 1997, AFI
originated $115 million in loans, generated $1.2 million in revenue, and
incurred $1.7 million in operating expenses since the acquisition. The purchase
price in excess of the fair value of the net assets acquired amounted to
$594,000 and is being amortized over a period of 15 years.
o On May 26, 1997, BB&T Corporation and the Company announced that BB&T
Corporation will acquire the Company in a transaction valued at $148.4 million.
Upon approval of shareholders and receipt of necessary regulatory approvals,
shareholders will receive between $22.50 and $25.00 per share for each share of
the Company stock held.
o Primarily as a result of the aforementioned transaction, the "gross-up"
provision of the Company's nonqualified stock option plan resulted in a charge
to earnings for 1997 of $2,488,000 representing the tax gross-up applicable to
the appreciation in the outstanding stock options.
o In addition to the above, approximately $537,000 in expenses related to
the merger have been incurred to date and charged to earnings.
o The sale of substantially all of the Company's loan servicing portfolio
in fiscal 1996 has resulted in a 53% decline in loan servicing and fee income
from $3,056,000 in 1996 to $1,430,000 in 1997. Loan servicing income included
therein was $92,000 in 1997.
Net interest income increased by 14% in fiscal year 1997, compared with
fiscal year 1996, compared with a 3% increase in fiscal year 1996 over fiscal
year 1995. Increases in capital in recent years have permitted the Company to
increase both its assets and liabilities. Assets grew 15% in 1997 with loans
growing 10% and loans held for sale 99%. Because deposits grew only 5%,
borrowings increased 77% to fund the asset growth. Most of the increase in net
interest income in fiscal years 1997 and 1996 were attributable to the increase
in the size of the balance sheet. As market rates moderated in 1997 on both
earning assets and interest-bearing liabilities, the Company experienced growth
in the origination of mortgages and other loans while depositors migrated from
lower yielding checking and savings deposits to higher yielding certificates of
deposit.
Net Earnings. The Company's net earnings for fiscal year 1997 were
$5,112,000, compared to net earnings of $12,142,000 for fiscal year 1996 and
$7,550,000 for fiscal year 1995. On a per share basis, earnings for fiscal year
1997 were $.87, compared with $2.09 for fiscal year 1996 and $1.33 for fiscal
year 1995.
The per share figures for fiscal years 1995 and prior have been adjusted to
reflect the two-for-one split of the Company's common stock, which occurred on
November 17, 1995.
Of the $1.22 decline in earnings per share, the earnings per share effect
of the one-time SAIF charge, the nonqualified stock option charge, and the
merger expenses to date amounted to $.67 of the decline and the reduction in
loan servicing fee income amounted to $.18. The one-time gain on the sale of
servicing in 1996 added $.72 to earnings per share in 1996.
Earnings per share in 1996, without the one-time sale of servicing, would
have been $1.37 and earnings in 1997 without the one-time expenses would have
been $1.54 for a 12% increase in core earnings.
11
<PAGE>
The following table shows changes in earnings per share:
<TABLE>
<CAPTION>
Fiscal Year 1997 Fiscal Year 1996 Fiscal Year 1995
Versus 1996 Versus 1995 Versus 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings per share for fiscal years
1996, 1995 and 1994, respectively $2.09 $1.33 $1.25
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) attributable to:
Net interest income .65 .14 .82
Provision for loan losses .01 (.18) (.05)
Noninterest income (1.06) 1.46 (.96)
Noninterest expense (.47) (.28) .52
SAIF recapitalization assessment (.54) - -
Compensation value of nonqualified stock options (.43) - -
Merger related expenses (.09) - -
Income taxes .71 (.35) (.23)
Average shares outstanding _ (.03) (.02)
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase (1.22) .76 .08
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings per share for fiscal years
1997, 1996 and 1995, respectively $ .87 $2.09 $1.33
===========================================================================================================================
</TABLE>
Net Interest Income. Net interest income for fiscal year 1997 was
$30,520,000, an increase of $3,801,000, or 14.2%, compared with fiscal year
1996. For fiscal year 1996, net interest income was $26,719,000, an increase of
$825,000, or 3.2%, compared to fiscal year 1995.
The Company's net earnings are highly dependent on the difference between
the income it receives from loans and investments and its cost of funds,
consisting principally of the interest paid on interest-bearing deposits and
borrowings.
The yield received on the Company's loan and investment portfolios may not
change at the same time and in the same amount as the interest rates it pays on
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 increased as a result of upward trends in short-term
interest rates, which enables the Company to partially compensate for increased
deposit and borrowing costs.
12
<PAGE>
The following table reflects the average yields earned and rates paid by
the Company during the last three fiscal years.
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earnings assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $707,741 $62,640 8.85% $626,313 $56,368 9.00% $566,965 $50,685 8.94%
Investments (3) 39,472 2,786 7.06 33,702 1,979 5.87 39,076 2,376 6.08
Other interest-earning assets 17,986 949 5.28 13,558 694 5.12 8,627 464 5.38
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 765,199 66,375 8.67 673,573 59,041 8.77 614,668 53,525 8.71
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Cash and due from banks 8,678 8,417 8,494
Office properties and equipment, net 9,172 8,847 8,589
Other assets 19,616 12,571 9,923
Allowance for loan losses (8,440) (6,118) (6,126)
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $794,225 $697,290 $635,548
===========================================================================================================================
Interest-bearing liabilities:
Checking and money market
deposit accounts $101,896 3,787 3.72 $ 88,089 3,375 3.83 $ 85,395 3,081 3.61
Savings deposits 67,873 2,306 3.40 68,512 2,349 3.43 89,537 3,087 3.45
Certificates 380,106 21,551 5.67 348,664 20,609 5.91 267,934 14,511 5.41
Federal Home Loan Bank advances 137,068 7,672 5.60 98,365 5,968 6.07 105,173 6,414 6.10
Other borrowings 5,427 294 5.42 375 21 5.60 8,875 538 6.06
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 692,370 35,610 5.14 604,005 32,322 5.35 556,914 27,631 4.96
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Deposits 26,408 30,189 25,503
Other 10,778 9,103 7,608
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 729,556 643,297 590,025
Stockholders' equity 64,669 53,993 45,523
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $794,225 $697,290 $635,548
===========================================================================================================================
Net interest income $30,765 $26,719 $25,894
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate spread (2) 3.53% 3.42% 3.75%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.02% 3.97% 4.21%
===========================================================================================================================
</TABLE>
(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
(2) Average yield on total interest-earning assets less the average rate paid on
total interest-bearing liabilities.
(3) Interest income is on a fully taxable-equivalent basis.
13
<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 $7,334,000 in
fiscal year 1997 and increased by $5,516,000 in fiscal year 1996, as compared to
the respective previous fiscal years. Total interest expense increased by
$3,288,000 in fiscal year 1997 and increased by $4,691,000 in fiscal year 1996,
as compared to the previous fiscal years. The fiscal year 1997 and 1996
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. The decline in rates
in 1997 compared with 1996, particularly in deposits, contributed to the
increase in net interest income. Deposit rates increased in fiscal year 1996
over 1995, while asset yields remained flat.
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 the prior
year volume) and volume (change in volume multiplied by the prior year average
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 $4,046,000 increase in net interest income in
fiscal year 1997 was the net result of a growing balance sheet and declining
deposit rates, while the $825,000 increase in net interest income in fiscal year
1996 over 1995 was the result of growth in the balance sheet offset by rising
deposit interest rates.
<TABLE>
<CAPTION>
Fiscal Year 1997 Versus 1996 Fiscal Year 1996 Versus 1995
Increase (Decrease) Due to Increase (Decrease) Due to
(In thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $7,221 $(949) $6,272 $5,339 $ 344 $5,683
Investment securities 370 437 807 (321) (76) (397)
Other interest-earning assets 233 22 255 251 (21) 230
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,824 (490) 7,334 5,269 247 5,516
- ---------------------------------------------------------------------------------------------------------------------------
Checking and money market
deposit accounts 516 (104) 412 99 196 295
Savings deposits (22) (21) (43) (721) (17) (738)
Certificates 1,806 (864) 942 4,679 1,418 6,097
Federal Home Loan Bank advances 2,196 (492) 1,704 (413) (33) (446)
Other borrowings 274 (1) 273 (479) (38) (517)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,770 (1,482) 3,288 3,165 1,526 4,691
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income $3,054 $ 992 $4,046 $2,104 $(1,279) $ 825
===========================================================================================================================
</TABLE>
Asset Liability Management. The primary objectives of asset liability
management are to provide for the safety of depositor and investor funds, assure
adequate liquidity, and maintain an appropriate balance between interest
sensitive earning assets and interest bearing liabilities. During fiscal year
1997, the Company initiated a new approach to assessing its exposure to changes
in interest rates. Three new analytical tools are used to evaluate and quantify
the interest rate risk exposure--a matched funding matrix, simulation of the
effect on net interest income under various possible interest rate scenarios,
and computation of the economic value of equity for each of the scenarios.
Interest rate risk is determined by the relative sensitivities of earning
asset yields and interest bearing liability costs to changes in interest rates.
Overnight borrowed funds on which rates change daily and loans which are tied to
the prime rate or a Treasury rate differ considerably from long-term investment
securities and fixed rate loans. Similarly, time deposits over $100,000 and
money market deposit accounts are much more interest sensitive than interest
bearing checking and savings accounts.
14
<PAGE>
One method by which banks evaluate interest rate risk is to look at the
interest sensitivity gap, the difference between interest sensitive assets and
interest sensitive liabilities repricing during the same period, measured at a
specific point in time. The Company's interest rate sensitivity is illustrated
in the following interest rate sensitivity gap table. The table reflects
rate-sensitive positions at June 30, 1997, and is not necessarily reflective of
positions throughout the year. The carrying amounts of interest-rate-sensitive
assets and liabilities are presented in the periods in which they next reprice
to market rates or mature and are aggregated to show the interest rate
sensitivity gap. Anticipated prepayments on mortgage related loans and
mortgage-backed securities assumes a reasonable level of prepayments as
currently experienced by the Company in a stable, or flat, rate environment.
