SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
-----------------------------------------------------
- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to _____________________
SEC File Number: 0-24668
FFVA FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Virginia 74-2712490
- ------------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
925 Main Street, Lynchburg, Virginia 24504
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 845-2371
--------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the last sale price of such stock on March 17, 1997,
was $93.7 million. (4,073,014 shares at $23.00 per share).
As of March 17, 1997, the Registrant had 4,542,552 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of the Registrant's Annual Report to
Stockholders for the year ended December 31, 1996.
2. Part III -- Portions of the Registrant's Proxy Statement for Annual Meeting
of Stockholders to be held on April 22, 1997.
<PAGE>
PART I
Item 1. Business
- -----------------
General
FFVA Financial Corporation ("Registrant" or "Company") is a unitary
savings and loan holding company that was incorporated in May 1994 under the
laws of the Commonwealth of Virginia for the purpose of acquiring all of the
common stock of First Federal Savings Bank of Lynchburg (the "Bank"). This
acquisition occurred in October of 1994 at which time the Bank simultaneously
converted from a mutual to stock institution, sold all of its outstanding
capital stock to the Company and the Company made its initial public offering of
common stock. As of December 31, 1996, the Company had total assets of $533.8
million, total deposits of $397.4 million and stockholders' equity of $74.5
million or 13.95% of total assets under generally accepted accounting principles
("GAAP"). The only subsidiary of the Company is the Bank. The Bank has no
subsidiaries at this time.
The Bank is a federally chartered capital stock savings bank located in
Lynchburg, Virginia. The Bank was founded in 1923 as Lynchburg Mutual Building
and Loan Association and operated under a charter granted by the Commonwealth of
Virginia. A federal charter was obtained in 1936 and the name was changed to
First Federal Savings and Loan Association of Lynchburg. In 1988, the Bank
obtained a federal savings bank charter and changed its name to First Federal
Savings Bank of Lynchburg. The Bank's deposits are federally insured by the
Savings Association Insurance Fund ("SAIF"), as administered by the Federal
Deposit Insurance Corporation ("FDIC").
The Company directs and plans the activities of the Bank, the Company's
primary asset. The Company's business activities to date have been limited to
its investment in the Bank, other equity investments, loans made to the Bank for
use in the normal course of the Bank's business, and loans made to the First
Federal Savings Bank Employee Stock Ownership Plan ("ESOP") to enable the ESOP
to purchase shares of the Company's common stock in the initial public offering.
References to the Company include the Bank, unless the context otherwise
indicates.
The Company offers a variety of financial services to meet the needs of
the communities it serves. The Company's principal business is attracting
deposits from the general public and investing those deposits, together with
funds generated from operations, to originate one- to four-family residential
mortgage loans. To a lesser extent, the Company invests in multi-family mortgage
loans, commercial real estate loans, construction loans, land and land
development loans and consumer and other loans. The Company also invests in
mortgaged-backed securities and investment securities. The Company's revenues
are derived principally from interest earned on its mortgage loan and
mortgage-backed securities portfolios and interest and dividends received on its
investment securities. The Company's primary sources of funds are deposits and
principal and interest payments on loans, mortgage-backed and related
securities, investment securities and borrowings.
The Company operates from its main office located at 925 Main Street,
Lynchburg, Virginia and eleven branch offices. The Bank has five locations in
the City of Lynchburg, Virginia, and locations at Altavista, Farmville,
Keysville, Madison Heights, South Boston (2), and South Hill, Virginia. The
office located in Keysville was acquired from Crestar Financial Corporation in
August 1995. The office located in Madison Heights was completed and opened for
business in June 1996. The Company's primary market area includes, but is not
limited to, the City of Lynchburg, and all or portions of Amherst,
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Appomattox, Bedford, Brunswick, Buckingham, Campbell, Charlotte, Cumberland,
Halifax, Lunenburg, Mecklenburg, Nelson, Nottaway, Pittsylvania, and Prince
Edward Counties in Virginia.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences and, to a lesser extent, multi-family, commercial real estate,
construction, land and land development loans, consumer and other loans.
Consumer loans in the Company's portfolio at December 31, 1996 principally
consisted of loans secured by deposits, loans secured by real estate, automobile
loans, mobile home loans and small business loans.
The Company's primary lending strategy is to originate adjustable and
fixed-rate one- to four-family mortgages for portfolio. From time to time, the
Company may chose to limit interest rate risk exposure on fixed-rate mortgages
by serving as closing agent for various mortgage corporations. This relationship
allows the Company to earn fee income on loans produced as agent without
subjecting the Company to undue interest rate risk exposure. The Company
continues to monitor the interest rate environment and evaluate loan volume
related to interest rate risk. The Company continues to pursue high quality
multi-family and commercial real estate loans in the Company's primary market
area. The Company also continued to aggressively market short term consumer and
small business loans during 1996, as year end balances increased to $32.4
million from $20.8 million.
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<PAGE>
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentage at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------- ------------------ ------------------ ------------------ ----------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Mortgage Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family(1)....... $211,675 78.47% $207,649 76.60% $212,872 77.21% $220,433 73.73% $232,237 70.52%
Multi-family ................ 11,484 4.26 12,123 4.47 11,626 4.21 15,361 5.14 15,226 4.62
Commercial real estate....... 26,729 9.91 26,872 9.91 28,882 10.48 30,414 10.17 35,006 10.63
Construction ................ 6,742 2.50 11,245 4.15 6,707 2.43 9,453 3.16 12,554 3.81
Land and land development.... 1,819 .67 2,829 1.05 2,725 .99 2,494 .83 1,939 .59
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total ..................... 258,449 95.81 260,718 96.18 262,812 95.32 278,155 93.03 296,962 90.17
Consumer and other loans....... 11,310 4.19 10,364 3.82 12,906 4.68 20,831 6.97 32,389 9.83
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable..... 269,759 100.00% 271,082 100.00% 275,718 100.00% 298,986 100.00% 329,351 100.00%
====== ====== ====== ====== ======
Less:
Loans in process ............ 2,900 5,964 3,138 3,585 3,533
Unearned discounts and
deferred loan fees ......... 1,170 1,073 994 969 980
Allowance for credit losses.. 2,359 2,576 3,054 3,217 3,310
-------- -------- -------- -------- --------
Loans receivable, net........ $263,330 $261,469 $268,532 $291,215 $321,528
======== ======== ======== ======== ========
</TABLE>
----------------------
(1) Includes home equity loans on one- to four-family residences.
3
<PAGE>
Loan Maturity. The following table sets forth certain information as of
December 31, 1996, regarding the dollar amount of loans maturing in the
Company's portfolio based on their contractual terms to maturity. ARM loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature. Fixed rate mortgage
loans and construction loans are included in the period in which the final
contractual repayment is due.
<TABLE>
<CAPTION>
After
One
Within Through After
One Five Five
Year Years Years Total
----- ------- ----- -----
(In Thousands)
Real estate loans:
Permanent mortgage loans including,
<S> <C> <C> <C> <C>
multi-family and commercial real estate.... $115,548 $ 52,075 $116,785 $284,408
Construction loans, net ...................... 7,998 1,023 -- 9,021
-------- -------- -------- --------
Total real estate loans ........................ 123,546 53,098 116,785 293,429
Consumer and other loans ..................... 10,252 6,809 2,289 19,350
Commercial installment loans ................. 10,099 2,563 377 13,039
-------- -------- -------- --------
Total loans .............................. $143,897 $ 62,470 $119,451 $325,818
======== ======== ======== ========
</TABLE>
One- to Four-Family Mortgage Lending. The Company offers both fixed rate
and ARM loans secured by one- to four-family residences, most of which are
located in the Company's primary market area. The majority of such loans are
secured by property which typically serves as the primary residence of the
owner. Sources of loan originations typically include existing or past
customers, building contractors, members of the local communities and real
estate agents in the Company's lending area.
The Company generally originates one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or selling price
of the property securing the loan. One- to four-family mortgage loans may be
originated in amounts up to 95% of the lower of the appraised value or selling
price of the mortgaged property, provided that the property is owner-occupied
and private mortgage insurance ("PMI") is provided on the amount in excess of
80% of the lesser of the appraised value or selling price. Mortgage loans
originated by the Company generally include due-on-sale clauses which provide
the Company with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Company's consent. Due-on- sale clauses are an important means of
adjusting the rates on the Company's fixed-rate mortgage loan portfolio and the
Company has generally exercised its rights under these clauses.
The Company currently offers ARM loans that adjust annually as well as ARM
loans that adjust annually after the first three years or adjust every three
years after the first three year period. The Company offers ARM loans with terms
up to 30 years. The Company's ARM loans typically carry an initial interest rate
below the fully-indexed rate for the loan. The initial discounted rate is
determined by the Company in accordance with market and competitive factors. The
Company's ARM loans adjust by a maximum of 2.0% per adjustment, with a lifetime
cap of 6%.
The volume and types of ARM loans originated by the Company have been
affected by such market factors as the level of interest rates, competition and
consumer preferences. The Company will continue to offer ARM loans, however,
there can be no assurance that in the future the Company will be able to
originate a sufficient volume of ARM loans to increase or maintain the
proportion that these
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<PAGE>
loans bear to total loans. In fact, the proportion of ARM loans outstanding as
compared to total mortgage loans has declined during 1995 and 1996 due to a
relatively stable and affordable fixed rate lending environment.
The origination of ARM loans helps reduce the Company's exposure to
increases in interest rates. However, ARM loans generally pose credit risks
different from the risks inherent in fixed rate loans, primarily because as
interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. In order to minimize risks, borrowers of
ARM loans are qualified at the maximum first adjustment rate at the time of
origination. The Company has not originated, nor does it currently originate ARM
loans which provide for negative amortization.
The Company offers fixed rate mortgage loans with terms of 10 to 30 years,
which amortize monthly. Interest rates charged on fixed rate mortgage loans are
competitively priced based on market conditions and the Company's cost of funds.
From time to time, the Company has chosen to limit interest rate risk exposure
on fixed-rate mortgages by serving as closing agent for various mortgage
corporations. During 1994, 1995 and 1996, fees earned in this capacity were
$196,000, $105,000, and $64,000, respectively.
The Company has in the past sold a portion of its conforming fixed rate
mortgage loans in the secondary market to federal agencies while retaining the
servicing rights on such loans sold. As of December 31, 1996, the Company's
portfolio of loans serviced for others totalled approximately $5.9 million.
Multi-Family Lending. The Company originates multi-family loans generally
with contractual terms of up to 25 years. These loans are secured by apartment
buildings and are made in amounts of up to 80% of the lower of appraised value
or selling price of the property. In making such loans, the Company bases its
underwriting decision primarily on the net operating income generated by the
real estate to support the debt service, the financial resources and the income
level of the borrower, the borrower's experience in owning or managing similar
property, the marketability of the property and the Company's lending experience
with the borrower. The Company generally requires personal guarantees from
borrowers.
Commercial Real Estate Lending. The Company originates commercial real
estate loans that are generally secured by properties used exclusively for
business purposes such as retail stores, mini- warehouse units, churches, hotels
and professional office buildings located primarily in the Company's primary
market area. The Company's commercial real estate loans are generally made in
amounts up to the lower of 80% of the appraised value or selling price of the
property. These loans are generally made with terms of up to 15 years. Most
commercial real estate loans are ARMs or five to 10 year balloons. In making
such loans, the Company considers the net operating income of the property and
the borrower's expertise, financial strength and credit history. The Company
generally requires personal guarantees from the borrowers or the principals of
the borrowing entity.
Since payments on loans secured by commercial real estate properties are
often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy. As a result, loans secured by
commercial real estate properties generally involve a greater degree of risk
than residential mortgage loans.
5
<PAGE>
Construction Loans. The Company's construction loans primarily have been
made to finance the construction of one- to four-family residential properties
and, to a lesser extent, multi-family residential and commercial real estate
properties. Construction loans generally are made to customers of the Company
and developers and contractors in the Company's lending area. The Company offers
construction loans in amounts up to 80% of the appraised value of the property
securing the loan. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Single-family residential loans are
structured to allow the borrower to pay interest only on the funds advanced for
construction for a period of up to 18 months. Multi-family and commercial real
estate construction loans are originated for up to one year with the borrower
paying a variable rate of interest indexed to prime rate as published in The
Wall Street Journal. Upon or prior to completion of the construction, the
borrower generally applies to the Company for a permanent loan.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate as
the builder may encounter cost over-runs or construction delays. As a result,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the construction. At December
31, 1996, the Company had $12.6 million, or 3.81% of its total loan portfolio
invested in construction loans. At that date, the Company had originated $3.9
million in construction loans to various local contractors on unsold properties
located in the Company's primary market area.
Land and Land Development Loans. The Company originates loans for the
acquisition and development of property to contractors and individuals. Land
development loans typically are short-term loans. The Company offers land
development loans in amounts up to 75% of the appraised value of the property
securing the loan. Loan proceeds are disbursed in increments as development
progresses and as inspections warrant. Land development loans are originated for
up to five years with the borrower paying interest only, indexed to the prime
rate as published in The Wall Street Journal. Land development loans generally
are made to customers of the Company and developers and contractors with whom
the Company has had prior lending experience.
In addition to land development loans, the Company originates loans
secured by improved lots and raw land. The Company offers lot loans of up to 75%
of lesser of the appraised value or selling price of the property. Raw land
(unimproved) loan to value is limited to 65%. Such loans have terms of up to 15
years. Land and land development lending is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate.
Consumer and Other Loans. The Company also offers secured and unsecured
consumer loans. The primary collateral for secured loans consists of real
estate, automobiles, and deposits, however other types of collateral may be
considered. In underwriting consumer loans, the Company considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral, if any. Federal regulations
allow the Company to make secured and unsecured consumer loans of up to 35% of
the Company's assets. In addition, the Company has lending authority above the
35% limit for certain consumer loans, such as home improvement loans and loans
secured by savings accounts.
The Company may make secured or unsecured loans for commercial, corporate,
business or agricultural purposes, including the issuance of letters of credit
secured by real estate, business equipment, inventories, accounts receivable and
cash equivalents in amounts not exceeding 10% of the Company's assets. These
loans are generally for the purpose of small business operations.