As can be seen from the table, the Company is asset sensitive within one
year and after five years and is slightly liability sensitive from one year to
five years. However, looking at the cumulative interest sensitivity gap, the
Company is asset sensitive throughout the time frame shown. This would generally
indicate that the Company would have an improved net interest margin in periods
of rising rates and would have a lower net interest margin in periods of
declining rates. From the gap table, it is not possible to quantify the actual
dollar impact on earnings in a changing rate environment.
While the static gap evaluation of interest rate sensitivity is useful, it
is not indicative of the actual dollar impact of fluctuating interest rates on
net interest income as the Company has significant loans with contractual terms
that limit the amount of interest rate change in any one year and in total over
the life of the loan. Thus the Company runs various earnings simulation
scenarios used to quantify the effect on net interest income in a rising or
declining rate environment over a several year time horizon. In addition, the
Company also computes the market value of equity (also called economic value of
equity) which essentially discounts the future cash flows inherent in the
current balance sheet. This provides an even longer term view of the exposure to
equity for changes in interest rates. In addition to these computations the
Company also computes a rate shock to the balance sheet. The shock tests are for
an immediate, and sustained, 1%, 2%, 3%, and 4% increase in rates and similarly
a shock decrease in rates.
As noted previously, the gap table would indicate the Company is asset
sensitive thereby benefiting in a rising rate environment but not a declining
rate environment. The results of the simulation computations confirm this. A 2%
increase in rates would improve net interest income approximately 5% in the
first 12 months whereas a 2% decline in rates would have approximately a 9%
negative impact on net interest income. In the second 12 months, the positive or
negative impact is significantly less than the first 12 month impact. For these
same 2% scenarios, the impact on the economic value of equity would be a
negative 18% for a 2% rise in rates and a 13% favorable impact for a 2% decline
in rates.
The processes described herein are currently evaluated on a quarterly
basis. The Company believes that given the current and projected forecast for
interest rates, it does not have an undue exposure to changes in interest rates.
It must also be noted that changes in interest rates can affect the banking
habits of the customer and the general level of economic activity. These
changes, which are difficult to predict, can also have additional favorable or
negative effects on the Company's earnings.
15
<PAGE>
INTEREST RATE SENSITIVITY GAP ANALYSIS
<TABLE>
<CAPTION>
June 30,1997 Expected Repricing or Maturity Date
- ------------------------------------------------------------------------------------------------------------------------------------
Within One to Three to After Five
One Year Three Years Five Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits with
the FHLB $ 15,978 6.36% $ - 0.00% $ - 0.00% $ - 0.00% $ 15,978 6.36%
Investment securities 10,424 6.58 37 8.0 4,017 6.54 19,771 6.47 34,249 6.51
Mortgages held for sale 92,495 7.61 92,495 7.61
Loans 477,903 8.88 100,299 9.11 36,780 9.38 70,384 9.26 685,366 8.98
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 596,800 8.58 100,336 9.11 40,797 9.10 90,155 8.65 828,088 8.68
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities
Time deposits 271,743 5.24 100,498 6.0 30,398 6.01 1,434 6.38 404,073 5.70
Savings and interest checking* 25,276 3.14 38,200 3.14 19,100 3.14 19,100 3.14 101,676 3.14
Money market checking* 63,477 4.17 63,477 4.17
FHLB borrowings 167,000 6.25 6,500 6.66 7,500 6.19 552 2.00 181,552 6.25
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 527,496 5.25 145,198 5.27 56,998 4.49 21,086 3.33 750,778 5.21
- -----------------------------------------------------------------------------------------------------------------------------------
Asset-liability gap $ 69,304 $ (44,862) $(16,201) $69,069 $ 77,310
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $ 69,304 $ 24,442 $ 8,241 $77,310
===================================================================================================================================
</TABLE>
*Projected runoff of non-maturity deposits was computed based upon decay
assumptions developed by bank regulators to assist banks in addressing FDICIA
rule 305.
16
<PAGE>
The Company's portfolio of loans totalled $685,366,000 at June 30, 1997.
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 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
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> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
Residential - fixed rate $ 67,489 9.8% $ 77,266 12.3% $ 74,592 12.6% $ 79,979 16.1% $ 38,882 10.4%
Residential - adjustable rate 292,943 42.6 270,374 43.2 256,463 43.4 190,490 38.4 179,331 47.8
- -----------------------------------------------------------------------------------------------------------------------------
Total residential 360,432 52.4 347,640 55.5 331,055 56.0 270,469 54.5 218,213 58.2
- -----------------------------------------------------------------------------------------------------------------------------
Commercial - fixed rate 16,248 2.4 16,633 2.7 14,678 2.5 17,970 3.6 17,786 4.8
Commercial - adjustable rate 30,548 4.4 32,089 5.1 45,630 7.7 54,067 10.9 61,975 16.5
- -----------------------------------------------------------------------------------------------------------------------------
Total commercial 46,796 6.8 48,722 7.8 60,308 10.2 72,037 14.5 79,761 21.3
- -----------------------------------------------------------------------------------------------------------------------------
Construction - fixed rate 15,877 2.3 20,185 3.2 9,640 1.6 - - - -
Construction - adjustable rate 126,105 18.3 101,190 16.2 100,477 17.0 90,456 18.3 36,531 9.8
- -----------------------------------------------------------------------------------------------------------------------------
Total construction 141,982 20.6 121,375 19.4 110,117 18.6 90,456 18.3 36,531 9.8
- -----------------------------------------------------------------------------------------------------------------------------
Total first mortgage loans 549,210 79.8 517,737 82.7 501,480 84.8 432,962 87.3 334,505 89.3
- -----------------------------------------------------------------------------------------------------------------------------
Second mortgage and home equity loans:
Fixed rate 22,159 3.2 18,201 2.9 14,981 2.6 9,180 1.8 6,204 1.7
Adjustable rate 31,668 4.6 29,233 4.7 24,845 4.2 20,679 4.2 14,658 3.9
- -----------------------------------------------------------------------------------------------------------------------------
Total second mortgage loans 53,827 7.8 47,434 7.6 39,826 6.8 29,859 6.0 20,862 5.6
- -----------------------------------------------------------------------------------------------------------------------------
Loans on savings accounts 2,190 .3 1,691 0.3 1,363 0.2 970 0.2 1,038 0.3
- -----------------------------------------------------------------------------------------------------------------------------
Installment loans:
Fixed rate 80,442 11.7 55,910 8.9 44,977 7.6 31,787 6.4 17,622 4.7
Adjustable rate 2,890 .4 3,275 0.5 3,481 0.6 639 0.1 415 0.1
- -----------------------------------------------------------------------------------------------------------------------------
Total installment loans 83,332 12.1 59,185 9.4 48,458 8.2 32,426 6.5 18,037 4.8
- -----------------------------------------------------------------------------------------------------------------------------
Gross loans 688,559 100.0% 626,047 100.0% 591,127 100.0% 496,217 100.0% 374,442 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
Less:
Unearned discount 581 301 1,361 1,555 1,847
Deferred income 2,612 2,665 2,886 3,012 2,290
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments 3,193 2,966 4,247 4,567 4,137
- -----------------------------------------------------------------------------------------------------------------------------
Total loans $685,366 $623,081 $586,880 $491,650 $370,305
=============================================================================================================================
</TABLE>
Provision for Loan Losses. The Company provided $2,347,000 during fiscal
year 1997 as additions to the allowance for loan losses, compared with
$2,429,000 in fiscal year 1996 and $1,390,000 in fiscal year 1995. In
establishing the level of the allowance for loan losses, the Company considers
many factors, including general economic conditions, loan loss experience,
historical trends and other circumstances, both internal and external. The
amount of the provision for loan losses is established based on evaluations of
the adequacy of the allowance for loan losses. The Company considers the size
and risk exposure of each segment of the loan portfolio. For secured loans,
management considers estimates of the fair value of the collateral, considering
the current and currently anticipated future operating or sales conditions. Such
estimates are particularly susceptible to changes that could result in a
material adjustment to future results of operations. Factors such as independent
appraisals, current economic conditions and the financial condition of borrowers
are periodically evaluated to determine whether or not the Company's investment
in such assets exceeds their estimated values. The Company's policy is to
establish both general and specific allowances for loan losses.
17
<PAGE>
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 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 7,527 $ 6,373 $ 5,611 $ 4,616 $ 3,570
Provision charged to expense 2,347 2,429 1,390 1,090 1,171
Loans charged off:
Residential real estate 27 23 9 68 9
Commercial real estate 156 1,056 458 _ _
Construction _ _ _ _ _
Consumer and other loans 466 257 205 71 222
- ---------------------------------------------------------------------------------------------------------------------------
Total gross charge-offs 649 1,336 672 139 231
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Residential real estate _ _ _ _ _
Commercial real estate _ _ _ _ _
Construction _ _ _ _ _
Consumer and other loans 70 61 44 44 106
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 70 61 44 44 106
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 579 1,275 628 95 125
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 9,295 $ 7,527 $ 6,373 $ 5,611 $ 4,616
===========================================================================================================================
Average loans outstanding (1) $650,036 $594,653 $550,056 $485,454 $437,253
Loans at year end (1) 685,366 623,081 586,880 491,650 370,305
Ratio of provision for loan
losses to average loans .30% 0.41% 0.25% 0.22% 0.27%
Ratio of net charge-offs
to average loans .09% 0.21% 0.11% 0.02% 0.03%
Ratio of allowance for loan
losses to loans 1.36% 1.21% 1.09% 1.14% 1.25%
===========================================================================================================================
</TABLE>
(1) Loans receivable shown gross of allowance for loan losses, net of unearned
income, deferred income, and discounts.
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 1998 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) June 30 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Category Category Category Category Category
Percent of Percent of Percent of Percent of Percent of Percent of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $1,640 60.2% $1,425 63.1% $1,055 62.8% $ 807 60.5% $ 594 63.8%
Commercial real estate 2,880 6.8 2,552 7.8 2,958 10.2 3,099 14.5 3,170 21.3
Construction 3,400 20.6 2,200 19.4 1,150 18.6 730 18.3 272 9.8
Consumer and other loans 1,375 12.4 1,350 9.7 1,210 8.4 975 6.7 580 5.1
- ------------------------------------------------------------------------------------------------------------------------------
Total $9,295 100.0% $7,527 100.0% $6,373 100.0% $5,611 100.0% $4,616 100.0%
==============================================================================================================================
</TABLE>
18
<PAGE>
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.
On January 27, 1997, the Company opened a full-service retail branch in the
Brafferton Shopping Center on Garrisonville Road in Stafford, VA. As of June 30,
1997, the Company operated twenty-four full service retail facilities throughout
Virginia.
The Company originated/purchased $19,177,000 of residential equity lines of
credit and fixed-rate second mortgages during fiscal year 1997, compared with
$22,808,000 in fiscal year 1996 and $17,070,000 in fiscal year 1995. The Company
also originated/purchased $55,662,000 of consumer and installment loans during
fiscal year 1997, compared with $24,705,000 in fiscal year 1996 and $25,527,000
in fiscal year 1995. The Company has placed emphasis on making these forms of
credit available to its retail customers. The Company's success in promoting
these loan products is attributed to enhanced training of retail branch
personnel, the centralization of credit decision-making, and marketing campaigns
that target these products.
The Company occasionally purchases loans to obtain geographic diversity and
yields not obtainable in the Company's normal lending areas. The Company
purchased $19,289,000 of loans in fiscal year 1997 ($16,768,000 of fixed-rate
second mortgages and $2,521,000 of manufactured home loans), compared with
$6,930,000 of fixed-rate second mortgage loans in fiscal year 1996, and
$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).
The following table summarizes retail banking loan originations and
purchases by type of loan for fiscal years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Residential equity lines of credit (1) $10,116 13.5% $10,997 20.2% $10,250 19.5%
Fixed-rate second mortgages 25,829 34.5 18,741 34.4 9,990 18.9
Consumer loans 38,894 52.0 24,705 45.4 32,529 61.6
- ---------------------------------------------------------------------------------------------------------------------------
Total originations and purchases $74,839 100.0% $54,443 100.0% $52,769 100.0%
===========================================================================================================================
</TABLE>
(1) Reflects loan balances prior to deduction of undisbursed loan amounts.
19
<PAGE>
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.
In August 1996, the Company opened mortgage loan centers in the Maryland
communities of Columbia, Frederick, Timonium and Bel Air. At June 30, 1997, the
Company operated 12 loan production centers in northern Virginia and Maryland.
On December 16, 1996, the Company acquired American Finance and
Investments, Inc. ("AFI"), a provider of residential mortgage loans through the
Internet and through telemarketing. 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 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 may 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.
During the first six months of ownership, AFI generated $115,000,000 in mortgage
loan originations.
Origination and Purchase of Mortgage Loans. The Company originated
$628,091,000 of fixed rate conventional, Federal Housing Administration ("FHA"),
and Veterans Administration ("VA") residential mortgage loans during fiscal year
1997, compared to $431,069,000 in fiscal year 1996 and $252,254,000 in fiscal
year 1995. 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 45.7% increase in fiscal year 1997 compared to fiscal year 1996 was
due to the acquisition of AFI which added $115,000,000 in originations.
20
<PAGE>
The Company originated $75,534,000 of adjustable rate residential mortgage
loans during fiscal year 1997, compared to $81,741,000 in fiscal year 1996 and
$82,534,000 in fiscal year 1995. 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. Adjustable rate mortgage
loan originations were 9.7% of total permanent mortgage loan and construction
loan originations in fiscal year 1997, compared to 14.2% in fiscal year 1996 and
20.3% in fiscal year 1995.
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 1997, 1996 and
1995.
The Company originated $77,006,000 of construction loans during fiscal year
1997, compared with $57,973,000 in fiscal year 1996 and $70,277,000 in fiscal
year 1995. Construction loans were 9.8% of total permanent mortgage loan and
construction loan originations in fiscal year 1997, compared with 10.1% in
fiscal year 1996 and 17.3% in fiscal year 1995. The increases in both
outstanding construction loan balances and loan commitments has been consistent
with management's goals of diversifying the Company's loan portfolio and
penetrating 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 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 1998 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.
21
<PAGE>
The following table summarizes permanent first mortgage and construction
loan originations by type of loan for fiscal years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Permanent mortgage loans:
Fixed rate residential:
Conventional $312,896 39.9% $317,884 55.4% $167,204 41.2%
FHA/VA 315,195 40.1 113,185 19.7 85,050 21.0
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed rate residential 628,091 80.0 431,069 75.1 252,254 62.2
- ---------------------------------------------------------------------------------------------------------------------------
Adjustable rate residential:
One year 41,259 5.3 46,635 8.1 71,307 17.5
Three year 34,275 4.4 35,106 6.1 11,227 2.8
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustable rate residential 75,534 9.7 81,741 14.2 82,534 20.3
- ---------------------------------------------------------------------------------------------------------------------------
Fixed rate commercial 4,154 .5 3,283 0.6 - -
- ---------------------------------------------------------------------------------------------------------------------------
Adjustable rate commercial:
One year - - - - 804 0.2
Other - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustable rate commercial - - - - 804 0.2
- ---------------------------------------------------------------------------------------------------------------------------
Construction loans (1):
Residential construction 54,873 - 41,121 7.2 47,451 11.7
Acquisition, development
and commercial construction 22,133 - 16,852 2.9 22,826 5.6
- ---------------------------------------------------------------------------------------------------------------------------
Total construction 77,006 9.8 57,973 10.1 70,277 17.3
- ---------------------------------------------------------------------------------------------------------------------------
Total originations and purchases $784,785 100.0% $574,066 100.0% $405,869 100.0%
===========================================================================================================================
</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 financial asset to the transaction's counterparty at a specific price
for a specific period of time. In this instance, the 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.
22
<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 fiscal years 1996 and
1995, a large portion of the Company's loans were sold with the Company
retaining the rights to service the loans. Since, the quarter ended March 31,
1996, the Company has 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
$4,205,000 in fiscal year 1997, an increase of $1,340,000, or 46.8%, over the
gains in fiscal year 1996. Gains from such sales in fiscal year 1996 were
$2,865,000, an increase of $1,968,000, or 219.4%, from the gains of $897,000 in
fiscal year 1995. The substantially higher gains in fiscal year 1997 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.
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 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate $378,328 74.0% $331,434 82.9% $180,454 69.4%
Adjustable rate 132,926 26.0 68,128 17.1 79,556 30.6
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage loans sold $511,254 100.0% $399,562 100.0% $260,010 100.0%
===========================================================================================================================
</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 $163,600,000 in fiscal
year 1997, $117,913,000 in fiscal year 1996, and $51,905,000 in fiscal year
1995.
In an environment of stable interest rates, the Company's gains on the sale
of mortgage loans and securitized loans would generally be limited to those
gains resulting from the yield differential between retail mortgage loan
interest rates and rates required by secondary market purchasers. A loss from
the sale of a loan may occur if interest rates increase between the time the
Company establishes the interest rate on a loan and the time the loan is sold.
Because of the uncertainty of future loan origination volume and the future
level of interest rates, there can be no assurance that the Company will realize
gains on the sale of financial assets in future periods.
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.
23
<PAGE>
Loan servicing income decreased to $92,000 in fiscal 1997 and by $130,000
to $3,056,000 during fiscal year 1996 and increased by $580,000 to $3,186,000
during fiscal year 1995. The increases in mortgage loan servicing income in
fiscal year 1995 was 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 1997 was due to the sale in the fourth quarter of fiscal
1996 of substantially all loans serviced for others except for $21,164,000 still
retained.
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 $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.
The following table indicates the components of the Company's mortgage loan
servicing portfolio at the indicated dates:
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended June 30 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Amount Amount Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Company's mortgage loan portfolio $496,917 $440,062 $ 429,438
Serviced for others:
FNMA 6,081 7,252 655,073
FHLMC 14,789 13,528 30,406
Other investors 294 7,056 60,214
- ---------------------------------------------------------------------------------------------------------------------------
Total serviced for others 21,164 27,836 745,693
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage loans serviced $518,081 $467,898 $1,175,131
===========================================================================================================================
</TABLE>
Investments. The table below shows the carrying value of securities at the
dates indicated:
<TABLE>
<CAPTION>
(In thousands) June 30 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Held to maturity:
U.S. government agency $ - $ - $15,460
State and municipal 6,174 6,278 7,630
Agency mortgage/backed 369 374 593
- ---------------------------------------------------------------------------------------------------------------------------
Total held to maturity 6,543 6,652 23,683
- ---------------------------------------------------------------------------------------------------------------------------
Available for sale:
FHLB stock 9,078 6,998 7,333
U.S. government agency notes 6,461 6,385 -
Agency mortgage/backed 12,167 15,320 8,778
- ---------------------------------------------------------------------------------------------------------------------------
Total available for sale 27,706 28,703 16,111
- ---------------------------------------------------------------------------------------------------------------------------
Total $34,249 $35,355 $39,794
===========================================================================================================================
</TABLE>
24
<PAGE>
The table below shows the weighted average yields and maturities, at
carrying value, of securities (excluding the FHLB stock) at June 30, 1997:
<TABLE>
<CAPTION>
(In thousands)
After One But After Five But
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> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
State and municipal $ - -% $ - -% $ - -% $ 6,174 5.06% $ 6,174 5.06%
Other - - - - - - 379 8.00 369 8.00
- ----------------------------------------------------------------------------------------------------------------------------------
Total held to maturity - - - - - - 6,543 5.23 6,543 5.23
- ----------------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. government agency notes - - 3,973 6.52 - - 2,488 7.00 6,461 6.71
Agency mortgaged/backed - - - - - - 12,167 7.14 12,167 7.14
- ----------------------------------------------------------------------------------------------------------------------------------
Total available for sale - _ 3,973 6.52 - - 14,655 7.12 18,628 6.99
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ - -% $3,973 6.52% $ - -% $21,198 6.54% $25,171 6.53%
==================================================================================================================================
</TABLE>
Noninterest Income. As a result of the Company's sale of substantially the
entire loan servicing portfolio in 1996, such loan servicing and fee income
declined from $3,050,000 in 1996 to $1,430,000 in 1997 consisting primarily of
loan fee income. The gain on the sale of loans and securitized loans increased
from $2,865,000 in 1996 to $4,205,000 in 1997. The increase is attributable to a
combination of the volume increase in loans originated and sold and the sale of
loans with servicing released. Financial service fees increased by $482,000, or
21.0%, in fiscal year 1997, and by $265,000, or 13.1%, in fiscal year 1996,
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 and an
increase in ATM fees resulting from the implementation of surcharge fees on
certain ATM usages. In addition, financial service fees in fiscal year 1997
included no fees from the Company's previous relationship with INVEST Financial
Services, Inc. ("INVEST"), compared to $52,000 in fiscal year 1996 and $155,000
in fiscal year 1995. Such fees are lower in the fiscal year 1996, as compared to
the previous year, since rising market interest rates in fiscal year 1995 and
1996 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 engaged CoreLink Financial, Inc. ("CoreLink") as its
broker-dealer for providing mutual funds and other securities products to the
Company's customers.