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<PAGE>
Consumer and business loans generally involve more risk than first
mortgage one- to four-family residential real estate loans. In the case of
certain collateralized consumer and business loans, the value of repossessed
collateral may not prove to be an adequate source of repayment. In addition, the
collateral may be less marketable than single family real estate. Further, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered.
These loans may also give rise to claims and defenses by a borrower against the
Company, and a borrower may be able to assert against the Company claims and
defenses which it has against the seller of the underlying collateral.
7
<PAGE>
Delinquent Loans. At December 31, 1994, 1995 and 1996, delinquencies in the
Company's portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1994 At December 31, 1995 At December 31, 1996
----------------------------------- ----------------------------------- ----------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ----------------- ----------------- ---------------- ----------------- ----------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.... 7 $ 140 16 $ 656 7 $ 233 18 $ 729 13 $ 469 12 $ 619
Multi-family........... -- -- -- -- -- -- -- -- -- -- -- --
Commercial real estate. -- -- 4 1,730 -- -- 4 1,776 -- -- -- --
Construction .......... -- -- -- -- -- -- -- -- -- -- -- --
Land and land development -- -- 1 150 -- -- -- -- -- -- -- --
---- ------ ---- ----- ------ ------ ------ ------- ------ ------ ------ -----
Total mortgage loans 7 140 21 2,536 7 233 22 2,505 13 469 12 619
Other loans............ -- -- 6 23 3 9 12 93 12 166 11 67
---- ------ --- ------ ----- ----- ----- ----- ----- ----- ----- -----
Total loans......... 7 $ 140 27 $2,559 10 $ 242 34 $2,598 25 $ 635 23 $ 686
=== ===== === ===== ===== ===== ===== ===== ===== ===== ===== =====
Delinquent loans to
net loans............. .09% .05% .36% .95% .12% .08% .42% .89% .30% .20% .27% .21%
Delinquent loans to
total loans.......... .09% .05% .36% .93% .12% .08% .42% .88% .30% .19% .27% .21%
</TABLE>
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Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and loans that are 90 days or more delinquent but on
which the Company is accruing interest at the dates indicated. The Company
continues accruing interest on loans delinquent 90 days or more past due, but
reserves 100% of the interest due on such loans, thus effecting a non-accrual
status. This policy was established at the request of the Office of Thrift
Supervision ("OTS").
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S> <C> <C> <C> <C> <C>
One- to four-family .......................................... $1,000 $ 866 $ 656 $ 677 $ 619
All other mortgage loans ..................................... 5,206 3,669 2,814 1,776 1,074
Consumer and other loans ....................................... -- -- -- -- 67
------ ------ ------ ------ ------
Total(1) ................................................... 6,206 4,535 3,470 2,453 1,760
------ ------ ------ ------ ------
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by one- to four-
family dwelling units ...................................... -- -- -- 52 --
All other mortgage loans ..................................... -- -- -- -- --
Consumer and other loans ....................................... 73 13 23 93 --
------ ------ ------ ------ ------
Total ...................................................... 73 13 23 145 --
------ ------ ------ ------ ------
Total non-performing loans ................................. 6,279 4,548 3,493 2,598 1,760
Total foreclosed real estate ............................... 249 400 85 -- 154
------ ------ ------ ------ ------
Total non-performing assets(2) ............................. $6,528 $4,948 $3,578 $2,598 $1,914
====== ====== ====== ====== ======
Restructured loans ............................................. $ 656 $ 372 $ -- $ -- $ --
Non-performing loans to net loans .............................. 2.38% 1.74% 1.30% .89% .55%
Non-performing loans to total loans ............................ 2.33% 1.68% 1.28% .88% .54%
Total non-performing assets to total
assets .................................................. 1.79% 1.30% .81% .52% .36%
</TABLE>
- -----------------------------------
(1) The amount of interest income which would have been recorded under the
original terms of such nonperforming loans was $225,000, $135,000, and
$44,000 for the years ended December 31, 1994, 1995, and 1996,
respectively. During the year ended December 31, 1996, $36,000 of
delinquent interest was reserved on non-accrual loans, while $108,000 of
interest was included in interest income as a result of non-accrual loans
being paid-off or being returned to a full accrual status. Consequently,
interest income was increased $72,000 for the year ended December 31, 1996
as a result of changes in the status of non-accrual loans. Changes in
accrued interest on nonperforming consumer loans are disregarded based on
immateriality.
(2) All non-performing assets at December 31, 1996 were included in classified
assets at that date.
The reduction in non-performing assets from $2.6 million at December 31,
1995 to $1.9 million at December 31, 1996 resulted primarily from the payoff of
a delinquent commercial real estate loan secured by property located in the
Lynchburg area. At December 31, 1996 non-performing loans included a $1.1
million loan participation secured by a shopping center in Bedford, Virginia.
Classified Assets. Federal regulations and the Company's Classification of
Assets Policy provide for the classification of loans and other assets
considered by the OTS to be of lesser quality as "Substandard," "Doubtful" or
"Loss" assets. An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any.
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<PAGE>
Substandard assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as Doubtful have all of the weaknesses inherent
in those classified Substandard with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as Loss are those considered "uncollectible" and
of such little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted. Assets which do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are required to be
designated "Special Mention" by management.
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
allowance for credit losses in an amount deemed prudent by management. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets, or portions thereof, as Loss,
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge-off such amount. The
Company's policies provide that the senior management and the Board of Directors
regularly review problem loans and review quarterly all classified assets
reported to the OTS.
The following table sets forth the Company's classified assets at December
31, 1996.
At
December 31,
1996
--------------
(In Thousands)
Special Mention............... $ 813
Substandard................... 3,257
Doubtful...................... --
Loss.......................... 29
------
Total........................ $4,099
======
The Company's most significant classified asset is a loan participation
secured by a shopping center in Bedford, Virginia. At December 31, 1996, this
loan had a balance of $1.1 million and was classified Substandard.
Allowance for Credit Losses
The allowance for credit losses is established through a provision for
credit losses based on management's evaluation of the risk inherent in its loan
portfolio and the regional and national economy. The determination of the
adequacy of the valuation allowance is based on a detailed analysis and
classification of loans with known or anticipated adverse performance
characteristics, and includes consideration of historical patterns, industry
experience, current economic conditions, changes in composition and risk
characteristics of the loan portfolio, and other factors deemed relevant to the
collectibility of the loans currently outstanding. In addition, various
regulatory agencies, as an integral
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<PAGE>
part of their examination process, periodically review the Company's allowance
for credit losses and valuation of foreclosed real estate. Such authorities may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
When the Company determines that an asset should be classified, it
generally does not establish a specific allowance for such asset unless it
determines that such asset may result in a loss. The Company may, however,
increase its general valuation allowance in an amount deemed prudent. General
valuation allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. The Company's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS and the
FDIC which can order the establishment of additional general or specific loss
allowances.
The Company provided $255,000 and $60,000 to its allowance for credit
losses for the years ended December 31, 1995 and 1996, respectively. At December
31, 1996, the total allowance was $3.3 million, which included $29,000 in
specific valuation allowances with the remaining balance representing general
valuation allowances. Adjustments to the allowance reflect management's
evaluation of the risks inherent in its loan portfolio. The Company will
continue to monitor and modify the level of its allowance for credit losses in
order to maintain a level which management considers adequate. For the years
ended December 31, 1995 and 1996, the Company had charge-offs of $154,000 and
$27,000, respectively, against this allowance.
The following table sets forth an analysis of the Company's allowance for
credit losses for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
-------- --------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ............................. $ 1,652 $ 2,359 $ 2,576 $ 3,054 $ 3,217
Provision for credit losses ................................ 726 900 600 255 60
Charge-offs:
Mortgage loans ........................................... 55 698 196 14 15
Other loans .............................................. 26 12 2 140 12
Recoveries:
Mortgage loans ........................................... 55 5 52 8 6
Other loans .............................................. 7 22 24 54 54
------- ------- ------- ------- -------
Balance at end of period ................................... $ 2,359 $ 2,576 $ 3,054 $ 3,217 $ 3,310
======= ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the period to
average net loans outstanding during the period........... 01% .26% .05% .03% (.01)%
Ratio of allowance for credit losses to net loans receivable
at the end of the period ................................. .90 .99 1.14 1.10 1.03
Ratio of allowance for credit losses to total
non-performing assets at the end of the priod............. 36.14 52.06 85.35 123.83 172.94
Ratio of allowance for credit losses to
non-performing loans at the end of the period............. 37.57 56.64 87.43 123.83 188.07
</TABLE>
11
<PAGE>
The following table sets forth the allocation of the Company's allowance
for credit losses by loan category and the percent of loans in each category to
total loans receivable, at the dates indicated. The portion of the credit loss
allowance allocated to each loan category does not represent the total available
for future losses which may occur within the loan category since the total
credit loss allowance is a valuation reserve applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------------- ------------------- ------------------ ------------------ -----------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans of
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
At end of period allocated to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.......... $ 221 78.47% $ 230 76.60% $ 203 77.21% $ 301 73.73 $ 235 70.52%
Multi-family................. 57 4.26 61 4.47 58 4.21 77 5.14 77 4.62
Commercial real estate....... 1,166 9.91 984 9.91 1,201 10.48 1,108 10.17 839 10.63
Construction................. 42 2.50 152 4.15 34 2.43 68 3.16 82 3.81
Land and land development.... 70 .67 73 1.05 58 .99 25 .83 19 .59
Consumer and other loans..... 258 4.19 205 3.82 229 4.68 260 6.97 412 9.83
Unallocated general reserves. 545 -- 871 -- 1,271 -- 1,378 -- 1,646 --
----- ------ ----- ----- ----- -------- ----- ----- ----- ------
Total allowance.......... $2,359 100.00% $2,576 100.00% $3,054 100.00% $3,217 100.00% $3,310 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
12
<PAGE>
Investment Activities
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Company must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations.
Historically, the Company has maintained liquid assets above the minimum OTS
requirements and at a level believed to be adequate to meet its normal daily
activities. In addition, the Company may invest in mortgage-backed and mortgage
related securities, such as collateralized mortgage obligations, to supplement
its lending activities.
The investment policy of the Company, which is approved by the Board of
Directors and implemented by the Company's President and Senior Vice
President/Treasurer, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Company's lending activities and to provide and maintain liquidity. In
establishing its investment strategies, the Company considers its business and
growth plans, the economic environment, its interest rate sensitivity "gap"
position, the types of securities to be held, and other factors. The President
presents a monthly report to the Board of Directors detailing all investment
activity and commitments to purchase securities.
Securities which are classified as held to maturity are accounted for
based on historical cost adjusted for amortization of premiums or discounts
using the level yield method. Securities classified as held to maturity totalled
$82.9 million as of December 31, 1996. The held to maturity portfolio consists
primarily of U.S. Government obligations and securities of various federal
agencies, mortgage-backed and related securities. Mortgage-backed securities
held to maturity consists of fixed rate, five year, and seven year balloons
insured or guaranteed by either FNMA or FHLMC. Mortgage-backed related
securities held to maturity consist of adjustable rate and fixed rate
collateralized mortgage obligations. All of the collateralized mortgage
obligations are also guaranteed by FNMA or FHLMC with the exception of $10.6
million in "AAA" rated private mortgage collateral.
Mortgage-backed and related securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgage loans with
varying interest rates and maturities. The interest rate risk characteristics of
the underlying pool of mortgages as well as the prepayments risk are passed on
to the holder of the mortgage-backed securities. Consequently, in a declining
interest rate environment there is a risk that mortgage-backed securities will
prepay faster than anticipated and the Company may not be able to reinvest the
cash flow from prepaid mortgage-backed securities into comparable yielding
investments. In a rising interest rate environment the value of the
mortgage-backed securities may be impaired and the mortgage-backed securities
with fixed-rate underlying mortgage loans will be worth less as investors seek
higher yielding investments.
Securities that are classified as available for sale are accounted for at
their market value, with unrealized gains and losses reported as a separate
component of capital designated as "unrealized holding gains/losses on available
for sale securities." Securities classified as available for sale totalled
$106.6 million as of December 31, 1996. Equity capital was increased for the
period ending December 31, 1996 as a result of this adjustment. The net
unrealized holding gain on available for sale securities totalled $1.2 million
at December 31, 1996. The available for sale portfolio consists primarily of
U.S. Government obligations and securities of various federal agencies,
investment grade corporate obligations,
13
<PAGE>
and 30-year fixed and adjustable rate mortgage-backed securities issued by GNMA,
FHLMC, and FNMA. While the market value of U.S. Government and federal agency
securities are directly related to changes in interest rates after the time of
purchase, the market value of the investment grade corporate securities could
also be affected by upgrades or downgrades in the credit rating of the issuer.
The market value of both fixed and adjustable rate mortgage-backed securities is
not only affected by changes in the general level of interest rates, but is also
affected by prepayment experience and changes in prepayment assumptions. While
adjustable rate mortgage-backed securities tend to exhibit more price stability
than fixed rate mortgage-backed securities, their market value may also be
influenced by the annual and lifetime caps to which they are subject. The
interest rate risk associated with adjustable mortgage-backed securities is that
if interest rates increase to such an extent that full interest rate adjustments
cannot be made as a result of the annual or lifetime caps, the market value of
such securities may be adversely affected despite its adjustable rate features.
The following table sets forth the carrying and market values of the
Company's investment securities portfolio, short-term investments, FHLB-Atlanta
stock, and mortgage-backed and related securities at the dates indicated. At
December 31, 1996, the market value of the Company's investment securities
portfolio and mortgage-backed securities portfolio were $61.4 million and $131.6
million, respectively.