Sales of real estate owned yielded net gains of $46,000, $279,000 and
$282,000 in fiscal years 1997, 1996 and 1995, respectively. The Company recorded
losses on the revaluation of real estate owned of $777,000 and $192,000 in
fiscal years 1996 and 1995. The Company did not have a revaluation allowance for
estimated losses on real estate owned at June 30, 1997.
Century Title Insurance Agency, Inc. was incorporated in December 1994 as a
subsidiary of the Savings Bank. This 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 $223,000, $192,000 and $28,000 of gross title
fee income in fiscal years 1997, 1996 and 1995, respectively and recorded in
other income.
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 a retail banking branch office
location.
Noninterest Expense. Personnel and related employee benefits expense is the
Company's largest non-interest expense. Personnel expense for fiscal year 1997
was $14,149,000, compared with $10,188,000 in fiscal year 1996 and $9,802,000 in
fiscal year 1995. The $3,961,000 increases in personnel costs in fiscal year
1997, as compared with fiscal year 1996, includes the $2,488,000 expense
applicable to the nonqualified stock options and $751,000 in personnel
25
<PAGE>
costs at AFI, since acquisition. Excluding these items, personnel costs
increased 7.1% over 1996. The balance of personnel cost increases is primarily
attributable to the increased volume in mortgage originations and general merit
increases to staff personnel.
Occupancy expense for the past three fiscal years was $1,777,000,
$1,594,000 and $1,451,000, respectively. A portion of the 11.5% increase for
fiscal year 1997 and the 9.9% increase for fiscal year 1996 was attributable to
the addition of retail banking branch offices.
Data processing expense for the past three fiscal years was $1,861,000,
$1,753,000 and $1,515,000, respectively. The fiscal year 1997 increase of 6.2%
was due to general growth in the bank whereas the 1996 increase of 15.7% was due
to increased loan and deposit account volume, a mortgage loan tracking system,
and local area networking.
Advertising expense amounted to $858,000, $366,000, and $269,000 for fiscal
years 1997, 1996, and 1995, respectively. The increase of $292,000 between 1997
and 1996 is attributable to the advertising costs at AFI. The significant cost
of deposit insurance premiums in 1997 is attributable to the one time
recapitalization premium of $3,149,000 paid in fiscal year 1997. Other
noninterest expense was $4,580,000, $3,492,000, and $2,956,000 in 1997, 1996,
and 1995, respectively. Approximately half ($537,000) of the increase from 1996
to 1997 is applicable to expenses incurred in connection with the anticipated
merger with BB&T Corporation.
Income Taxes. Income tax expense for fiscal year 1997 was $2,876,000,
resulting in an effective tax rate of 36.0%. By comparison, the Company had
income tax expense of $7,032,000 for an effective tax rate of 36.7% in fiscal
years 1996 and $4,992,000 in fiscal year 1995 for an effective tax rate of
39.8%.
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 year
1996 was 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 funding (liquidity)
for the Company consist of checking and savings deposits, borrowings from the
FHLB and others, and net earnings retained from operations. Deposits totalled
$600,205,000 at June 30, 1997, an increase of $26,669,000, or 4.6%, over the
$573,536,000 at June 30, 1996. Certificates of deposit grew by $36,487,000 while
checking and money market deposit accounts decreased by $8,311,000 and savings
deposits declined by $9,818,000. The movement of customer deposits from the
lower rate checking and savings products to the higher rate certificates of
deposit products is a continuation of the trend in banking that has occurred
over recent years.
Advances from the FHLB increased by $79,500,000 to $181,552,000 at June 30,
1997, compared with $102,052,000 at June 30, 1996. The increase in these
borrowings funded the $46,014,000 increase in loans held for sale and the 11%
increase in loans outstandings.
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, 1997, the
Company was conditionally committed under standby letters of credit aggregating
$20,843,000.
Due to the relative size of the Company's loan portfolio, the investment
portfolio is not a material component of earning assets. Investments (classified
as either held to maturity or available for sale) totalled $34,249,000 at June
30, 1997 and $35,355,000 at June 30, 1996. Such balances represented 4.0% 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
26
<PAGE>
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, 1997 and 1996, the
Company had liquidity ratios of 4.3% and 5.2%, respectively. The Company's
management anticipates that it will be able to maintain its current level of
regulatory liquidity during fiscal year 1998.
At June 30, 1997, the Savings Bank's net worth under generally accepted
accounting principles ("GAAP") was $66,492,000. 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, 1997, 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.
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 no deposit premiums since 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 considered 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.
In September, 1996, Congress passed legislation authorizing 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 one-time special assessment charged the Company in December was $3,149,000.
Thereafter, the Company's deposit insurance premium dropped from $.23 to $.065
per $100 of insured deposits.
Asset Quality. When a borrower fails to make a required loan payment, the
Company contacts the borrower and attempts to cause the default to be cured. In
general, first attempts at contact are made immediately following the assessment
of late charges 15 days following the due date. Defaults are cured promptly in
most cases. If the borrower has not paid by the 45th day of delinquency a letter
is sent giving the borrower 7 days in which to cure the default. If the default
is not cured by the expiration date the loan is accelerated. If the delinquency
on a mortgage loan exceeds 90 days and is not cured through the Company's normal
collection procedures, or an acceptable arrangement is not worked out with the
borrower, the Company will institute measures to remedy the default, including
commencing a foreclosure action or, in special circumstances, accepting from the
mortgagor a voluntary deed of the secured property in lieu of foreclosure.
Loans are placed on non-accrual status when, in the judgement of the
Company's management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. Generally, all loans more than 90 days
delinquent are placed on non-accrual status. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate 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.
27
<PAGE>
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 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential mortgage $ 7,419 $ 5,029 $ 3,415 $ 3,705 $ 4,544
Commercial mortgage 1,061 1,827 2,068 2,718 2,287
Construction 3,092 2,747 3,259 - -
Consumer non-mortgage 507 1,342 545 346 347
- ---------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 12,079 10,945 9,287 6,769 7,178
Specific loss allowances - (646) (768) (1,046) (518)
- ---------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans, net 12,079 10,299 8,519 5,723 6,660
- ---------------------------------------------------------------------------------------------------------------------------
Real estate acquired through foreclosure:
One to four family residential units 5,903 2,319 2,576 3,359 1,789
Residential lots or projects 934 2,004 106 137 141
Shopping/retail centers 623 1,727 672 672 4,426
Office buildings - - 188 - 1,005
Commercial land 187 192 351 350 159
- ---------------------------------------------------------------------------------------------------------------------------
Total real estate acquired through foreclosure 7,647 6,242 3,893 4,518 7,520
Specific and general allowances for losses - (889) (637) (615) (2,134)
- ---------------------------------------------------------------------------------------------------------------------------
Total real estate acquired through
foreclosure, net 7,647 5,353 3,256 3,903 5,386
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $19,726 $15,652 $11,775 $ 9,626 $12,046
===========================================================================================================================
Non-accrual loans to total loans 1.76% 1.67% 1.47% 1.18% 1.82%
Total non-performing assets to sum of
loans and net real estate acquired
through foreclosure 2.85% 2.52% 2.02% 1.96% 3.25%
Total non-performing assets
to total assets 2.30% 2.10% 1.70% 1.65% 2.15%
===========================================================================================================================
</TABLE>
The net amount of interest income foregone during fiscal years 1997, 1996
and 1995 on loans classified as non-performing was $576,000, $263,000, and
$250,000 respectively.
The following table summarizes all real estate acquired through
foreclosure, by property type, at June 30, 1997:
<TABLE>
<CAPTION>
Number Original Net
(Dollars in thousands) of Units Basis Allowances Investment
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One to four family residential units 25 $5,903 $ - $5,903
Residential lots or projects 5 934 - 934
Shopping/retail centers 2 623 - 623
Commercial land 1 187 - 187
- ---------------------------------------------------------------------------------------------------------------------------
33 7,647 - 7,647
General loss allowance - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Total real estate acquired through foreclosure 33 $7,647 $ - $7,647
===========================================================================================================================
</TABLE>
28
<PAGE>
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, 1997, such potential problem loans that are not included in the
above tables as nonperforming amounted to approximately $4.3 million.
NEW ACCOUNTING STANDARDS
In May 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights", was
issued. SFAS 122 became 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 SFAS123 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.
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. SFAS No. 125 supercedes SFAS No. 122. 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.
In February 1997, SFAS No. 128, Earnings Per Share was issued. The
Statement supersedes APB No. 15 and AICPA Accounting Interpretations 1-102 of
Opinion 15. It replaces the presentation of primary earnings per share (EPS)
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entries with complex
capital structures. Basic EPS excludes dilution and is computed by dividing net
income by the weighted-average number of common shares outstanding. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and then shared in the earnings of the entity. This statement is effective for
financial statements issued for periods ending after December 15, 1997. Earlier
application is not permitted, however, an entity is permitted to disclose
proforma amounts computed using this Statement in the notes to financial
statements in periods prior to required adoption. On a proforma basis, if the
Company had adopted this Statement at June 30, 1997, basic EPS would have been
$.89 for fiscal year 1997 and diluted EPS would have been $.87 per share.
29
<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/ William J. Vogt
Charles A. Patton William J. Vogt
President and Senior Vice President
Chief Executive Officer and Chief Financial Officer
30
<PAGE>
INDEPENDENTS AUDITOR'S 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, 1997 and 1996, and the related consolidated statements
of earnings, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1997. 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
present fairly, in all material respects, the financial position of Virginia
First Financial Corporation and subsidiaries as of June 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended June 30, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
August 14, 1997
31
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(In thousands, except share data) June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (includes interest bearing deposits of
$15,978 in 1997 and $12,270 in 1996) $ 26,738 $ 24,575
Securities held to maturity
(fair value $6,609 in 1997 and $6,660 in 1996) (note 2) 6,543 6,652
Securities available for sale (note 3) 27,706 28,703
Loans, net of unearned income and discounts (note 4) 685,366 623,081
Less: allowance for loan losses (9,295) (7,527)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 676,071 615,554
Loans held for sale 92,495 46,481
Real estate owned, net (note 5) 7,647 5,353
Office properties and equipment, net (note 6) 9,644 8,780
Accrued interest receivable, net 5,781 5,292
Other assets 5,778 5,477
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $858,403 $746,867
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 7) $600,205 $573,536
Notes payable and other borrowings (note 8) 611 639
Advances from Federal Home Loan Bank (note 9) 181,552 102,052
Advance payments by borrowers for taxes and insurance 3,397 2,169
Accrued expenses and other liabilities 6,146 7,475
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 791,911 685,871
- ---------------------------------------------------------------------------------------------------------------------------
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 5,810,462 shares in 1997 and 5,740,503 shares in 1996 5,810 5,740
Additional paid-in capital 9,115 8,439
Retained earnings-substantially restricted 51,478 46,943
Net unrealized gain (loss) on securities available for sale 89 (126)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 66,492 60,996
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 6, 10, 12, and 15)
Total liabilities and stockholders' equity $858,403 $746,867
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(In thousands, except share data) Years Ended June 30 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and loans available for sale $62,640 $56,368 $50,685
Securities and held to maturity 778 519 578
Securities available for sale 1,764 1,460 1,798
Other interest-earning assets 949 694 464
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 66,131 59,041 53,525
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (note 7) 27,645 26,333 20,679
Borrowings 7,966 5,989 6,952
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 35,611 32,322 27,631
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 30,520 26,719 25,894
Provision for loan losses (note 4) 2,347 2,429 1,390
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 28,173 24,290 24,504
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Gain on sale of loans and securitized loans, net 4,205 2,865 897
Loan servicing and fee income 1,430 3,056 3,186
Gain on sale of loan servicing rights - 6,847 14
Gain (loss) on sale of investment securities - 4 (103)
Financial service fees 2,775 2,293 2,028
Gain on sale of real estate owned 260 279 282
Loss on revaluation of real estate owned (214) (777) (192)
Other 283 346 338
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 8,739 14,913 6,450
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Personnel 14,149 10,188 9,802
Occupancy, net 1,777 1,594 1,451
Equipment 1,521 1,216 1,125
Advertising 858 366 269
Federal deposit insurance premiums 3,912 1,173 1,047
Data processing 1,861 1,753 1,515
Amortization of intangibles 266 247 247
Other 4,580 3,492 2,956
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 28,924 20,029 18,412
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income tax expense 7,988 19,174 12,542
Income tax expense (note 10) 2,876 7,032 4,992
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,112 $12,142 $ 7,550
===========================================================================================================================
Net earnings per share (note 11) $ .87 $ 2.09 $ 1.33
===========================================================================================================================
Average common and common equivalent shares outstanding 5,854,732 5,809,410 5,676,406
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share data) Years Ended June 30, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Retained Gain (Loss) on
Additional Earnings - Securities Total
Common Stock Paid-in Substantially Available Stockholders'
Shares Amount Capital Restricted for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 $19 - - - - (31) (31)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 5,740,503 5,740 8,439 46,943 (126) 60,996
Net earnings - - - 5,112 - 5,112
Cash dividends ($.10 per share) - - - (577) - (577)
Common stock issued due to
exercise of stock options 45,000 45 270 - - 315
Common stock issued under
incentive compensation plan 9,210 9 116 - - 125
Common stock issued under
dividend reinvestment
and stock purchase plan 15,749 16 290 - - 306
Change in net unrealized
gain (loss) on securities
available for sale, net of
income taxes of $82 - - - - 215 215
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 5,810,462 $5,810 $9,115 $ 51,478 $ 89 $ 66,492
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1997 1996 1995
- ---------------------------------- ---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings $ 5,112 $ 12,142 $ 7,550
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization 1,355 1,143 1,044
Provision for loan losses and losses on real estate owned 2,561 3,206 1,582
Loans held for sale:
Originations and purchases (553,064) (386,178) (231,122)
Gain on sales (4,204) (2,865) (911)
Proceeds from sales 511,254 378,104 224,434
Losses (gains) on securities available for sale - (4) 103
Increase in other assets (1,056) (1,716) (3,281)
(Decrease) increase in accrued expenses and other liabilities (1,329) 3,834 228
Other net 0 506 383
--------- --------- ---------
Net cash (used)/provided by operating activities (39,371) 8,172 10
--------- --------- ---------
INVESTING ACTIVITES
Net increase in loans (62,864) (42,850) (97,343)
Securities held to maturity:
Principal collected 109 1,352 263
Securities available for sale:
Purchases (19,900) (27,376) (13,757)
Net proceeds from sales 16,257 3,974 7,252
Principal collected 4,855 25,658 5,483
Net (increase) decrease real estate owned (2,508) 2,439 1,896
Office properties and equipment:
Purchases (1,954) (818) (1,030)
Proceeds from sales 2 13 1
--------- --------- ---------
Net cash used in investing activities (66,003) (37,608) (97,235)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in savings, checking and
money market deposit accounts (2,385) 18,194 (48,778)
Net increase in certificates of deposit 29,054 51,675 95,725
Borrowings resulting from:
Securities sold under agreements to repurchase 18,544 5,962 18,661
Advances from Federal Home Loan Bank 353,900 292,544 185,478
Other 18,910 13,379 12,745
Repayments of borrowings attributable to:
Securities sold under agreements to repurchase (18,544) (5,962) (18,661)
Advances from Federal Home Loan Bank (274,400) (325,150) (130,692)
Other (18,938) (13,297) (12,738)
Net increase (decrease) in mortgage escrow funds 1,228 (85) 308
Proceeds from issuance of common stock 745 508 212
Cash dividends paid (577) (395) (275)
--------- --------- ---------
Net cash provided by financing activities 107,537 37,373 101,985
--------- --------- ---------
Net increases in cash and cash equivalents 2,163 7,937 4,760
Cash and cash equivalents at beginning of year 24,575 16,638 11,878
--------- --------- ---------
Cash and cash equivalents at end of year $ 26,738 $ 24,575 $ 16,638
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash payments of interest $ 35,377 $ 33,972 $ 27,154
--------- --------- ---------
Cash payments of income taxes $ 7,435 $ 4,782 $ 4,924
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
The Company classifies its debt and marketable equity securities as either
held to maturity or available for sale.
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.
The Company does not have securities classified as "trading". The Company's
investment in the stock of the Federal Home Loan Bank ("FHLB") of Atlanta is
stated at cost.
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").
Loans and Loans Held for Sale
Loans 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 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.
36
<PAGE>
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 which
may be sold prior to maturity. These loans have been classified as loans 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 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. 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.
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.
37
<PAGE>
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 SFAS114 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, 1997 or 1996.
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.
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.
38
<PAGE>
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 three to seven years for furniture, fixtures, equipment and
vehicles and ten to 39 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 $2,251,000 and $1,983,000 at June 30, 1997 and 1996,
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
1996 and 1995 have been reclassified to conform to classifications adopted in
fiscal year 1997.
2. SECURITIES HELD TO MATURITY
The amortized cost, fair value and gross unrealized gains and losses of the
Company's securities held to maturity are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
June 30, 1997
<S> <C> <C> <C> <C>
Municipal bonds $6,174 $52 $ - $6,226
Federal agency mortgage-backed 369 14 - 383
- ---------------------------------------------------------------------------------------------------------------------------
Total 6,543 $66 $ - $6,609
- ---------------------------------------------------------------------------------------------------------------------------
June 30, 1996
Municipal bonds $6,278 $ - $ - $6,278
Federal agency mortgage-backed 374 8 - 382
- ---------------------------------------------------------------------------------------------------------------------------
Total $6,652 $ 8 $ - $6,660
===========================================================================================================================
</TABLE>
39
<PAGE>
3. SECURITIES AVAILABLE FOR SALE
The amortized cost, fair value, and gross unrealized gains and losses of
the Company's securities available for sale are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1997
FHLB stock $ 9,078 $ - $ - $ 9,078
Federal agency notes 6,453 8 - 6,461
Federal agency mortgage-backed 12,032 135 - 12,167
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 27,563 $ 143 $ - $ 27,706
===========================================================================================================================
June 30, 1996
FHLB stock $ 6,998 $ - $ - $ 6,998
Federal agency notes 6,440 - 55 6,385
Federal agency mortgage-backed 15,468 - 148 15,320
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 28,906 $ - $ 203 $ 28,703
===========================================================================================================================
</TABLE>
The table below shows the maturities of investment securities at June 30,
1997, excluding the FHLB stock.