<TABLE>
<CAPTION>
1994 1995 1996
--------------------- ----------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
--------- ---------- -------- ------- ---------- --------
(In Thousands)
Investment securities held to maturity:
U.S. Government and related
<S> <C> <C> <C> <C> <C> <C>
securities and agency obligations.... $27,986 $ 26,750 $ 31,482 $ 32,209 $ 35,558 $ 35,756
Corporate obligations ................ 21,888 21,150 -- -- -- --
Other debt securities ................ 1,485 1,427 1,832 1,836 732 742
-------- -------- -------- -------- -------- --------
Total .............................. 51,359 49,327 33,314 34,045 36,290 36,498
Investment securities,
available for sale .................. 25,875 25,875 34,724 34,724 21,652 21,652
FHLB-Atlanta stock ................... 3,075 3,075 3,075 3,075 3,268 3,268
-------- -------- -------- -------- -------- --------
Total investment securities ........... $ 80,309 $ 78,277 $ 71,113 $ 71,844 $ 61,210 $ 61,418
======== ======== ======== ======== ======== ========
Mortgage-backed and related
securities held to maturity:
Agency backed fixed rate ............ $ 38,339 $ 36,973 $ 12,857 $ 12,920 $ 11,892 $ 11,844
Agency backed adjustable rate....... 2,582 2,545 -- -- -- --
Collateralized mortgage obligations,
variable rate ....................... -- -- 12,145 12,539 16,413 16,748
Collateralized mortgage obligations,
fixed rate .......................... 10,920 10,299 10,944 11,012 18,265 18,146
-------- -------- -------- -------- -------- --------
Total .............................. 51,841 49,817 35,946 36,471 46,570 46,738
Mortgage-backed and related
securities available for sale........ 13,024 13,024 78,844 78,844 84,899 84,899
-------- -------- -------- -------- -------- --------
Total mortgage-backed and
related securities .................. $ 64,865 $ 62,841 $114,790 $115,315 $131,469 $131,637
======== ======== ======== ======== ======== ========
</TABLE>
There were no investment securities issued by any one entity (exclusive of
obligations of the U.S. Government or federal agencies) with a total carrying
value in excess of 10% of the Company's equity capital at December 31, 1996.
14
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and expected maturities of the Company's
investment securities portfolio as of December 31, 1996. Expected maturities may
differ from contractual maturities because issuers may have the right to call
some obligations without penalty. Market value adjustments recorded in
compliance with SFAS 115 are not considered when computing the yields and cost
of securities.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years After Ten Years Investment Securities
----------------- ----------------- ----------------- ----------------- ------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ------
Investment securities held to
maturity:
U.S. Government and related
securities and agency
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
obligations.....................$ 8,000 7.69 $21,579 7.12% $ 4,000 7.10% $ 1,979 7.19% $35,558 7.25% $35,756
Other asset-backed securities ..... -- -- 732 10.24 -- -- -- -- 732 10.24 742
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Total, held to maturity ........... 8,000 7.69 22,311 7.22 4,000 7.10 1,979 7.19 36,290 7.31 36,498
------- ------- ------- ------- ------- -------
Investment securities available
for sale:
U.S. Government and related
securities and agency
obligations ..................... 2,024 7.18 4,039 6.48 -- -- -- -- 6,063 6.72 6,063
Corporate obligations ............. 5,023 5.78 4,082 7.29 -- -- 1,003 7.89 10,108 6.59 10,108
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Total available for sale .......... 7,047 6.17 8,121 6.87 -- -- 1,003 7.89 16,171 6.64 16,171
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Preferred stock and other equity
securities....................... 2,491 -- -- -- -- -- 2,990 -- 5,481 -- 5,481
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Total investment securities .......$17,538 6.98% $30,432 7.13% $ 4,000 7.10% $ 5,972 7.43% $57,942 7.10% $58,150
======= ==== ======= ==== ======= ==== ======= ==== ======= ==== =======
</TABLE>
15
<PAGE>
The following table sets forth the carrying value of Registrant's
mortgage-backed securities portfolio at the dates indicated.
Weighted
Average
Rate at
December 31, December 31, December 31,
1995 1996 1996
---- ---- ----
Held to maturity: (Dollars in Thousands)
Agency backed, fixed rate.... $ 12,857 $ 11,892 6.59%
CMOs, fixed rate............. 10,944 18,265 6.46%
CMOs, adjustable rate........ 12,145 16,413 6.86%
-------- -------- ----
Total held to maturity..... 35,946 46,570 6.63%
-------- -------- ----
Available for Sale:
Agency backed, fixed rate.... 27,429 40,181 8.05%
Agency backed, adjustable rate 50,591 44,118 6.79%
CMOs, fixed rate............. 824 600 7.79%
-------- -------- ----
Total available for sale... 78,844 84,899 7.39%
-------- -------- ----
Total mortgage-backed securities $114,790 $131,469 7.12%
======== ======== ====
Mortgage-Backed Securities Maturity. The following table sets forth the
contractual maturity of Registrant's mortgage-backed securities portfolio at
December 31, 1996. The table does not include scheduled principal payments and
estimated prepayments.
Contractual
Maturities Due
--------------
(In Thousands)
Less than 1 year....................... $ 74
1 to 5 years........................... 10,067
5 to 10 years.......................... 4,789
Over 10 years.......................... 116,539
--------
Total mortgage-backed securities.. $131,469
========
16
<PAGE>
The following table sets forth the activity in the Company's
mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1994 1995 1996
--------- ----------- -----------
(Dollars in Thousands)
Mortgage-backed securities:
<S> <C> <C> <C>
At beginning of period ...................... $ 40,109 $ 64,865 $ 114,790
Mortgage-backed securities purchased...... 42,012 57,388 46,544
Mortgage-backed securities sold .......... (2,801) -- (5,183)
Provision appreciation (depreciation) in
market value ........................... (1,438) 3,256 (189)
Amortization and repayments .............. (13,017) (10,719) (24,493)
--------- --------- ---------
Balance of mortgage-backed and related
securities at end of period ........... $ 64,865 $114,790 $ 131,469
========= ========= =========
</TABLE>
Sources of Funds
Deposits. The Company offers a variety of deposit accounts having a range
of interest rates and terms. The Company presently offers regular savings,
interest-bearing checking, noninterest-bearing checking, money market and
certificate accounts (including retirement accounts). The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates, pricing of deposits and competition. The Company's deposits are
primarily obtained from areas surrounding its twelve offices, and the Company
relies primarily on service and long-standing relationships with customers to
attract and retain these deposits. Deposits increased $19.4 million to $397.4
million at December 31, 1996 from $378.0 million at December 31, 1995. The
weighted average rate of deposits decreased from 4.96% at December 31, 1995 to
4.71% at December 31, 1996, as interest rates remained fairly stable during
1996. The opening of our newest branch office in Madison Heights, Virginia
(Amherst County) contributed a $2.8 million deposit gain in six months of
operations.
When management determines the levels of the Company's deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings
and the rates charged on other sources of funds.
17
<PAGE>
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented. The Company does not have a significant
amount of deposits from out-of-state sources.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- -------------------------------- ------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
to Total Nominal to Total Nominal to Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
-------- ----------- --------- ------- -------- -------- ------ --------- ---------
(Dollars in Thousands)
Transaction accounts:
Noninterest-bearing
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
checking accounts ........ $ 3,274 .97% --% $ 6,218 1.65% --% $ 6,790 1.71% --%
NOW and Super NOW ......... 26,048 7.72 2.76 30,664 8.11 2.76 32,957 8.29 2.30
Money market .............. 52,130 15.46 3.41 45,642 12.08 3.58 43,735 11.00 3.52
Savings ................... 32,314 9.58 3.00 33,956 8.98 3.00 34,520 8.69 3.03
-------- ------ -------- ------ -------- ------
Total ................ 113,766 33.73 3.05 116,480 30.82 3.00 118,002 29.69 2.83
-------- ------ -------- ------ -------- ------
Certificate accounts:
Contractual maturities:
Within 12 months ......... 137,840 40.87 4.96 163,861 43.35 5.66 158,156 39.80 5.21
12-36 months ............. 46,905 13.91 5.57 55,844 14.77 5.84 86,648 21.80 5.61
Beyond 36 months ......... 38,745 11.49 5.87 41,790 11.06 6.51 34,629 8.71 6.51
-------- ------ -------- ------ -------- ------
Total ................. 223,490 66.27 5.25 261,495 69.18 5.83 279,433 70.31 5.50
-------- ------ -------- ------ -------- ------
Total deposits......... $337,256 100.00% 4.50% $377,975 100.00% 4.96% $397,435 100.00% 4.71%
======== ====== ======== ====== ======== ======
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity at December 31,
1996.
Certificates
Maturity Period of Deposits
--------------
(In Thousands)
Within three months.................. $ 8,934
Three through six months............. 4,980
Six through twelve months............ 9,595
Over twelve months................... 17,080
-------
$40,589
=======
18
<PAGE>
Borrowings
Deposits are the Company's primary source of funds. The Company's policy
has been to utilize borrowings to meet liquidity needs and when they are a less
costly source of funds or can be invested at a positive rate of return. The
Company may obtain from the FHLB-Atlanta advances which are generally secured by
a blanket lien against the Company's mortgage loan portfolio. At December 31,
1996, the Company had $41.0 million in outstanding advances from the
FHLB-Atlanta. The Company, from time to time, also makes use of other forms of
borrowings, primarily reverse repurchase agreements. At December 31, 1996, the
Company had $19.0 million in outstanding reverse repurchase agreements
collateralized by mortgage backed and mortgage related securities. The weighted
average interest rate for all borrowed funds was 5.69% at December 31, 1996.
The following table sets forth certain information regarding FHLB -
Atlanta advances and other borrowings at the dates or for the periods indicated.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
-----------------------------
1994 1995 1996
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Average balance outstanding ............................ $13,199 $30,702 $50,236
Maximum amount outstanding at any month-end
during the period .................................... 19,250 43,250 60,000
Balance outstanding at end of period ................... 11,250 29,250 60,000
Weighted average interest rate during the period ....... 6.74% 6.36% 5.57%
Weighted average interest rate at the end of period..... 7.14% 5.97% 5.69%
</TABLE>
The following table sets forth at December 31, 1996 the repayment
schedule, interest rates and amounts of FHLB-Atlanta advances and other
borrowings due by year.
Interest
Year Due Rate Amount
- -------- -------- ------
(In Thousands)
1997 5.66% $56,000
1998 5.51 2,000
1999 -- --
2000 6.16 2,000
-------
$60,000
Personnel
As of December 31, 1996, the Company had 132 full-time and 8 part-time
employees. None of the Company's employees are represented by a collective
bargaining group. The Company believes that its relationship with its employees
is good.
19
<PAGE>
Regulation
Set forth below is a brief description of certain laws which relate to the
regulation of the Company. The description does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
Unless otherwise indicated, this section discusses regulations that apply to the
Company indirectly through their direct application to the Bank. However, the
section entitled "Company Regulation" applies to the Company rather than the
Bank.
General. As a federally chartered, SAIF-insured savings association, the
Company is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Company is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board").
The OTS, in conjunction with the FDIC, regularly examines the Company and
prepares reports for the consideration of the Company's Board of Directors on
any deficiencies that they find in the Company's operations. The Company's
relationship with its depositors and borrowers is also regulated to a great
extent by federal law, especially in such matters as the ownership of savings
accounts and the form and content of the Company's mortgage documents.
The Company must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company and its operations.
The Company, as a holding company, is also required to file certain reports
with, and otherwise comply with the rules and regulations of the OTS and the
Securities and Exchange Commission ("SEC").
Insurance of Deposit Accounts
The deposit accounts held by the Company are insured by the SAIF to a
maximum of $100,000 for each insured member (as defined by law and regulation).
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of September 30, 1996, SAIF members paid within a range of 23 to
31 basis points (23 cents to 31 cents per $100 of domestic deposits), depending
upon the institution's risk classification. This risk classification is based on
an institution's capital group and supervisory subgroup assignment. Pursuant to
a law adopted during 1996, the FDIC imposed a special assessment on SAIF members
to capitalize the SAIF at the designated reserve level of 1.25% as of October 1,
1996. Based on the Company's deposits as of March 31, 1995, the date for
measuring the amount of the special assessment pursuant to the Act, the
assessment for the Company totalled $2.2 million. The FDIC has lowered the
premium for deposit insurance to a level necessary to maintain the SAIF at its
required reserve level. As of January 1, 1997, the Company was not required
20
<PAGE>
to pay any deposit insurance premium; however, the FDIC may choose to reinstate
premiums in the future.
The Company will pay, in addition to its deposit insurance premium as a
member of the SAIF, an amount equal to approximately 6.6 basis points toward the
retirement of Financing Corporation bonds ("Fico Bonds") issued in the 1980s to
assist in the recovery of the savings and loan industry. Members of the Bank
Insurance Fund ("BIF"), by contrast, will pay, in addition to their deposit
insurance premium, approximately 1.3 basis points. Beginning no later than
January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. By January 1, 1999, the BIF and the SAIF will
be merged, provided there are no financial institutions still chartered as
savings associations. Should the insurance funds be merged before January 1,
2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a
leverage ratio (core capital) equal to at least 3% of total adjusted assets, and
(3) a risk-based capital requirement equal to 8.0% of total risk-weighted
assets.
Savings associations with a greater than "normal" level of interest rate
exposure may, in the future, become subject to a deduction from capital for an
interest rate risk ("IRR") component for purposes of calculating their
risk-based capital requirement.
The Company is not under any agreement with regulatory authorities nor is
it aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have a material effect on liquidity, capital
resources or operations of the Company.
Prompt Corrective Action
Banking regulators are required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS rules, an institution
shall be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10.0% or more, has a Tier I risk-based capital ratio (core or leverage
capital to risk-weighted assets) of 6.0% or more, has a leverage capital ratio
of 5.0% or more and is not subject to any order or final capital directive to
meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risked -based ratio of 4.0% or more and a leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized", (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage capital ratio that is less than 4.0%
(3.0% in certain circumstances), (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage capital ratio that is less
than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0% In addition, under
certain circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
21
<PAGE>
Immediately upon becoming undercapitalized, an institution becomes subject
to restrictive provisions. The appropriate federal banking agency for an
undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long
term cost to the deposit insurance fund, subject in certain cases to specified
procedures.
The Company is currently a well capitalized institution.