<TABLE>
<CAPTION>
Amortized Fair
(in thousands) Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
Held to maturity:
<S> <C> <C>
After five but within ten years $ - $ -
After ten years 6,543 6,609
- ---------------------------------------------------------------------------------------------------------------------------
Total held to maturity 6,543 6,609
- ---------------------------------------------------------------------------------------------------------------------------
Available for sale:
Within one year - -
After one but within five years 3,953 3,973
After five but within ten years 14,532 14,655
- ---------------------------------------------------------------------------------------------------------------------------
Total available for sale 18,485 18,628
- ---------------------------------------------------------------------------------------------------------------------------
Total $25,028 $25,237
===========================================================================================================================
</TABLE>
Proceeds from sales of securities available for sale during fiscal year
1997 were $16,257,000 resulting in no gain or loss; for fiscal year 1996 there
were $3,974,000 in sales resulting in gross gains of $4,000 and proceeds from
such sales during fiscal year 1995 were $7,252,000 resulting in gross losses of
$103,000.
40
<PAGE>
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Residential $360,432 $347,640
Commercial 46,796 48,722
Construction 141,982 121,375
- ---------------------------------------------------------------------------------------------------------------------------
Total first mortgage loans 549,210 517,737
- ---------------------------------------------------------------------------------------------------------------------------
Second mortgage loans 53,827 47,434
Loans on savings accounts 2,190 1,691
Consumer loans 83,332 59,185
- ---------------------------------------------------------------------------------------------------------------------------
Gross loans 688,559 626,047
Less:
Unearned discount 581 301
Deferred income 2,612 2,665
- ---------------------------------------------------------------------------------------------------------------------------
Loans 685,366 623,081
Allowance for loan losses 9,295 7,527
- ---------------------------------------------------------------------------------------------------------------------------
Total loans, net $676,071 $615,554
===========================================================================================================================
</TABLE>
At June 30, 1997 and 1996, mortgage loans held for investment with unpaid
principal balances totaling $10,352,000 and $9,603,000, respectively, were
contractually delinquent as to principal or interest for ninety days or more. As
of June 30, 1997, 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, 1997.
Construction loans and commercial real estate mortgage loans on which the
recognition of interest has been discontinued amounted to $4,153,000 at June 30,
1997, $4,574,000 at June 30, 1996 and $5,327,000 at June 30, 1995. 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:
<TABLE>
<CAPTION>
(In thousands) Years Ended June 30 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $650 $411 $583
Interest income recognized 332 207 378
- ---------------------------------------------------------------------------------------------------------------------------
Interest income foregone $318 $204 $205
===========================================================================================================================
</TABLE>
Interest due on first mortgage loans sixty days or more delinquent at June
30, 1997 and 1996 amounted to $409,000 and $626,000, respectively. An allowance
of $409,000 and $549,000 at June 30, 1997 and 1996, respectively, was provided
for the potential loss of interest on such mortgage loans contractually
delinquent for more than ninety days.
41
<PAGE>
Activity in the allowance for losses on installment loans and real estate
loans is summarized as follows:
<TABLE>
<CAPTION>
Installment Real Estate
(In thousands) Loans Loans Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Provision 421 1,926 2,347
Charge-offs (466) (183) (649)
Recoveries 70 - 70
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $1,375 $7,920 $9,295
===========================================================================================================================
</TABLE>
At June 30, 1997 and June 30, 1996, the recorded investment in loans which
have been identified as impaired, in accordance with SFAS 114, totalled
$4,153,000 and $5,134,000, 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, 1997 were
comprised of $1,061,000 of commercial loans and $3,092,000 of construction
loans. None of the Company's impaired loans had a valuation allowance at June
30, 1997. All impaired loans were measured based on the fair value of the
collateral.
5. REAL ESTATE OWNED, NET
Real estate owned is summarized as follows:
<TABLE>
<CAPTION>
(In thousands) June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Residential properties $6,837 $4,323
Commercial properties 810 1,919
- ---------------------------------------------------------------------------------------------------------------------------
7,647 6,242
Less allowance for losses - (889)
- ---------------------------------------------------------------------------------------------------------------------------
Total real estate owned, net $7,647 $5,353
===========================================================================================================================
</TABLE>
42
<PAGE>
Activity in the allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
Residential Commercial
(In thousands) Properties Properties Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Provision 14 200 214
Charge-offs (791) (312) (1,103)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $0 $0 $0
===========================================================================================================================
</TABLE>
Non-cash additions to real estate owned were $7,418,000, $8,721,000, and
$2,349,000 in the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $2,275 $ 2,275
Buildings and improvements 7,775 7,589
Furniture, fixtures and equipment 6,849 5,155
Vehicles 172 128
- ---------------------------------------------------------------------------------------------------------------------------
17,071 15,147
Less accumulated depreciation and amortization (7,427) (6,367)
- ---------------------------------------------------------------------------------------------------------------------------
Total $9,644 $ 8,780
===========================================================================================================================
</TABLE>
Depreciation and amortization expense on office properties and equipment
totaled $1,089,000, $896,000, and $797,000 for the years ended June 30, 1997,
1996 and 1995, respectively.
The Company occupies certain properties under long-term operating lease
agreements. Rental expenses under these agreements approximated $813,000,
$594,000, and $578,000 for fiscal years 1997, 1996 and 1995, respectively.
Scheduled minimum rental payments on these noncancelable long-term operating
lease commitments at June 30, 1997 were as follows (in thousands):
Minimum
Year Ending Rental
June 30 Payments
------------------------------------------
1998 $685
1999 586
2000 483
2001 442
2002 372
Later years 1,643
-----------------------------------------
Total $4,211
=========================================
43
<PAGE>
7. DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
(In thousands) June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Range of Average Range of
Interest Interest Interest Interest
Cost Rate Rates Cost Rate Rates
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Checking accounts $ 65,338 1.07% 0.00%-5.00% $ 69,878 1.14% 0.00%-5.00%
Money market deposit accounts 63,477 4.17 2.45%-4.50% 67,248 4.28 2.45%-4.50%
Savings deposits 67,317 3.42 1.00%-3.50% 68,824 3.35 1.00%-3.50%
Certificates 404,073 5.71 2.25%-9.50% 367,586 5.77 2.25%-9.50%
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $600,205 4.78% $573,536 4.74%
===========================================================================================================================
</TABLE>
Scheduled maturities of certificates of deposit at June 30, 1997 were as
follows (in thousands):
Amount
---------------------------------------------------
1998 $271,611
1999 51,445
2000 49,253
2001 10,536
2002 19,875
Thereafter 1,353
----------------------------------------------------
Total $404,073
====================================================
Certificates of deposit with balances greater than $100,000 at June 30,
1997 and 1996 were $54,077,000 and $46,779,000, respectively. A summary of such
certificates of deposit by maturity at June 30,1997 follows (in thousands):
Amount
---------------------------------------------------------
Within three months $10,209
After three but within six months 6,593
After six but within twelve months 18,772
After twelve months 18,503
----------------------------------------------------------
Total $54,077
==========================================================
Interest expense on deposits is summarized as follows:
(In thousands) Years Ended June 30 1997 1996 1995
- -------------------------------------------------------------------------------
Checking and money market deposit accounts $ 3,395 $ 3,376 $ 3,082
Savings deposits 2,306 2,349 3,087
Certificates 21,944 20,608 14,510
- -------------------------------------------------------------------------------
Total interest expense on deposits $27,645 $26,333 $20,679
===============================================================================
44
<PAGE>
8. NOTES PAYABLE AND OTHER BORROWINGS
At June 30, 1997 and 1996, notes payable and other borrowings consisted of
U.S. Treasury tax and loan notes, collateralized by FNMA and FHLMC participation
certificates. At June 30, 1997, the FNMA and FHLMC participation certificates
had an aggregate carrying value of $918,000 and a fair value of $921,000.
During the fiscal years ended June 30, 1997, 1996 and 1995, 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, 1997 or 1996. Selected information on
agreements to repurchase follows:
(In thousands)
Daily Maximum Amount
Years Average Amount Outstanding at Weighted Average
Ended Outstanding Any Month-End Interest Rate
June 30 For the Year During the Year For the Year
- -------------------------------------------------------------------------------
1997 $ - $ - -%
1996 16 - 5.35
1995 $8,547 $13,996 6.04
===============================================================================
Interest expense on notes payable and other borrowings totalled $294,000,
$21,000, and $538,000 in fiscal years 1997, 1996 and 1995, 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, 1997 June 30, 1996
Ending June 30 Amount Interest Rates Amount Interest Rates
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $167,000 5.26% - 6.48% $ 60,000 5.47% - 7.15%
1998 - - 2,500 5.26%
1999 6,500 5.79% - 7.20% 25,000 4.75%
2000 5,000 6.23% 6,500 5.79% - 7.20%
2001 2,500 6.10% 5,000 6.23%
Later years 552 2.00% 3,052 2.00% - 6.10%
- ---------------------------------------------------------------------------------------------------------------------------
Total $181,552 $102,052
===========================================================================================================================
Weighted Average
Interest Rate 6.29% 5.55%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1997, the Company has pledged its FHLB stock and qualifying
residential loans with an aggregate balance of $242,176,000 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 $7,672,000, $5,968,000, and
$6,414,000 in the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
45
<PAGE>
10. INCOME TAXES
Prior to 1996, the Internal Revenue Code provided that a qualified savings
institution could compute its bad debt reserve, and the related deduction for
income tax reporting purposes, based upon either the percentage of taxable
income method or the ratio of actual charge-offs to loans outstanding, subject
to a base year amount determined at June 30, 1983. The Company computed its bad
debt deduction for income tax reporting purposes using the percentage of taxable
income method for fiscal years 1996 and 1995. Due to law changes effective for
1996, the Company computed its bad debt deduction using the direct charge-off
method for the fiscal year ended June 30, 1997.
The Company's retained earnings at June 30, 1997 and 1996 include
$7,247,000 of tax bad debt reserves for which deferred tax has not been
provided. Pursuant to provisions in the Small Business Job Protection Act of
1996, the reserves would be subject to tax only if the Company fails to qualify
as a "bank" or in the case of certain excess distributions to shareholders.
Income tax expense (benefit) is summarized as follows:
(In thousands) Years Ended June 30 1997 1996 1995
- -----------------------------------------------------------------------------
Current: Federal $4,153 $6,949 $4,480
State 799 823 495
- -----------------------------------------------------------------------------
Total current 4,952 7,772 4,975
- -----------------------------------------------------------------------------
Deferred:Federal (1,756) (630) 14
State (320) (110) 3
- -----------------------------------------------------------------------------
Total deferred (2,076) (740) 17
- -----------------------------------------------------------------------------
Total: Federal 2,397 6,319 4,494
State 479 713 498
- -----------------------------------------------------------------------------
Total $2,876 $7,032 $4,992
=============================================================================
The differences between the statutory federal income tax rate and the
effective rate of income tax are as follows:
Years Ended June 30 1997 1996 1995
- -------------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest (1.1) (0.4) (0.6)
State income taxes 4.0 2.6 2.7
Other (.9) (0.5) 2.7
- -------------------------------------------------------------------------------
Effective income tax rate 36.0% 36.7% 39.8%
===============================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1997 and 1996 are as follows:
(In thousands) June 30 1997 1996
- ------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $2,653 $2,061
Deferred compensation 1,047 907
Other, net 968 112
- ------------------------------------------------------------------------------
Total gross deferred tax assets 4,668 3,080
- ------------------------------------------------------------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 140 270
Depreciation and amortization 309 350
Deferred loan fees 467 544
Other, net 453 561
- ------------------------------------------------------------------------------
Total gross deferred tax liabilities 1,369 1,725
- ------------------------------------------------------------------------------
Net deferred tax asset $3,299 $1,355
==============================================================================
46
<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, 1997. 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.
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 1997, 10,000 shares of restricted stock and 135,000 of stock options
were granted, leaving 276,686 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 with expiration ten years after the dates
of grant.
The Company applies Accounting Principles (APB) Opinion 25 and related
interpretations in accounting for the Plans. Accordingly, no compensation cost
has been recognized for its fixed stock options. Had compensation cost for the
options granted under the Plans been determined based on the fair value at the
grant dates consistent with the alternative method of FASB Statement No. 123
(FAS 123), the Company's net earnings and per common share for fiscal year 1997
would have been reduced from the reported net earnings of $5,112,000 to
$4,588,000 and reported earnings per share of $.87 to $.78 per share. No options
were granted in fiscal years 1996 or 1995. For purpose of computing the pro
forma amounts indicated above, the fair value of each option on the grant date
was estimated using the Black-Scholes option pricing model with the following
assumptions used for grants in fiscal year 1997: dividend yield of .73%;
expected volatility of 49%; a risk-free interest rate of 6.90%; and an expected
option life of 10 years.
Stock option transactions are summarized below:
<TABLE>
<CAPTION>
Years Ended June 30
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1997 Price 1996 Price 1995 Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at July 1 217,980 $ 7.00 363,350 $7.00 574,890 $4.85
Granted 135,000 $13.14 0 - 0 -
Exercised (45,000) $ 7.00 (145,370) $7.00 (211,540) $1.17
Lapsed 0 - 0 - 0 -
- ---------------------------------------------------------------------------------------------------------------------------
Options outstanding at June 30 307,980 $ 9.69 217,980 $7.00 363,350 $7.00
===========================================================================================================================
Options exerciseable at June 30 257,980 217,980 363,350
Options available for grant at June 30 276,686 421,686 447,000
===========================================================================================================================
</TABLE>
47
<PAGE>
The following table summarizes information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.00 172,980 7 Years $ 7.00 172,980 $ 7.00
$ 13.00 110,000 9.75 $ 13.00 85,000 $ 13.00
$ 13.75 25,000 10 $ 13.75
- -------------------------------------------------------------------------------------------------------------------------
$7.00-$13.75 307,980 8.2 Years $ 9.69 257,980 $ 8.98
===========================================================================================================================
</TABLE>
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 1997, 1996 and 1995. The weighted average
number of shares of common stock used to compute earnings per share for fiscal
years 1997, 1996 and 1995 were 5,854,732, 5,809,410 and 5,676,406, 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 1997, 1996 and 1995, 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 $240,000, $197,000, and $166,000 for fiscal years 1997, 1996
and 1995, 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.
48
<PAGE>
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).
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, 1997, 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:
<TABLE>
<CAPTION>
Risk-
Tangible Core Based
(In thousands) Capital Capital Capital
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP capital $66,466 $66,466 $66,466
Non-allowable assets:
Goodwill (2,129) (2,129) (2,129)
Other intangible assets (123) _ _
Equity in subsidiaries (908) (908) (908)
Additional capital items:
Unrealized gain on debt securities, net (89) (89) (89)
General loss allowances - - 7,655
- ---------------------------------------------------------------------------------------------------------------------------
Regulatory capital - computed 63,217 63,340 70,995
Minimum capital requirement 12,854 25,713 48,907
- ---------------------------------------------------------------------------------------------------------------------------
Capital above minimum requirement $50,363 $37,627 $22,088
===========================================================================================================================
Ratios:
Regulatory capital - computed 7.38% 7.39% 11.61%
Minimum capital requirement 1.50 4.00 8.00
===========================================================================================================================
</TABLE>
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 $676,000, $455,000 and
$478,000 in fiscal years 1997, 1996 and 1995, respectively. See note 14 for
limitations on the payment of dividends by the Savings Bank to the Parent
Company.
49
<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 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in subsidiary, at equity $66,466 $60,955
Other assets 26 41
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $66,492 $60,996
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Stockholders' equity before unrealized gain (loss) 66,403 61,122
Net unrealized gain (loss) on securities available for sale 89 (126)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 66,492 60,996
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $66,492 $60,996
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(In thousands) Years Ended June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest expense $133 $ 126
Income tax benefit 35 48
- ---------------------------------------------------------------------------------------------------------------------------
Loss before equity in undistributed net earnings of subsidiary (98) (78)
Equity in undistributed net earnings of subsidiary 5,210 12,220
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,112 $12,142
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(In thousands) Years Ended June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net earnings $ 5,112 $12,142
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization 14 14
Equity in undistributed net earnings of subsidiary (5,210) (12,220)
Decrease in other assets (15) -
Decrease in accrued expenses and other liabilities - 4
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (99) (60)
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of subsidiary stock (740) (508)
Cash dividends received 676 455
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investment activities (64) (53)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of common stock 740 508
Cash dividends paid (577) (395)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 163 113
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents - -
Cash and cash equivalents at beginning of year - -
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ - $ -
</TABLE>
50
<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, 1997
and 1996. 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, 1997 and 1996 totalled $107,600,000
and $77,275,000, respectively.
The Company had outstanding loan origination commitments aggregating
$5,101,000 at June 30, 1997. 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, 1997. The Company had outstanding commitments to fund $30,958,000 of
construction loans at June 30, 1997. In addition, the Company had $31,279,000
outstanding in lines of credit extended to its customers at June 30, 1997.
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, 1997, the
Company was conditionally committed under standby letters of credit aggregating
$20,843,000.
51
<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, 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) June 30 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $26,738 $26,738 $ 24,575 $ 24,575
Securities held to maturity 6,543 6,609 6,652 6,660
Securities and available for sale 27,706 27,706 28,703 28,703
Loans 685,366 707,350 623,081 629,958
Loans held for sale 92,495 92,495 46,481 46,481
Deposits (600,205) (605,082) (573,536) (577,205)
Notes payable and other borrowings (611) (611) (639) (639)
Advances from Federal Home Loan Bank (181,552) (182,586) (102,052) (100,646)
===========================================================================================================================
</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 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.
52
<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 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands, except per share data) Sept. 30 Dec. 31 Mar. 31 Jun. 30
- ---------------------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
Total interest income $ 15,684 $ 16,484 $ 16,603 $ 17,360
Total interest expense 8,508 8,902 8,864 9,337
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 7,176 7,582 7,739 8,023
Provision for loan losses 562 581 609 595
Noninterest income 1,913 2,048 3,049 1,729
Noninterest expense 8,420 5,559 6,729 8,216
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income tax expense 107 3,490 3,450 941
Income tax (benefit) expense (89) 1,313 1,236 416
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 196 $ 2,177 $ 2,214 $ 525
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ .03 $ .37 $ .38 $ .09
===========================================================================================================================
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 $ 1 .36 $ .33 $ .38 $ 1.02
===========================================================================================================================
</TABLE>
18. PENDING ACQUISITION
Virginia First has entered into an agreement to be acquired by BB&T
Corporation in a transaction consisting of approximately 70% stock and 30% cash.
The value received by Virginia First shareholders can vary between $22.50 and
$25.00 per share. Based on BB&T's June 30 stock price, Virginia First
shareholders would receive $17.50 in BB&T share value and $7.50 in cash for a
combined value of $25.00 for each share of Virginia First held. Virginia First
shareholders will be asked to vote on the merger agreement at its upcoming
annual meeting scheduled for November 26, 1997. The transaction is expected to
be consummated on or about December 1, 1997.