Dividend and Other Capital Distribution Limitations
Under Virginia law, the Company may pay any cash dividend, so long as
after giving effect to the dividend, the Company will (1) be able to pay its
bills in the usual course of business; and (2) the Company's total assets will
not be less than the sum of its total liabilities plus the amount that would be
needed, if the Company were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. With
respect to stock dividends, shares may be issued pro rata and without the
requirement that shareholders pay for any part of the dividend.
The Bank, however, is subject to OTS restrictions on the payment of
dividends to its sole stockholder FFVA Financial Corporation. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends. In addition, the Bank may not
declare or pay a cash dividend on its capital stock if the effect thereof would
be to reduce the regulatory capital of the Bank below the amount required for
the liquidation account created in connection with the mutual to stock
conversion of the Bank.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
December 31, 1996, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions to the Company could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized" (not meet any one of its minimum regulatory capital
requirements).
22
<PAGE>
Qualified Thrift Lender Test
The Home Owners Loan Act ("HOLA"), as amended, requires savings
institutions to meet a qualified thrift lender ("QTL") test. If the Company
maintains at least 65% of its portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 10% of total assets) in Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Atlanta. Certain
assets are subject to a percentage limitation of 20% of portfolio assets. In
addition, savings associations may include shares of stock of the Federal Home
Loan Banks, FNMA and FHLMC as qualifying QTIs. Compliance with the QTL test is
measured on a monthly basis in nine out of every 12 months. As of December 31,
1996, the Company was in compliance with its QTL requirement with 87.14% of its
total assets invested in QTIs.
A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank.
Liquidity Requirements
All savings associations are required to maintain an average daily balance
of liquid assets, as defined by the OTS, equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. The Company was in compliance with this
requirement on December 31, 1996.
Federal Home Loan Bank System
The Company is a member of the FHLB of Atlanta, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
As a member, the Company is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. As of December 31, 1996, the Company had $3.3
million in FHLB stock, which was in compliance with this requirement.
23
<PAGE>
Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-
savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association. This regulation and oversight is intended primarily for the
protection of the depositors of the Company's subsidiary savings association and
not for stockholders of the Company.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions, provided the Company satisfies the QTL
test. If the Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
The Company must obtain approval from the OTS before acquiring control of
any other SAIF- insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Recent and Proposed Legislation
Bills have been introduced to congressional committees that would
consolidate the OTS with the Office of the Comptroller of the Currency ("OCC").
The resulting agency would regulate all federally chartered commercial banks and
thrift institutions. In the event that the OTS is consolidated with the OCC, it
is possible that the thrift charter could be eliminated and thrifts could be
forced to convert to commercial banks. Legislation passed in 1996 required the
recapture (for income tax purposes) of the Bank's post 1987 additions to bad
debt reserves; however, the Bank's management does not believe this recapture
has had a material effect on the earnings of the Bank or the Company because the
Bank has previously provided deferred taxes on its bad debt reserves. Under
current law and regulations, a unitary savings and loan holding company, such as
the Company, which has only one thrift subsidiary such as the Bank, has
essentially unlimited investment authority. Legislation has also been proposed
which, if enacted, would limit the non-banking related activities of savings and
loan holding companies to those activities permitted for bank holding companies.
24
<PAGE>
Executive Officers of the Registrant
- ------------------------------------
The following individuals were executive officers of the Registrant as of
December 31, 1996:
Name Age(1) Positions Held With the Registrant
- ---- ------ ----------------------------------
James L. Davidson, Jr. 63 President, and Chief Executive Officer
E. L. (Ron) Rash, Jr. 45 Executive Vice President
Ronald W. Neblett 49 Senior Vice President and Treasurer
Margaret C. Burnette 52 Senior Vice President and Secretary
- ---------------------------
(1) At December 31, 1996.
The following is a description of the principal occupation and employment
of the executive officers of the Registrant as of December 31, 1996, during at
least the past five years.
James L. Davidson, Jr., has served as a director of the Bank since 1965 and
was appointed President in 1975. Mr. Davidson's employment with the Bank
commenced in 1961. Mr. Davidson has also served as director of the Company since
its formation in 1994.
E.L. (Ron) Rash, Jr., has served as Executive Vice President of the Bank
since December 1995. Prior to that he served as a Senior Vice President of the
Bank. Mr. Rash has been employed by the Bank for 17 years. Mr. Rash has also
served as an executive officer of the Company since its formation in 1994.
Ronald W. Neblett, CPA, has served as Senior Vice President and Treasurer
of the Bank since January 1985. Mr. Neblett has been employed by the Bank for 25
years. Mr. Neblett has also served as an executive officer of the Company since
its formation in 1994.
Margaret C. Burnette has served as Senior Vice President and Secretary of
the Bank since January 1985. Ms. Burnette has been employed with the Bank for 33
years. Ms. Burnette has also served as an executive officer of the Company since
its formation in 1994.
Item 2. Properties
- ------------------
Properties
- ----------
The Company conducts its business through its main office and eleven
branch offices.
25
<PAGE>
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Company holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Company's business. In the opinion of management, no material loss is expected
from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the most recent fiscal year.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information contained under the section captioned "Stock Price
Information" on page 53 of the Company's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 (the "Annual Report"), is incorporated
herein by reference.
Item 6. Selected Financial Data
- ---------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" and "Selected Consolidated Financial Ratios and Other
Data" on pages 3 and 4 of the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 5 to 16 of the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
The Registrant's financial statements listed under Item 14 are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- --------------------
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the last fiscal year.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Information With
Respect to Nominees for Director and Directors Continuing in Office" in the
Registrant's definitive proxy statement for the Registrant's Annual Meeting of
Stockholders to be held on April 22, 1997 (the "Proxy Statement") is
incorporated herein by reference.
26
<PAGE>
Additional information concerning executive officers is included in this
report under "Part I Executive Officers of the Registrant" and included in the
Proxy Statement in the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance."
Item 11. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and Executive
Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the chart in the section captioned "Voting Securities
and Principal Holders Thereof" and to the chart in the section
captioned "Information With Respect to Nominees for Director and
Directors Continuing in Office" in the Proxy Statement.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation
of which may at a subsequent date result in a change in control of
the Registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of the Registrant included in the Annual Report are incorporated
herein by reference and also in Item 8 hereof.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of December 31, 1995 and
1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996
27
<PAGE>
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996
Notes to Consolidated Financial Statement
2. Financial Statement Schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under the related
instructions or are inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Restated Articles of Incorporation of FFVA Financial
Corporation*
3(ii) Bylaws of FFVA Financial Corporation
11 Statement regarding computation of per share earnings
13 Portions of the Annual Report to Stockholders for the fiscal
year ended December 31, 1996
21 Subsidiaries of the Registrant**
23 Consent from Cherry, Bekaert & Holland, L.L.P. regarding the
incorporation by reference of their report into a previously
filed Registration Statement on Form S-8 originally filed by
the Registrant with the Securities and Exchange Commission
on September 28, 1995
27 Financial Data Schedule***
(b) On November 13, 1996, the Company filed a Form 8-K which
indicated its receipt of regulatory authorization to
repurchase up to 502,255 shares of the Company's outstanding
common stock.
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 33-79540) declared effective by the Commission on August 12, 1994.
** Incorporated by reference to the Form 10-K filed on March 28, 1995 with the
Commission for the fiscal year ended December 31, 1994.
*** Provided in electronic filing only.
28
<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 as of March 25, 1997.
FFVA FINANCIAL CORPORATION
By: /s/ James L. Davidson, Jr.
---------------------------
James L. Davidson, Jr.
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirement 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 as of March 25, 1997.
/s/ James L. Davidson, Jr. /s/ Ronald W. Neblett
- ----------------------------------- ----------------------------------
James L. Davidson, Jr. Ronald W. Neblett
President, Chief Executive Officer, Senior Vice President and Treasurer
and Director (Principal Financial and Accounting
(Principal Executive Officer) Officer)
/s/ John W. Ferguson, Jr. /s/ James K. Candler
- ----------------------------------- ---------------------------------
John W. Ferguson, Jr. James K. Candler
Chairman of the Board Director
/s/ James E. McCausland /s/ Thomas P. Whitten
- ----------------------------------- ---------------------------------
James E. McCausland Thomas P. Whitten
Director Director
/s/ Edward A. Hunt, Jr. /s/ V. Howard Belcher
- ----------------------------------- ---------------------------------
Edward A. Hunt, Jr. V. Howard Belcher
Director Director
/s/ Charles R. W. Schoew /s/ Thomas O. Doyle
- ----------------------------------- ---------------------------------
Charles R. W. Schoew Thomas O. Doyle
Director Director
EXHIBIT 3(II)
<PAGE>
BYLAWS OF
FFVA FINANCIAL CORPORATION
ARTICLE I
DEFINITIONS
Terms defined in the Articles of Incorporation of this Corporation shall
have the same meaning when used in these Bylaws.
ARTICLE II
OFFICES
SECTION 1. Registered and Other Offices. The registered office of FFVA
Financial Corporation (hereinafter called the "Corporation") in the Commonwealth
of Virginia shall be at 925 Main Street, Lynchburg, Virginia 24504. The
Corporation also may have an office or offices and keep the books and records of
the Corporation, in accordance with the laws of the Commonwealth of Virginia, at
such other place or places either within or without the Commonwealth of Virginia
as the Board of Directors of the Corporation may from time to time determine or
the business may require.
ARTICLE III
MEETING OF STOCKHOLDERS
SECTION 1. Place of Meetings. All meetings of the stockholders shall be
held at the principal office of the Corporation at 925 West Main Street,
Lynchburg, Virginia 24504, or at such other place within or without the
Commonwealth of Virginia as may from time to time be fixed by the Board of
Directors.
SECTION 2. Annual Meetings. The annual meeting of stockholders of the
Corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held either (i) at
2:00 p.m. on the second Wednesday of April of each year, (ii) at such other date
and time as the Board of Directors shall designate.
SECTION 3. Special Meetings. Special meetings of the stockholders, for any
purposes or purposes, may be called by the Chairman of the Board or a majority
of the Board of Directors, and only such other persons as are specifically
permitted to call special meetings by the Virginia Stock Corporation Act.
SECTION 4. Notices of Meetings. Except as may otherwise be required by the
Virginia Stock Corporation Act, notice of each meeting of stockholders, annual
or special, shall be in writing and shall state the place where it is to be
held, the date and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes thereof, and a copy thereof shall be served either
personally or by mail upon each stockholder of record entitled to vote at such
meeting, not less than ten (10) or more than sixty (60) days before the meeting,
except that notice of a stockholders' meeting to act on an amendment of the
Articles of Incorporation, a plan of merger or share exchange, a proposed sale
of assets or the
<PAGE>
dissolution of the Corporation shall be given not less than twenty-five (25) nor
more than sixty (60) days before the meeting date. If mailed, it shall be
directed to such stockholder at his or her address as it appears on the records
of the Corporation. (Notices of any meeting of stockholders shall not be
required to be given to any stockholder who shall attend such meeting in person
or by proxy except when the stockholder attends the meeting for the express and
sole purpose of objecting, at the beginning of the meeting, to the transaction
of any business because the meeting is not lawfully called or convened, or that
insufficient notice thereof was given. Notice of any adjourned meeting of
stockholders need not be given except as otherwise provided in this Article
III.)
SECTION 5. Stockholder List. The Secretary of the Corporation shall make,
at least ten (10) days before each meeting of stockholders, a complete list of
the stockholders entitled to vote at such meeting or any adjournment thereof,
with the address of and the number of shares held by each. The list shall be
arranged by voting group and within each voting group by class or series of
shares. The original share transfer books shall be prima facie evidence as to
who are the stockholders entitled to examine such list or transfer books or to
vote at any meeting of stockholders.
SECTION 6. Quorum. Except as otherwise provided by the Virginia Stock
Corporation Act, at each meeting of the stockholders of the Corporation the
holders of shares sufficient to cast a majority of the votes represented by all
voting shares of the Corporation issued and outstanding and entitled to vote at
such meeting, present in person or by proxy, shall constitute a quorum. Shares
entitled to vote as a separate voting group may take action on a matter only if
a quorum of those shares exists with respect to that matter.
SECTION 7. Adjournments. Whether or not a quorum is present at any annual
or special meeting of stockholders, a majority in interest of those present in
person or by proxy and entitled to vote may adjourn the meeting from time to
time to another time or place, at which time, if a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally called. Notice need not be given of the adjourned meeting if the
date, time and place thereof are announced at the meeting at which the
adjournment is taken, unless a new record date is fixed for the adjourned
meeting (which shall be done in the event that the meeting is adjourned to a
date more than 120 days after the date fixed for the original meeting), in which
event a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
SECTION 8. Organization. Each meeting of the stockholders shall be
presided over by the Chairman of the Board, or in his or her absence by the
President, or if neither the Chairman of the Board nor the President is present
by an Executive or Senior Vice President.
SECTION 9. Order of Business. The order of business at all meetings of the
stockholders shall be as determined by the designated chairman of the meeting.
SECTION 10. Voting. At each meeting of the stockholders, every stockholder
of record of the Corporation entitled to vote at such meeting shall be entitled
to vote the common or other shares of voting stock standing in his or her name
on the books of the Corporation and entitled to be voted at such meeting:
(i) At the time fixed pursuant to Article VIII of these Bylaws as
the record date for the determination of stockholders entitled to notice of and
to vote at such meeting, or
- 2 -
<PAGE>
(ii) If no such record date shall have been fixed, then at the close
of business on the day next preceding the day on which notice of such meeting is
given, or
(iii) If notice of such meeting shall have been waived, than at the
close of business on the day next preceding the day on which such meeting is
held.
Each share of common stock shall be entitled to one vote per share. The
holders of the Common Stock or any other equity securities of the Corporation
have no right to cumulate votes for the election of directors. Each share of
other voting stock of the Corporation shall be entitled to such number of votes
as may be provided in the Articles of Incorporation or resolutions of the Board
of Directors of the Corporation establishing such stock. Except as permitted by
law, shares of its own stock belonging to the Corporation shall not be voted
directly or indirectly. Every stockholder entitled to vote at any meeting of
stockholders may cast such vote in person or by proxy appointed by an instrument
in writing, signed by such stockholder or his or her duly authorized attorney
and delivered to the secretary of the meeting; provided, however, that no proxy
shall be voted after eleven (11) months from its date, unless the proxy
expressly provides for a longer duration. At all meetings of the stockholders
all matters (except where other provision is made by law or by the Articles of
Incorporation, as amended, or by these Bylaws) shall be decided by a majority of
the votes cast by the stockholders present in person or by proxy and entitled to
vote thereof, provided that a quorum is present.