53
<PAGE>
CUSTOMER SERVICE DEPARTMENT
(804) 748-3930 or Toll Free (800) 348-0333
FULL SERVICE RETAIL OFFICES
Petersburg
* Franklin & Adams Streets, (804) 733-0333,
(804) 748-5847, or Toll-Free (800) 523-0839
2048 South Sycamore Street, (804) 732-1336
801 South Adams Street, (804) 733-8507
Colonial Heights
* 2609 Boulevard, (804) 526-1363
Hopewell
* 105 North Main Street, (804) 458-8570
Chester
* 2531 West Hundred Rd., (804) 748-5052
Emporia
North Main Street & Weaver Avenue, (804) 634-9431
Richmond
1210 Westover Hills Boulevard, (804) 233-5497
* 1773 Parham, (804) 288-1611
* 10051 Midlothian Turnpike, (804) 272-5897
* 4802 South Laburnum Avenue, (804) 226-9333
* 1650 Willow Lawn Dr., (804) 288-3980
Ashland
201 North Washington Highway, (804) 798-1444
Fredericksburg
* 3205 Plank Road, (540) 786-9864
Roanoke
316 South Jefferson Street, (540) 344-6661
* 1620 Hershberger Road, (540) 362-5801
* 3119 Chaparral Drive, (540) 989-8504
Salem
303 East Burwell Street, (540) 387-0281
Vinton
203 Virginia Avenue, (540) 345-8128
Lynchburg
* 7114 Timberlake Road, (804) 237-6541
Appomattox
* History Junction, (804) 352-7168
Rocky Mount
216 College Street, (540) 483-9216
Lake Ridge
* 12451 Hedges Run Dr., (703) 491-7723
Stafford
* 305 Garrisonville Rd., (540) 659-9699
* Virginia First ATM Locations
VIRGINIA FIRST MORTGAGE DIVISION
LOAN CENTERS
Woodbridge (Division Headquarters)
1308 Devils Reach Road, Suite 200,
(703) 494-9945
Fairfax
10400 Eaton Place, Suite 130
(703) 218-4000
Charlottesville
1160 Pepsi Place, Suite 109, (804) 978-1110
Fredericksburg
3205 Plank Road, (540) 786-4819
Lynchburg
7331 Timberlake Road, Suite 306,
(804) 237-7961
Richmond
9200 Arboretum Pkwy., Suite 104,
(804) 320-2500
Roanoke
3119 Chaparral Drive, (540) 989-1116
Bel Air, Maryland
139 N. Main St., Suite 101, (410) 879-1800
Columbia, Maryland
8818 Centre Park Dr., Suite 100,
(410) 995-0134
Frederick, Maryland
211 S. Jefferson St., Suite B, (301) 620-1100
Bethesda, Maryland
6550 Rock Spring Dr., Suite 210,
(301) 493-4900
Timonium, Maryland
9515 Deereco Rd., Suite 1010,
(410) 561-0472
54
<PAGE>
DEPOSIT ACCOUNTS
Totally Free Checking
Interest Checking
Freedom 55 Checking
VIP Checking
Money Market Checking
Advantage Accounts
Regular Savings
Christmas Clubs
INVESTMENT OPTIONS
Certificates of Deposit (Flexible Terms)
Century Account Penalty-Free Certificates
Individual Retirement Accounts
ALTERNATIVE INVESTMENT OPTIONS
Free Financial Planning Services
Mutual Funds Services
Tax Deferred Annuities
Insurance Products
Equities
RESIDENTIAL MORTGAGE LENDING
Conventional Fixed Rate
Adjustable Rate Mortgage (ARMs)
5 and 7 Year Two Step
Jumbo Fixed Rate
Jumbo ARMs
Federal Housing Administration
Mortgages (FHA)
Veterans Administration Mortgages (VA)
Virginia Housing Development Authority
(VHDA)/Conventional Blend
VHDA/FHA Blend
VHDA/VA Blend
Construction-to-Permanent Loans
Builder Lines of Credit
RETAIL LENDING
Second Mortgages
Home Equity Lines of Credit
Automobile Loans
Automobile Refinance Loans
Home Improvement Loans
Personal Loans
Manufactured Housing Loans
OTHER SERVICES
Bank Cards (Master Card/Visa)
Travelers Cheques
Money Orders
Bank Checks
Wire Transfers
ATMs (Most, Exchange and Cirrus
Networks linking the Discover,
American Express, Mastercard and
Diners Club cards)
Notary
55
<PAGE>
DIRECTORS
Frasier W. Brickhouse
Assistant Dean, School of Business,
Virginia State University
Preston H. Cottrell
President and Chief Executive Officer,
Cottrell Communications
William L. Eure, Jr.
Owner, President and General Manager,
Eure Communications, Inc.
Benjamin S. Gill
Owner, Benny's BBQ
George R. Mercer
President, Mercer Rug Cleaning and Carpet Sales
Charles A. Patton
President and Chief Executive Officer,
Virginia First Financial Corporation and
Virginia First Savings Bank
William A. Patton
Chairman of the Board,
Virginia First Financial Corporation and
Virginia First Savings Bank
Francis R. Payne, Jr., M.D.
Retired, Petersburg Obstetrics and Gynecology
Association, Ltd.
John H. VanLandingham, Jr.
Chairman of the Board,
Builders Supply Company of Petersburg
OFFICERS
OFFICERS OF VIRGINIA FIRST SAVINGS BANK
Charles A. Patton *
President and Chief Executive Officer
William J. Vogt *
Senior Vice President and Chief Financial Officer
Gary L. Martin
Senior Vice President, Mortgage Banking
Teresa R. Mathisen
Vice President Human Resources
Maria R. Campbell
Vice President, Retail Banking
Central Region
Rebecca E. Truax *
Corporate Secretary
Steven A. Whitley
Executive Vice President, Chief Operating Officer
David L. Huntington
Senior Vice President, Retail Lending
Linda Markham
Vice President and Regional Manager-Western Division
John M. Silver
Vice President, Internal Audit
Gary L. Armstrong
Vice President, Commercial Lending
* Also serves in same capacity as officer of
Virginia First Financial Corporation
56
<PAGE>
STOCKHOLDER INFORMATION
FORM 10-K
A copy of the annual report on Form 10-K may be obtained without charge upon
request to William J. Vogt, Senior Vice President and Chief Financial Officer,
Virginia First Financial Corporation, P.O. Box 2009, Petersburg, Virginia
23804-2009.
CORPORATE LEGAL COUNSEL
Williams, Mullen, Christian & Dobbins
Two James Center
1021 East Cary Street, Suite 1500
Richmond, Virginia 23219
STOCK LISTINGS
The Company's common stock is traded on the NASDAQ National Market System
("NMS") under the trading symbol VFFC.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Certified Public Accountants
Two James Center
1021 East Cary Street, Suite 1900
Richmond, Virginia 23219
TRANSFER AGENT AND REGISTRAR
First Union National Bank
Capital Management Group
Two First Union Center, CMG-16
Charlotte, North Carolina 28288-1165
DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN
Virginia First's Dividend Reinvestment and Stock Purchase Plan is an economical,
convenient way for stockholders to increase their holdings of the Company's
stock. Once enrolled in this plan, stockholders may purchase new shares directly
from the Company by reinvesting cash dividends, making optional cash purchases
or both. To obtain a plan prospectus and enrollment card, write or call Virginia
First at 804-733-0333.
STOCK PRICE AND DIVIDEND INFORMATION (1)
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $23.25 $17.00 $15.25 $13.75 $14.25 $9.38 $7.63 $5.63
Low 13.38 12.25 12.50 11.00 8.38 5.94 4.88 2.00
Close 23.25 14.75 12.75 13.75 13.75 8.75 7.25 4.75
Dividends .025 .025 .025 .025 .07 .05 .05 -
====================================================================================================================
</TABLE>
(1) All stock price and dividend data has been adjusted to reflect a two-for-one
stock split which occurred November 17, 1995.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Virginia First Financial Corporation:
We consent to incorporation by reference in Registration Statement Nos.
33-78180, 33-78182 and 33-78184 on Form S-8 of Virginia First Financial
Corporation of our report dated August 14, 1997, relating to the consolidated
statements of financial condition of Virginia First Financial Corporation and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of earnings, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended June 30, 1997, which report is
incorporated by reference in the June 30, 1997 annual report on Form 10-K of
Virginia First Financial Corporation.
\s\ KPMG PEAT MARWICK LLP
Richmond, Virginia
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 10,760,000
<INT-BEARING-DEPOSITS> 15,978,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,706,000
<INVESTMENTS-CARRYING> 6,543,000
<INVESTMENTS-MARKET> 6,609,000
<LOANS> 685,366,000
<ALLOWANCE> 9,295,000
<TOTAL-ASSETS> 858,403,000
<DEPOSITS> 600,205,000
<SHORT-TERM> 182,163,000
<LIABILITIES-OTHER> 9,543,000
<LONG-TERM> 0
0
0
<COMMON> 14,925,000
<OTHER-SE> 51,567,000
<TOTAL-LIABILITIES-AND-EQUITY> 858,403,000
<INTEREST-LOAN> 62,640,000
<INTEREST-INVEST> 2,542,000
<INTEREST-OTHER> 949,000
<INTEREST-TOTAL> 66,131,000
<INTEREST-DEPOSIT> 27,645,000
<INTEREST-EXPENSE> 35,611,000
<INTEREST-INCOME-NET> 30,520,000
<LOAN-LOSSES> 2,347,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 28,924,000
<INCOME-PRETAX> 7,988,000
<INCOME-PRE-EXTRAORDINARY> 7,988,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,112,000
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 8.67
<LOANS-NON> 12,079,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,119,000
<ALLOWANCE-OPEN> 7,527,000
<CHARGE-OFFS> 649,000
<RECOVERIES> 70,000
<ALLOWANCE-CLOSE> 9,295,000
<ALLOWANCE-DOMESTIC> 9,295,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