SECTION 11. Inspectors. For each meeting of stockholders, the Board of
Directors shall appoint one, two or three inspectors of election. If for any
meeting the inspectors appointed by the Board of Directors shall be unable to
act or the Board of Directors shall fail to appoint such inspectors, inspectors
may be appointed at the meeting by the chairman thereof. The inspectors
appointed to act at any meeting of the stockholders, before entering upon the
discharge of their duties, shall be sworn faithfully to execute the duties of
inspectors at such meeting with strict impartiality and according to the best of
their ability, and the oath so taken shall be subscribed by them. Such
inspectors shall conduct the voting in each election of directors and, as
directed by the Board of Directors or the chairman of the meeting, voting on any
other matter voted on at such meeting, and after the voting shall make a
certificate of the vote taken. No director or candidate for the office of
director shall act as an inspector for the election of directors. Inspectors
need not be stockholders.
SECTION 12. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the
Corporation at least ten (10) days before the date of the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any stockholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the Secretary at least
ten (10) days before the meeting, such proposal shall be laid over for action at
an adjourned, special, or annual meeting of the stockholders taking place thirty
(30) days or more thereafter. This provision shall not prevent the consideration
and approval or disapproval at the annual meeting of reports of officers,
directors, and committees; but in connection with such reports, no new business
shall be acted upon at such annual meeting unless stated and filed as herein
provided.
SECTION 13. Informal action by stockholders. Any action required to be
taken at a meeting of the stockholders, or any other action which may be taken
at a meeting of stockholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
stockholders entitled to vote with respect to the subject matter.
- 3 -
<PAGE>
ARTICLE IV
DIRECTORS
SECTION 1. General Powers. The Board of Directors shall manage and direct
the management of the business and affairs of the Corporation and may exercise
all such authority and powers of the Corporation and do all such lawful acts and
things as are not by law, the Articles of Incorporation, as amended, or these
Bylaws directed or required to be exercised or done by the stockholders.
SECTION 2. Number. The Board of Directors of the Corporation shall consist
of ten (10) members, and shall be divided into classes and elected as set forth
in the Articles of Incorporation.
SECTION 3. Nominations of Directors. Nominations for the election of
directors may be made by the Board of Directors or by any stockholder entitled
to vote for the election of directors. The Board of Directors shall appoint
three or more directors to act as a nominating committee for selecting the Board
of Director nominees for election as directors. Except in the case of a nominee
substituted as a result of the death or other incapacity of a Board of Director
nominee, the nominating committee shall deliver written nominations to the
secretary at least 20 days prior to the date of the annual meeting. All
nominations made by the nominating committee shall be ratified by the Board of
Directors. Stockholder nominations shall be made in the manner and with the
effect provided in the Articles of Incorporation.
SECTION 4. Quorum. At any meeting of the Board of Directors, a majority of
the directors then holding office shall constitute a quorum for the transaction
of business except where otherwise provided by law, the Articles of
Incorporation or these Bylaws. In the absence of a quorum, a majority of the
directors present may adjourn the meeting to some future time not more than
thirty (30) days later.
SECTION 5. Voting. At all meetings of the Board of Directors, each
director present shall have one vote. At all meetings of the Board of Directors,
all questions, the manner of deciding which is not otherwise specifically
regulated by law, the Articles of Incorporation or these Bylaws, shall be
determined by a majority of the directors present at the meeting.
SECTION 6. Place of Meeting. The Board of Directors may hold its meetings
at such place or places within or without the Commonwealth of Virginia as the
Board of Directors from time to time may determine or as shall be specified or
fixed in the respective notices or waivers of notice thereof.
SECTION 7. Annual Meeting. The Board of Directors shall meet for the
purpose of the organization, the election of officers and the transaction of
other business, as soon as practicable after each annual election of directors
on the same day and at the same place at which such election is held or at such
other time or place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors or in a consent and
waiver of notice thereof signed by all the directors.
SECTION 8. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board of Directors by resolution
may determine. If any day fixed for a regular meeting shall be a legal holiday
at the place where the meeting is to be held, then the meeting which would
otherwise be held on that day shall be held at said place at the same hour on
the next succeeding business day not a legal holiday. Notice of regular meetings
need not be given.
- 4 -
<PAGE>
SECTION 9. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board or a
majority of the Board of Directors. Notice of each such meeting shall be mailed
to each director, addressed to him or her at his or her residence or usual place
of business, at least three (3) days before the day on which the meeting is to
be held; or shall be sent to him or her at such place by telegraph, cable or
wireless, or be delivered personally or by telephone not later than the day
before the day on which the meeting is to be held. Except as otherwise expressly
required by law or these Bylaws, the purpose of any special meeting shall not be
required to be stated in the notice thereof. Notice of any meeting of the Board
of Directors shall not be required to be given to any director who shall be
present at such meeting.
SECTION 10. Telephone Meetings. The Board of Directors may hold a meeting
by conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Notice of such
meeting, if any, shall be given as provided in Section 9 and shall give each
director the telephone number at which, or other manner in which, he or she will
be called.
SECTION 11. Action Without a Meeting. Any action required or permitted to
be taken by the Board of Directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 12. Organization. At each meeting of the Board of Directors, the
Chairman of the Board or in his or her absence, the president, or in his or her
absence a director chosen by a majority of the directors present, shall act as
chairman of such meeting and preside thereat. The Secretary, or in his or her
absence of the Secretary and the Assistant Secretaries, any person appointed by
the chairman, shall act as secretary of the meeting and keep the minutes
thereof.
SECTION 13. Order of Business. At all meetings of the Board of Directors,
business shall be transacted in the order determined by the chairman of the
meeting, subject to the approval of the Board of Directors.
SECTION 14. Resignations. Any director may resign at any time by giving
written notice to the Chairman of the Board or to the Secretary of the
Corporation. Such resignation shall take effect upon receipt of such notice or
at any later time specified therein; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
SECTION 15. Removal of Directors. Any director or the entire Board of
Directors may be removed only in the manner provided in the Articles of
Incorporation.
SECTION 16. Election of Directors. Directors are to be elected by a
plurality of votes cast by the shares entitled to vote in the election at a
meeting of stockholders at which a quorum is present. If, at any meeting of
stockholders, due to a vacancy or vacancies or otherwise, directors of more than
one class of the Board of Directors are to be elected, each class of directors
to be elected at the meeting shall be elected in a separate election by a
plurality vote.
SECTION 17. Compensation. Directors, as such, may receive annual
compensation for their services. In addition, by resolution of the Board of
Directors, a reasonable fixed sum, and reasonable expenses of attendance, if
any, may be allowed for actual attendance at each regular or special meeting
- 5 -
<PAGE>
of the Board of Directors. Members of either standing or special committees may
be allowed such compensation for actual attendance at committee meetings as the
Board of Directors may determine.
SECTION 18. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file a written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the Secretary of the Corporation within five
(5) days after the date a copy of the minutes of the meeting is received. Such
right to dissent shall not apply to a director who voted in favor of such
action.
ARTICLE V
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Executive Committee. The Board of Directors may, by resolution
passed by a majority of the Board of Directors, designate an Executive Committee
to consist of three or more members of the Board of Directors.
SECTION 2. Vacancies. A majority of the Board of Directors shall have the
power to change the membership of the Executive Committee at any time, to fill
vacancies therein and to discharge the Executive Committee or to remove any
member thereof (including the Chairman), either with or without cause, at any
time.
SECTION 3. Executive Committee To Report. All completed action by the
Executive Committee shall be reported to the Board of Directors at its meeting
next succeeding such action or at its meeting held in the month following the
taking of such action.
SECTION 4. Procedure. Meetings of the Executive Committee shall be held at
such times and places as the Chairman of the Executive Committee may determine.
The Executive Committee, by a vote of a majority of its members, may fix its
rules of procedure, determine its manner of acting and specify what notice, if
any, of meetings shall be given, except as the Board of Directors shall by
resolution otherwise provide.
SECTION 5. Powers. Except as otherwise provided by law or the Articles of
Incorporation, the Executive Committee shall have and may exercise the powers of
the Board of Directors in the management of the business and affairs of the
Corporation in the intervals between meetings of the Board of Directors in all
cases in which specific directions shall not have been given by the Board of
Directors, and shall have power to authorize the seal of the Corporation to be
affixed to all papers which may require it.
SECTION 6. Other Committees The Board of Directors may, by resolutions
passed by a majority of the Board of Directors designate members of the Board of
Directors to constitute other committees which shall in each case consist of
such number of directors, and shall have and may execute such powers as may be
determined and specified in the respective resolutions appointing them. A
majority of all the members of any such committee may fix its rules of
procedure, determine its manner of acting and fix the time and place, whether
within or without the Commonwealth of Virginia, of its meetings and specify what
notice thereof, if any, shall be given, except that a majority of the Board of
- 6 -
<PAGE>
directors shall have the power to change the membership of any such committee at
any time, to fill vacancies therein and to discharge any such committee or to
remove any member thereof, either with or without cause, at any time.
ARTICLE VI
OFFICERS
SECTION 1. Titles. The principal officers of the Corporation shall be a
Chief Executive Officer, a President, one or more Executive or Senior Vice
Presidents, a Secretary and a Treasurer. Other officers may be appointed in
accordance with the provisions of this Article VI. One person may hold the
office and perform the duties of any two or more of said officers.
SECTION 2. Election, Term of Office and Qualifications. The officers shall
be elected annually by the Board of Directors. Each officer, except as may be
appointed in accordance with the provisions of this Article VI, shall hold
office until his or her successor shall have been chosen and shall qualify or
until his or her death or until he or she shall have resigned or until he or she
shall have been removed in the manner hereinafter provided.
SECTION 3. Appointed Officers. The Board of Directors may from time to
time appoint or delegate the appointment of such other officers and assistant
officers and agents as it may deem necessary including one or more Assistant
Secretaries and one or more Assistant Treasurers. Such officers shall hold
office for such period, have such authority and perform such duties, subject to
the control of the Board of Directors, as are in these Bylaws provided or as the
Chief Executive Officer, president or the Board of Directors may from time to
time prescribe. The Chief Executive Officer or President shall have authority to
appoint and remove agents and employees and to prescribe their powers and duties
and may authorize any other officer or officers to do so.
SECTION 4. Removal. Any officer elected or appointed directly by the Board
of Directors may only be removed, either with or without cause, at any time by
the vote of the majority of the Board of Directors.
SECTION 5. Resignation. Any officer may resign at any time by giving
written notice to the Chief Executive Officer or to the Secretary. Such
resignation shall take effect upon receipt of such notice or at any later time
specified therein; and unless otherwise specified therein the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 6. Vacancies. A vacancy in any office because of death,
resignation, removal or other causes shall be filled for the unexpired portion
of the term in the manner prescribed by these Bylaws for regular election or
appointment to such office.
SECTION 7. The Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the stockholders and the Board of Directors and shall
perform such other duties as the Board of Directors may from time to time
prescribe.
SECTION 8. Chief Executive Officer. The Chief Executive Officer shall,
subject to the Board of Directors, have general charge of the business affairs
and property of the Corporation. Unless otherwise designated by the Board of
Directors, the President shall also be the Chief Executive Officer.
- 7 -
<PAGE>
SECTION 9. The President. In the absence or inability to act of the
Chairman of the Board, the President shall, when present, preside at all
meetings of the Board of Directors and the stockholders. The President shall
have such other powers and perform such duties as may from time to time be
assigned to him or her by the Board of Directors or as may be prescribed by
these Bylaws.
SECTION 10. Executive or Senior Vice Presidents. Each Executive or Senior
Vice president shall have such powers and perform such duties as may from time
to time be assigned to him or her by the Board of Directors, the Chief Executive
Officer or as may be prescribed in these Bylaws.
SECTION 11. Vice President. Each Vice president shall have such powers and
perform such duties as may from time to time be assigned to him or her by the
Board of Directors or as may be prescribed in these Bylaws.
SECTION 12. The Secretary. The Secretary shall attend all meetings of the
Board of Directors and record all its proceedings. He or she may give, or cause
to be given, notice of all stockholders' and directors' meetings and shall
perform such other duties as may be prescribed by the Board of Directors or the
President. The Secretary may certify all votes, resolutions and actions of the
stockholders and of the Board of Directors.
SECTION 13. The Treasurer. The Treasurer shall have charge and custody of,
and be responsible for all funds and securities of the Corporation, and shall
deposit all such funds in the name of the Corporation in such banks or other
depositories as shall be selected or authorized to be selected by the Board of
Directors; shall render or cause to be rendered a statement of the condition of
the finances of the Corporation at all regular meetings of the Board of
Directors, and a full financial report of the Corporation at the annual meeting
of stockholders, if called upon so to do; shall receive and give receipt for
moneys due and payable to the Corporation from any source whatsoever; and, in
general, shall perform or cause to be performed all the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him or her by the Board of Directors or as may be prescribed in these Bylaws.
SECTION 14. Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as from time to
time may be assigned to them by the Board, the President, Chief Executive
Officer or the Secretary or Treasurer, respectively. At the request of the
Secretary or the Treasurer, or in case of his or her absence or inability to
act, any Assistant Secretary or Assistant Treasurer, respectively, may act in
his or her place.
SECTION 15. Indemnification of Directors, Officers, Etc. Directors and
officers of the Corporation shall, and agents and employees of the Corporation
may be indemnified in the manner provided in the Articles of Incorporation. The
Corporation may purchase and maintain liability insurance on behalf of such
persons or to protect itself against liability for such indemnification to the
extent authorized by Article 8 of the Articles of Incorporation. The duties of
the Corporation to indemnify and to advance expenses to any person as provided
in the Articles of Incorporation shall be in the nature of a contract between
the Corporation and each such person, and no amendment or repeal of Article 8 of
the Articles of Incorporation, and no amendment or termination of any trust or
other fund created pursuant thereto, shall alter to the detriment of such person
the right of such person to the advance of expenses or indemnification related
to a claim based on an act or failure to act which took place prior to such
amendment, repeal or termination.
- 8 -
<PAGE>
SECTION 16. Liability of Directors or Officers. The personal liability of
a director or officer of the Corporation shall be limited in the manner provided
in the Articles of Incorporation.
ARTICLE VII
CONTRACTS, CHECKS, BANK ACCOUNTS, ETC.
SECTION 1. Execution of Contracts The Board of Directors may authorize any
officer, employee or agent, in the name and on behalf of the Corporation, to
enter into any contract or execute and satisfy any instrument, and any such
authority may be general or confined to specific instances, or otherwise
limited.
SECTION 2. Loans. The Chief Executive Officer, President or any other
officer, employee or agent authorized by the Bylaws or by the Board of Directors
may effect loans and advances at any time for the Corporation from any bank,
trust company or other institutions or from any firm, corporation or individual
and for such loans and advances may make, execute and deliver promissory notes,
bonds or other certificates or evidences of indebtedness of the Corporation, and
when authorized so to do may pledge and hypothecate or transfer any securities
or other property of the Corporation as security for any such loans or advances.
Such authority conferred by the Board of Directors may be general or confined to
specific instances or otherwise limited.
SECTION 3. Checks, Drafts, Etc. All checks, drafts and other orders for
the payment of money out of the funds of the Corporation and all notes or other
evidences of indebtedness of the Corporation shall be signed on behalf of the
corporation in such a manner as shall from time to time be determined by
resolution of the Board of Directors.
SECTION 4. Deposits. The funds of the Corporation not otherwise employed
shall be deposited from time to time to the order of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
select or as may be selected by an officer, employee or agent of the Corporation
to whom such power may from time to time be delegated by the Board of Directors.
SECTION 5. General and Special Bank Accounts. The Board of Directors, the
Chief Executive Officer, the President or any other officer or officers
designated by the Board of Directors may from time to time authorize the opening
and keeping of general and special bank accounts with such banks, trust
companies or other depositories as may be selected by the President or any other
officer or officers or agent or agents to whom power in that respect shall have
been delegated by the Board of Directors. The Board of Directors may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VIII
CAPITAL STOCK
SECTION 1. Certificates of Stock. Every holder of shares of stock shall be
entitled to have a certificate, in such form as the Board of Directors shall
prescribe, certifying the number and class of shares of stock of the Corporation
owned by him or her. Each such certificate shall be signed in the name of the
Corporation by the Chairman of the Board, the Chief Executive Officer, the
President or an Executive or Senior Vice President or a Vice President, and the
Treasurer or an Assistant Treasurer or
- 9 -
<PAGE>
the Secretary or an Assistant Secretary. Signatures of such officers may be
facsimiles to the extent permitted by the Virginia Stock Corporation Act. In
case any officer or officers who shall have signed, or whose facsimile signature
or signatures shall have been used on, any such certificate or certificates
shall cease to be such officer or officers, whether because of death,
resignation or otherwise, before such certificate or certificates shall have
been delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as though
the person or persons who shall have signed such certificate or certificates or
whose facsimile signature or signatures shall have been used thereon had not
ceased to be such officer or officers. A record shall be kept of the respective
names of the persons, firms or corporations owning the stock represented by
certificates for stock of the Corporation, the number of shares represented by
such certificates, respectively, and the respective dates thereof, and, in case
of cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be canceled and a
new certificate or certificates shall not be issued in exchange for any existing
certificates until such existing certificate shall have been so canceled, except
in cases otherwise provided for in this Article VIII.
SECTION 2. Transfer of Shares. Each transfer of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by his or her attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the Corporation, or with
a transfer agent appointed as is in this Article VIII provided, upon the payment
of any taxes thereon and the surrender of the certificate or certificates for
such shares properly endorsed. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation; provided that whenever any transfer of shares shall
be made for collateral security and not absolutely, such fact, if known to the
Corporation or to any such agent, shall be so expressed in the entry of transfer
if requested by both the transferor and transferee.
SECTION 3. Date for Determining Stockholders of Record. In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of directors
may fix, in advance, a record date, which shall not be more than seventy (70)
nor less than ten (10) days before the date of such meeting, nor more than
seventy (70) days prior to any other action, except as otherwise required by the
Virginia Stock Corporation Act. A determination of stockholders entitled to
notice of or to vote at a stockholders' meeting is effective for any adjournment
of the meeting unless the Board of Directors fixes a new record date, which it
shall do if the meeting is adjourned to a date more than one hundred and twenty
(120) days after the date fixed for the original meeting.
SECTION 4. Lost, Destroyed, and Mutilated Certificates. The holder of any
shares of stock of the Corporation for which the certificate therefor has been
lost, destroyed or mutilated, shall immediately notify the Corporation of such
loss, destruction or mutilation. The Board of Directors may, in its discretion,
and after the expiration of such period of time as it may determine to be
advisable, cause to be issued to such stockholder a new certificate or
certificates for shares of stock, upon the surrender of the mutilated
certificate, or in case of loss or destruction of the certificate, upon proof
satisfactory to the Board of Directors of such loss or destruction, and the
Board of Directors may, in its discretion, require the owner of the lost,
destroyed or mutilated certificate, or his or her legal representatives, to give
the Corporation a bond, in such sum and with such surety or sureties as it may
direct, to indemnify the Corporation against any claim that may be made against
it on account of the alleged loss, destruction or mutilation of any such
certificate or the issuance of such new certificate.
- 10 -
<PAGE>
SECTION 5. Examination of Books by Stockholders. The Board of Directors
shall, subject to any applicable statutes, have the power to determine, from
time to time, whether and to what extent and at what times and places and under
what conditions the accounts and books and documents of the corporation, or any
of them, shall be opened to the inspection of the stockholders; and no
stockholder shall have any right to inspect any account or book or document of
the Corporation, except as conferred by any such statute, unless and until
authorized so to do by resolution of the Board of Directors or of the
stockholders of the Corporation.
ARTICLE IX
WAIVER OF NOTICE
Whenever any notice whatever is required to be given by these Bylaws or by
the Articles of Incorporation, or by statute, the person entitled thereto may in
person, or in the case of a stockholder by his or her attorney thereunto duly
authorized, waive such notice in writing (including telegraph, cable, radio or
wireless), whether before or after the meeting, or other matter in respect of
which such notice is to be given, and in such event such notice need not be
given to such person and such waiver shall be equivalent to such notice, and any
action to be taken after such notice or after the lapse of a prescribed period
of time may be taken without such notice and without the lapse of any period of
time.
ARTICLE X
SEAL
The seal of the Corporation shall be in the form of a circle and shall
bear the name of the Corporation and the year of its incorporation.
ARTICLE XI
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of January
and end on the last day of December in each year.
ARTICLE XII
AMENDMENTS
These Bylaws (including, without limitation, this Article XII) may be
altered, amended or repealed or new bylaws may be adopted in the manner set
forth in the Articles of Incorporation.
- 11 -
EXHIBIT 11
<PAGE>
EXHIBIT 11
FFVA FINANCIAL CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
1995(1) 1996
----------- -----------
Primary earnings per share:
<S> <C> <C>
Weighted average number of shares outstanding ............ 6,074,184 5,211,750
Average unallocated ESOP shares .......................... (266,060) (231,031)
Incremental shares attributed to outstanding options...... 56,160 156,243
----------- -----------
Weighted average number of common stock
equivalents ............................................ 5,864,284 5,136,962
=========== ===========
Net income ............................................... $ 6,474,000 $ 5,463,000
=========== ===========
Primary earnings per common and common
equivalent share ........................................... $ 1.11 $ 1.06
=========== ===========
Earnings per share assuming full dilution:
Weighted average number of shares outstanding ............ 6,074,184 5,211,750
Average unallocated ESOP shares .......................... (266,060) (231,031)
Incremental shares attributed to outstanding options...... 56,160 239,576
----------- -----------
Weighted average number of common stock
equivalents ............................................ 5,864,284 5,220,295
=========== ===========
Net income ............................................... $ 6,474,000 $ 5,463,000
=========== ===========
Fully diluted earnings per common and common
equivalent share............................................ $ 1.11 $ 1.05
=========== ===========
</TABLE>
The Company accounts for the shares acquired by the Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 93-6: shares
controlled by the ESOP are not considered in the weighted average shares
outstanding until the shares are committed for allocation.
(1) Adjusted to reflect the two-for-one stock split paid June 5, 1996.
EXHIBIT 13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In Thousands)
Selected financial data:
<S> <C> <C> <C> <C> <C>
Total assets .......................... $365,018 $379,585 $440,603 $497,290 $533,826
Loans receivable, net ................. 263,330 261,469 268,532 291,215 321,528
Mortgage-backed securities ............ 41,305 40,109 64,865 114,790 131,469
Investment securities ................. 43,207 49,010 80,309 71,113 61,210
Cash and cash equivalents ............. 8,154 17,393 16,387 7,683 6,634
Deposits .............................. 333,295 335,976 337,256 377,975 397,435
Other borrowings ...................... 6,500 12,500 11,250 29,250 60,000
Equity capital/stockholders' equity.... 23,772 29,753 90,859 88,059 74,481
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(In Thousands)
Selected operating data:
<S> <C> <C> <C> <C> <C>
Interest income ............... $29,962 $28,430 $29,380 $37,683 $40,993
Interest expense .............. 17,742 14,726 14,783 19,212 21,182
------- ------- ------- ------- -------
Net interest income ......... 12,220 13,704 14,597 18,471 19,811
Provision for credit losses ... 726 900 600 255 60
------- ------- ------- ------- -------
Net interest income after
provision for credit losses 11,494 12,804 13,997 18,216 19,751
------- ------- ------- ------- -------
Noninterest income ............ 1,699 1,700 896 1,054 1,321
------- ------- ------- ------- -------
Noninterest expense ........... 6,974 7,134 7,496 9,084 12,569 (3)
------- ------- ------- ------- -------
Income before income taxes and
extraordinary item ........... 6,219 7,370 7,397 10,186 8,503
Income tax expense ............ 2,303 2,702 2,694 3,712 3,040
------- ------- ------- ------- -------
Net income before
extraordinary item ......... 3,916 4,668 4,703 6,474 5,463
Cumulative effect at January 1,
1993 of change in accounting
for income taxes ............. -- 679 -- -- --
------- ------- ------- ------- -------
Net income .................. $ 3,916 $ 5,347 $ 4,703 $ 6,474 $ 5,463
======= ======= ======= ======= =======
Per Share Data:
Net income per share(1) ..... -- -- $0.79(2) $ 1.11(2) $ 1.06
Dividends per share ......... -- -- -- $ 0.30(2) $ 0.375
</TABLE>
- ------------------------------
(1) Based on the weighted average number of shares of common stock and common
stock equivalents outstanding.
(2) Restated for two for one stock split paid June 5, 1996.
(3) Includes a $2,230 one-time assessment to recapitalize SAIF.
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income
divided by average total assets) ....... 1.09% 1.43% 1.17% 1.35% 1.05%
Return on average equity (net income
divided by average equity) ............. 18.03 20.05 10.63 7.15 6.68
Interest rate spread during period (1).... 3.33 3.62 3.40 3.12 3.30
Net interest margin (2) .................. 3.51 3.81 3.75 3.97 3.94
Net yield on average interest-earning
assets ................................. 8.61 7.91 7.56 8.10 8.16
Net interest income after provision for
credit losses, to total noninterest
expenses ................................. 164.81 179.48 186.73 200.53 157.14
Noninterest expense to average assets..... 1.93 1.91 1.86 1.89 2.41
Asset Quality Ratios:
Non-performing loans to total assets...... 1.72 1.20 .79 .52 .33
Non-performing loans to total loans ...... 2.33 1.68 1.28 .88 .54
Non-performing assets to total assets..... 1.79 1.30 .81 .52 .36
Allowance for credit losses to
non-performing assets .................. 36.14 52.06 85.35 123.83 172.94
Capital Ratios:
Average equity to average assets ratio
(average equity divided by average total
assets) ................................ 6.02 7.15 10.99 18.88 15.68
Capital to assets at period end .......... 6.51 7.84 20.62 17.71 13.95
Average interest-earning assets to average
interest-bearing liabilities ........... 103.65 104.72 109.40 120.62 115.23
Other data:
Number of:
Real estate loans outstanding(3) ....... 5,873 5,470 5,172 5,104 4,982
Deposit accounts ....................... 36,398 35,546 37,189 42,839 43,311
Full service offices ................... 10 10 10 11 12
</TABLE>
- ---------------------------------
(1) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin is net interest income before provision for credit
losses divided by average interest-earning assets.
(3) Does not include open-end lines of credit.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business of the Company
- -----------------------
FFVA Financial Corporation (the "Company") is a Virginia corporation
organized in May 1994. On October 12, 1994, the Company acquired all the capital
stock of First Federal Savings Bank of Lynchburg (the "Bank") in the conversion
of the Bank from a federal mutual savings bank to a federal stock savings bank.
The Company, as a unitary savings and loan holding company, under existing laws,
generally is not restricted in the types of business activities in which it may
engage provided that the Bank retains a specified amount of its assets in
housing-related investments.
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies.
The Company's business activities to date have been limited to its
investment in the Bank, other equity investments, and loans made to the Bank for
use in the normal course of its business, and to the First Federal Savings Bank
Employee Stock Ownership Plan (the "ESOP") which enabled the ESOP to purchase
shares of the Company's common stock in the initial public offering. The loans
bear interest rates and have terms and conditions which prevailed in the market
place at the time they were originated. During the year ended December 31, 1996,
the Company repurchased and retired 1,013,712 shares of its common stock through
open market transactions.
Business of the Bank
- --------------------
The business of the Bank consists principally of attracting deposits from
the general public and using such deposits to originate mortgage loans secured
by one- to four-family residences and to purchase U.S. Government and federal
agency securities, mortgage-backed and related securities and other investment
securities. To a lesser extent, the Bank also originates multi-family,
commercial real estate, construction, land and land development and consumer and
other loans. The Bank's profitability depends primarily on its net interest
income which is the difference between the income it receives on its loan and
investment portfolios and its cost of funds, which consists of interest paid on
deposits and borrowed funds. To a lesser extent, the Bank's profitability is
also affected by the level of other noninterest income and expenses. Other
noninterest income consists of fees of loans, customer service charges, gains
from sale of investments and other miscellaneous income. Other noninterest
expenses consist of personnel, occupancy related expenses, federal deposit
insurance premiums, data processing, advertising and other operating expenses.
The operations of the Bank are influenced significantly by local economic
conditions and by policies of financial institution regulatory agencies,
including the OTS and the FDIC. The Bank's cost of funds is influenced by
interest rates on competing investments and by rates offered on similar
investments by competing financial institutions in the Bank's market area, as
well as general market interest rates. Lending activities are affected by the
demand for financing of real estate and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered.
5
<PAGE>
Asset/Liability Management
- --------------------------
The Company's earnings depend to a significant extent on its net interest
income, which is the difference between (i) the interest income on loans,
mortgage-backed securities and investments, and (ii) the interest expense on
deposits and borrowings. The Company is subject to interest rate risk and
corresponding fluctuations in its net interest income, to the extent that its
interest-bearing liabilities and interest-earning assets do not mature or
reprice at the same time. Asset/liability management policies are employed in an
effort to reduce the Company's exposure to interest rate risk by matching, to
the extent deemed feasible and appropriate, the repricing periods of the
Company's interest-earning assets and interest-bearing liabilities and thereby
reducing the volatility of net interest income.
The matching of the repricing characteristics of assets and liabilities
may be analyzed by examinining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that same time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or reprice within a specific time frame and the amount of
interest-bearing liabilities anticipated, based on certain assumptions, to
mature or reprice within that same time frame. A gap is considered positive when
the amount of interest rate sensitive assets maturing or repricing within a
specific time frame exceeds the amount of interest rate sensitive liabilities
maturing or repricing within that same time frame. A gap is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
within a specific time frame exceeds the amount of interest rate sensitive
assets maturing or repricing within the same time frame. Accordingly, in a
rising interest rate environment, an institution with a positive gap would be in
a better position to invest in higher yielding assets, which would result in the
yield on its assets repricing at a pace greater than the cost of its
interest-bearing liabilities. During a period of falling interest rates, an
institution with a positive gap would tend to have its assets repricing at a
faster rate than one with a negative gap, which would tend to restrain the
growth of or reduce its net interest income.
The one year cumulative gap expressed as a percentage of earning assets
was calculated to be a negative 1.10% at December 31, 1996. The ratio of
interest-bearing assets to interest-bearing liabilities at December 31, 1996 was
114.53%. Total interest earning assets increased $35.4 million during 1996,
while interest-bearing liabilities increased by $49.6 million.
The Company seeks to limit its exposure to interest rate risk, in part,
through the origination of ARM loans and shorter-term consumer loans. Management
believes that, although investment in ARM loans may reduce short-term earnings
below amounts obtainable through investments in fixed-rate mortgage loans, an
ARM loan portfolio reduces the Company's exposure to adverse interest rate
fluctuations and enhances longer term profitability. While the Company
originates fixed-rate mortgage loans, it monitors the outstanding balances and
terms of all fixed rate mortgage loans to ensure that the addition of these
assets do not result in undue risk.
A large portion of the Company's assets have been invested in
mortgage-backed and mortgage-related securities and investment securities with
short and intermediate average lives. While the Company's mortgage-backed
securities portfolio does contain approximately $82.7 million of loans with 30
year terms, $43.2 million of these securities were collateralized by ARM loans
as of December 31, 1996. The investment policy of the Company is designed to
manage the interest rate sensitivity of its assets and liabilities, to generate
a favorable return without incurring undue interest rate risk, to supplement the
Company's lending activities, and to provide and maintain liquidity.
6
<PAGE>
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
anticipated by the Company, based upon certain assumptions described below, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual terms of the asset or liability. Prepayment
rates for mortgage loans, mortgage-backed securities and other loans are based
upon national prepayment estimates published by major Wall Street investment
banking firms, depending upon the coupon rate of the asset. Deposit decay rate
assumptions supplied by the Federal Home Loan Bank of Atlanta have been applied
to demand deposit accounts, savings accounts and money market deposit accounts.
Management believes that these assumptions are appropriate and reasonable.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------------------------
Over
Less Three Over One Three
Than Months to Six to Through Through Over
Three Six Twelve Three Five Five
Months Months Months Years Years Years Total
------ ------ ------ ------ ----- ----- -----
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans and mortgage-backed
<S> <C> <C> <C> <C> <C> <C> <C>
and related securities(1)(2).............. $ 70,482 $ 35,427 $ 112,006 $ 67,180 $ 48,205 $88,230 $ 421,530
Consumer and other loans(1)............... 17,894 1,112 2,026 5,942 5,348 -- 32,322
Investments and interest-earning
deposits(2)(3) ......................... 6,542 3,500 12,001 21,972 8,314 9,965 62,294
--------- -------- --------- -------- -------- --------- ---------
Total interest-earning assets......... 94,918 40,039 126,033 95,094 61,867 98,195 516,146
--------- -------- --------- -------- -------- --------- ---------
Interest-bearing liabilities:
NOW and Super NOW accounts ................. 3,620 3,225 5,433 11,239 3,007 6,437 32,961
Savings accounts ........................... 1,571 1,500 2,797 8,913 5,810 13,929 34,520
Money market deposit accounts............... 14,129 9,564 10,858 4,812 2,290 2,078 43,731
Certificates of deposit .................... 47,126 37,010 74,021 86,647 34,629 -- 279,433
--------- -------- --------- -------- -------- --------- ---------
Total interest-bearing deposits(4).... 66,446 51,299 93,109 111,611 45,736 22,444 390,645
--------- --------- --------- --------- --------- --------- ---------
FHLB-Atlanta advances and other
borrowed funds ............................ 49,000 2,000 5,000 2,000 2,000 -- 60,000
--------- -------- --------- -------- -------- --------- ---------
Total interest-bearing liabilities ... 115,446 53,299 98,109 113,611 47,736 22,444 450,645
--------- -------- --------- -------- -------- --------- ---------
Interest sensitivity gap.................... $ (20,528) $(13,260) $ 27,924 $(18,517) $ 14,131 75,751 $ 65,501
========= ========= ========= ========= ========= ========= =========
Cumulative interest sensitivity gap......... $ (20,528) $(33,788) $ (5,864) $(24,381) $(10,250) $ 65,501
========= ======== ========= ======== ======== =========
Cumulative interest sensitivity gap
as a percentage of total assets........... (3.85)% (6.33)% (1.10)% (4.57)% (1.92)% 12.27% 12.27%
Ratio of interest-earning assets to
interest-bearing liabilities................ 82.22 % 79.98 % 97.80% 93.59 % 97.61 % 114.53% 114.53%
</TABLE>
- -------------------------------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced by
non-performing loans, but are not reduced by the allowance for credit
losses.
(2) Includes assets available for sale, but does not include mark to market
adjustments reflected in unrealized holding gain (loss).
(3) Includes interest-bearing cash equivalents.
(4) Does not include noninterest-bearing deposits totalling $6,790.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. As a result of these limitations, it is
difficult to correlate changes in net interest income to changes in the level of
interest rates.
7
<PAGE>
Analysis of Net Interest Income
- -------------------------------
The following table sets forth certain information relating to the
Company's statements of financial condition and statements of income for the
years ended December 31, 1994, 1995, and 1996 and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets and liabilities, respectively, for the periods shown. Average balances
are derived from month end balances. Management does not believe that the use of
month end balances instead of average daily balances has caused any material
difference in the information presented. The average balances of loans
receivable include loans on which the Company has discontinued accruing
interest. The yields and costs include fees which are considered adjustments to
yields. Market value adjustments recorded in compliance with SFAS 115 are not
considered when computing the yields and costs of securities.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- ------------------------------ -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- -------- -------- ---------- ------- -------- ----------
(In Thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans, net............ $251,935 $20,717 8.22% $266,097 $23,437 8.81% $279,433 $24,714 8.84%
Consumer and other loans,
net .......................... 10,888 1,018 9.35 16,224 1,703 10.50 25,911 2,487 9.60
Mortgage-backed and related
securities(1) ................ 51,526 3,333 6.47 99,829 6,884 6.90 123,959 8,662 6.99
Overnight and short term
deposits .................... 12,470 488 3.91 5,945 422 7.10 4,361 283 6.49
Investment securities(1)(2).... 61,939 3,824 6.17 76,903 5,237 6.81 68,561 4,847 7.07
-------- ------- -------- ------- -------- -------
Total interest-earning
assets ................... 388,758 29,380 7.56 464,998 37,683 8.10 502,225 40,993 8.16
------- ------- -------
Noninterest-earning assets....... 13,739 14,664 19,162
-------- -------- --------
Total assets .............. $402,497 $479,662 $521,387
======== ======== ========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Deposits:
Transaction accounts.......... $ 89,728 2,684 2.99 $ 80,140 2,555 3.19 $ 82,527 $ 2,319 2.81
Savings and certificates...... 252,438 11,210 4.44 274,675 14,705 5.35 303,085 16,063 5.30
-------- ------- -------- ------- -------- -------
Total deposits ............ 342,166 13,894 4.06 354,815 17,260 4.86 385,612 18,382 4.77
FHLB advances and other
borrowings ................... 13,199 889 6.74 30,702 1,952 6.36 50,236 2,800 5.57
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities .............. 355,365 14,783 4.16 385,517 19,212 4.98 435,848 21,182 4.86
------- ------- -------
Other liabilities ............... 2,890 3,604 3,801
-------- -------- --------
Total liabilities.......... 358,255 389,121 439,649
-------- -------- --------
Stockholders' equity ............ 44,242 90,541 81,738
-------- -------- --------
Total liabilities and
stockholders' equity...... $402,497 $479,662 $521,387
======== ======== ========
Net interest income/interest
rate spread(3) ................. $ 14,597 3.40% $18,471 3.12% $19,811 3.30%
======== ======= =======
Net earning assets/net interest
margin(4) ...................... $ 33,393 3.75% $79,481 3.97% $66,377 3.94%
======== ======= =======
Ratio of interest-earning assets
to interest-bearing liabilities. 109.40% 120.62% 115.23%
======= ======= =======
</TABLE>
- -----------------------------------
(1) Includes assets available for sale.
(2) Includes FHLB-Atlanta stock.
(3) Interest-rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income before the provision for
credit losses divided by average interest-earning assets.
8
<PAGE>
Rate\Volume Analysis
- ---------------------
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1995 vs. 1994 1996 vs. 1995
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- ------ --------- -------
(In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans, net ............. $ 1,201 $ 1,519 $ 2,720 $ 1,179 $ 98 $ 1,277
Consumer and other loans ........ 548 137 685 941 (157) 784
Mortgage-backed and related
securities(1) ................. 3,317 234 3,551 1,685 93 1,778
Overnight and short term deposits (337) 271 (66) (105) (34) (139)
Investment securities(1)(2) ..... 991 422 1,413 (584) 194 (390)
------- ------- ------- ------- ------- -------
Total ....................... 5,720 2,583 8,303 3,116 194 3,310
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Transaction accounts ............ (298) 169 (129) 74 (310) (236)
Savings and certificate accounts 1,048 2,447 3,495 1,507 (149) 1,358
------- ------- ------- ------- ------- -------
Total deposits .............. 750 2,616 3,366 1,581 (459) 1,122
Borrowings ...................... 1,115 (52) 1,063 1,114 (266) 848
------- ------- ------- ------- ------- -------
Total ....................... 1,865 2,564 4,429 2,695 (725) 1,970
------- ------- ------- ------- ------- -------
Net change in net interest income $ 3,855 $ 19 $ 3,874 $ 421 $ 919 $ 1,340
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------------------------
(1) Includes assets available for sale.
(2) Investment securities include FHLB-Atlanta stock.
Financial Condition and Results of Operation
Comparison of Financial Condition at December 31, 1995 and 1996
General. Total assets increased $36.5 million or 7.34%, to $533.8 million
at December 31, 1996 from $497.3 million at December 31, 1995, reflecting
increases in the Company's loan and mortgage-backed securities portfolio.
Loans Receivable, Net. The Company's loans receivable, net increased $30.3
million or 10.41% to $321.5 million at December 31, 1996 from $291.2 million at
December 31, 1995. The loan categories experiencing the most significant growth
during 1996 were the residential, one to four family category which increased by
$11.8 million, the consumer loan category which increased by $11.6 million, and
the commercial loan category which increased by $4.6 million.
9
<PAGE>
Mortgage-backed Securities. The Company's mortgage-backed securities
portfolio increased $16.7 million, or 14.55%, to $131.5 million at December 31,
1996 from $114.8 million at December 31, 1995. The Company's portfolio
encompasses a variety of both fixed rate and adjustable rate products. A total
of $84.9 million mortgage-backed securities are designated as "available for
sale," while $46.6 million are classified as "held to maturity" at December 31,
1996.
Investment Securities. The Company's investment securities decreased $9.9
million or 13.92% to $61.2 million at December 31, 1996 from $71.1 million at
December 31, 1995 as the Company concentrated its asset growth in the loan and
mortgage-backed securities portfolios during 1996.
Deposits. The Company's deposits increased $19.4 million or 5.13% to
$397.4 million at December 31, 1996 from $378.0 million at December 31, 1995.
Advances from FHLB and Other Borrowed Money. Advances from the Federal
Home Loan Bank of Atlanta increased by $11.7 million to $41.0 million at
December 31, 1996 from $29.3 million at December 31, 1995. During 1996, the
Company also entered into reverse repurchase agreements with a regional bank.
The balance outstanding under reverse repurchase agreements at December 31, 1996
was $19.0 million. Funds from the additional borrowings were used to fund the
purchase of mortgage backed securities and collateralized mortgage obligations
and to fund the growth of the Company's loan portfolio.
Stockholders' Equity. Stockholders' equity decreased $13.6 million from
$88.1 million at December 31, 1995 to $74.5 million at December 31, 1996. The
decrease in stockholders' equity was a result of the Company's repurchase of
1,013,712 shares of common stock at a cost of $18.0 million during 1996. The
decrease in stockholders' equity which occurred as a result of the stock
repurchases was partially offset by income from operations. Other factors
contributing to the decrease was a decrease in the value of the Company's
"available for sale" portfolio as reflected in the value of the unrealized
holding gain component of stockholders' equity and the payment of cash dividends
totalling $1.9 million. At December 31, 1996, the ratio of capital to total
assets was 13.95%.
Comparison of Operating Results for the Years Ended December 31, 1995 and 1996
Net Income. Net income decreased $1.0 million to $5.5 million for the year
ended December 31, 1996 from $6.5 million for the year ended December 31, 1995.
This decrease was primarily due to a special FDIC assessment to recapitalize the
SAIF portion of the insurance fund. The Company's portion of this assessment
totalled $2.2 million. Excluding the special assessment, non interest expense
increased a total of $1.3 million. This was partially offset by an increase of
$1.3 million in the Company's net interest income to $19.8 million from $18.5
million in the prior year. Income tax expense also decreased $670,000 as a
result.
Interest Income. Interest income increased approximately $3.3 million, or
8.8%, from $37.7 million for the 1995 period to $41.0 million for the 1996
period. This increase was primarily due to a $37.2 million, or 8.0%, increase in
the average balance of total interest earning assets from $465.0 million at
December 31, 1995 to $502.2 million at December 31, 1996. The average yield on
interest earning assets was 8.10% for the year ended December 31, 1995 and 8.16%
for the year ended December 31, 1996.
Interest Expense. Interest expense increased $2.0 million, or 10.42% from
$19.2 million for the 1995 period to $21.2 million for the 1996 period, as a
result of an increase in deposits and other interest-bearing liabilities.
Average interest-bearing liabilities increased $50.3 million or 13.05%, from
10
<PAGE>
$385.5 million in the 1995 period to $435.8 million in the 1996 period. The
average cost of interest-bearing liabilities decreased 12 basis points from
4.98% in the 1995 period to 4.86% in the 1996 period.
Net Interest Income. Net interest income for the 1996 period increased $1.3
million or 7.03% from $18.5 million for the 1995 period to $19.8 million for the
1996 period. There was an increase in the average interest rate spread from
3.12% for the 1995 period to 3.30% for the 1996 period which was partially
offset by a 5.39% decrease in the ratio of interest-earning assets to interest
bearing liabilities. The decrease in the ratio of interest-earning assets to
interest-bearing liabilities can be attributed to the Company's decision to
repurchase over one million shares of common stock at a cost of $18.0 million
during 1996.
Provision for Credit Losses. The provision for credit losses decreased by
$195,000 from $255,000 for the 1995 period to $60,000 for the 1996 period. At
December 31, 1996, allowances for credit losses were $3.3 million, representing
1.01% of total loans and 188.07% of non-performing loans. The Company maintains
an allowance for credit losses at a level considered adequate to absorb credit
losses. The determination of the adequacy of the valuation allowance is based on
a detailed analysis of loans with known or anticipated adverse performance
characteristics, and includes consideration of historical patterns, industry
experience, current economic conditions, changes in composition and risk
characteristics of the loan portfolio, and other factors deemed relevant to the
collectibility of the loans outstanding. The Company maintains a loan review
system which allows for a periodic review of its loan portfolio and the early
identification of potential problem loans. Such system takes into consideration,
among other things, delinquency status, size of loans, type of collateral and
financial condition of the borrowers. Specific credit loss allowances are
established for identified loans based on a review of such information and/or
appraisals of the underlying collateral. General credit loss allowances are
based upon a combination of factors including, but not limited to, actual credit
loss experience, composition of the loan portfolio and current economic
conditions. Although management believes that adequate general allowances for
losses have been established, actual losses are dependent upon future events
and, as such, further additions to the level of the general credit loss
allowance may be necessary.
Noninterest Income. Noninterest income increased 18.18% from $1.1 million
for the 1995 period to $1.3 million for the 1996 period primarily as a result of
a $182,000 increase from $431,000 to $613,000 in other income.
Noninterest Expense. Noninterest expense increased $3.5 million or 38.46%
from $9.1 million for the 1995 period to $12.6 million for the 1996 period. The
Company recorded an expense of $2.2 million for a one-time special FDIC
assessment to recapitalize the SAIF portion of the insurance fund which
accounted for 62.86% of the increase. The Company also experienced a $900,000
increase in compensation and employee benefit plan expense. A significant
portion of this increase can be attributed to increased staff requirements as a
result of growth experienced by the Company, partially due to the opening of a
new branch office in 1996 and increased benefit plan costs as a result of
growth. Office occupancy and equipment costs and data processing costs also
increased as a result of the additional branches and new accounts.
Income Taxes. The provision for income taxes decreased from $3.7 million
in 1995 to $3.0 million in 1996 as a result of the Company's decreased net
income for 1996.
Comparison of Financial Condition at December 31, 1994 and 1995
General. Total assets increased $56.7 million or 12.87%, to $497.3 million
at December 31, 1995 from $440.6 million at December 31, 1994, reflecting
increases in the Company's loan and mortgage-backed securities portfolio.
11
<PAGE>
Loans Receivable, Net. The Company's loans receivable, net increased $22.7
million or 8.45% to $291.2 million at December 31, 1995 from $268.5 million at
December 31, 1994. Growth in the loan portfolio during 1995 was concentrated in
the residential, one to four family category which increased by $7.6 million and
the consumer loan category which increased by $7.9 million.
Mortgage-backed Securities. The Company's mortgage-backed securities
portfolio increased $49.9 million, or 76.89%, to $114.8 million at December 31,
1995 from $64.9 million at December 31, 1994. The Company's portfolio
encompasses a variety of both fixed rate and adjustable rate products. The
Company's purchases during 1995 were concentrated in adjustable rate
mortgage-backed securities which comprise approximately 54% of the total
mortgage-backed securities portfolio as of December 31, 1995. A total of $78.8
million mortgage-backed securities were designated as "available for sale,"
while $35.9 million were classified as "held to maturity" at December 31, 1995.
Investment Securities. The Company's investment securities decreased $9.2
million or 11.46% to $71.1 million at December 31, 1995 from $80.3 million at
December 31, 1994 as the Company concentrated its asset growth in the loan and
mortgage-backed securities portfolios during 1995.
Deposits. The Company's deposits increased $40.7 million or 12.07% to
$378.0 million at December 31, 1995 from $337.3 million at December 31, 1994.
The acquisition of the Keysville Branch of Crestar Financial Corporation
resulted in deposit growth of approximately $22.0 million, while the remaining
deposit growth was generated in the normal course of business.
Advances from FHLB. Advances from the Federal Home Loan Bank of Atlanta
increased by $18.0 million to $29.3 million at December 31, 1995 from $11.3
million at December 31, 1994. During March 1995, the Company borrowed $25.0
million from the Federal Home Loan Bank under a variable rate advance. These
proceeds were used to fund the purchase of adjustable rate mortgage-backed
securities. A portion of the advance was repaid prior to year end.
Stockholders' Equity. Stockholders' equity decreased $2.8 million from
$90.9 million at December 31, 1994 to $88.1 million at December 31, 1995. The
decrease in stockholders' equity was a direct result of the Company's repurchase
of 300,000 shares of common stock at a cost of $8.5 million during 1995. The
decrease in stockholders' equity which occurred as a result of the stock
repurchases was partially offset by income from operations and an increase in
the value of the Company's "available for sale" portfolio as reflected in the
value of the unrealized holding gain component of stockholders' equity. Other
factors contributing to the decrease was the Company's purchase of 80,000 shares
of common stock to be held in the Management Stock Bonus Plan and the payment of
cash dividends totalling $1.8 million. At December 31, 1995, the ratio of
capital to total assets was 17.71%.
Comparison of Operating Results for the Years Ended December 31, 1994 and 1995
Net Income. Net income increased $1.8 million to $6.5 million for the year
ended December 31, 1995 from $4.7 million for the year ended December 31, 1994.
This increase was primarily due to an increase of $3.9 million in the Company's
net interest income to $18.5 million from $14.6 million in the prior year. This
increase in net interest income was partially offset by a $1.6 million increase
in noninterest expense and a $1.0 million increase in income tax expense.
12
<PAGE>
Interest Income. Interest income increased approximately $8.3 million, or
28.2%, from $29.4 million for the 1994 period to $37.7 million for the 1995
period. This increase was primarily due to an increase in the average balance of
total interest earning assets during 1995 coupled with an increase in their
average yield. Average interest earning assets increased $76.2 million, or
19.60% from $388.8 million at December 31, 1994 to $465.0 million at December
31, 1995. The average yield on interest earning assets increased .54% from 7.56%
for the year ended December 31, 1994 to 8.10% for the year ended December 31,
1995.
Interest Expense. Interest expense increased $4.4 million, or 29.73% from
$14.8 million for the 1994 period to $19.2 million for the 1995 period, as a
result of an increase in deposits and other interest-bearing liabilities, and an
increase in the average cost paid on those interest-bearing liabilities. Average
interest-bearing liabilities increased $30.1 million or 8.47%, from $355.4
million in the 1994 period to $385.5 million in the 1995 period. At the same
time, the average cost of interest-bearing liabilities increased 82 basis points
from 4.16% in the 1994 period to 4.98% in the 1995 period.
Net Interest Income. Net interest income for the 1995 period increased
$3.9 million or 26.71% from $14.6 million for the 1994 period to $18.5 million
for the 1995 period. The increase in net interest income was primarily due to
increased earnings as a result of the investment of net conversion proceeds.
There was an 11.22% increase in the ratio of interest-earning assets to
interest-bearing liabilities which was partially offset by a reduction in the
average interest rate spread from 3.40% for the 1994 period to 3.12% for the
1995 period.
Provision for Credit Losses. The provision for credit losses decreased by
$345,000 from $600,000 for the 1994 period to $255,000 for the 1995 period. At
December 31, 1995, allowances for credit losses were $3.2 million, representing
1.08% of total loans and 123.83% of non-performing loans.
Noninterest Income. Noninterest income increased $158,000 from $896,000
for the 1994 period to $1,054,000 for the 1995 period primarily as a result of a
$191,000 increase from $18,000 to $209,000 in income recognized from the sale of
investment securities.
Noninterest Expense. Noninterest expense increased $1.6 million or 21.33%
from $7.5 million for the 1994 period to $9.1 million for the 1994 period. The
increase resulted primarily from a $1.1 million increase in compensation and
employee benefit plan expense.
A significant portion of the increase can be attributed to increased staff
requirements as a result of growth experienced by the company, partially due to
the purchase of a new branch in 1995. The Company experienced increased benefit
plan costs as a result of this growth and the implementation of a Management
Stock Bonus Plan. The Company also adopted an Employee Stock Ownership Plan in
conjunction with the Bank's conversion to stock form. Other operating expenses
including professional fees, printing and supplies, and various registration
fees and charges also increased as a result of the Company's conversion to a
publicly held company.
Income Taxes. The provision for income taxes increased from $2.7 million
in 1994 to $3.7 million in 1995 as a result of the Company's increased net
income for 1995.
13
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity is a product of its operating, investing and
financing activities. The Company's primary sources of funds are deposits,
borrowings, amortization, prepayments and maturities of outstanding loans and
mortgage-backed securities, maturities of investment securities and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Company invests excess funds in overnight deposits
to fund cash requirements experienced in the normal course of business. The
Company has been able to generate sufficient cash through its deposits as well
as borrowings (consisting of advances from the FHLB of Atlanta and reverse
repurchase agreements). At December 31, 1996, the Company had $41.0 million of
outstanding advances from the FHLB of Atlanta and $19.0 million outstanding with
a regional bank under reverse repurchase agreements.
Liquidity management is both a daily and long-term function of business
management. Excess cash is generally invested in overnight deposits. On a
longer-term basis, the Company maintains a strategy of purchasing investment
securities and mortgage-backed securities. The Company attempts to ladder the
maturities of its investment portfolio to provide an ongoing source of
liquidity. The Company uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain a portfolio of mortgage-backed and investment
securities. At December 31, 1996, the total approved loan commitments
outstanding amounted to $4.0 million. At the same date, commitments under unused
lines of credit amounted to $20.0 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1996 totaled $158.2 million.
Management believes that a significant portion of maturing deposits will remain
with the Company. The Bank had an average liquidity ratio of 12.00% during the
quarter ended December 31, 1996, which exceeded the required minimum liquid
asset ratio of 5.0%.
The bank's deposits are insured up to the legal maximum by the Savings
Associations Insurance Fund ("SAIF") as administered by the FDIC. In the past,
First Federal and most other SAIF members have paid an annual insurance premium
between .23% and .31% of total deposits held. Effective January 1, 1996, the
FDIC lowered the annual insurance premium for most members of the Bank Insurance
Fund ("BIF"), primarily commercial banks, to $2,000. Recent federal legislation
required the FDIC to impose a one-time assessment on all members of SAIF in
order to recapitalize the SAIF to the federally mandated level of 1.25%. The
assessment equalled .65% of an institutions domestic deposits as of March 31,
1995 and was approximately $2.2 million for First Federal Savings Bank. SAIF
premiums have been lowered which will reduce somewhat the competitive advantage
commercial banks have had regarding deposit insurance premiums.
On August 20, 1996, The Small Business Job Protection Act of 1996 was
signed into law. Under this law, the tax bad debt reserve method that had been
available to thrift institutions was repealed for tax years beginning after
1995. According to the legislation, applicable excess reserves must be
recaptured as income over five years beginning with fiscal 1997. The amount to
be recaptured is the excess of the accumulated reserves since fiscal 1987 over
the amount allowed by use of the actual charge-off method for those years.
Thrifts can delay those payments by two years if they meet a residential lending
requirement. Since the Bank has provided deferred taxes on those bad debt
reserves accumulated since 1987, management believes that the enactment of these
proposals will have no material effect on the earnings of the Bank or the
Company.
14
<PAGE>
At December 31, 1996, the Bank had regulatory capital which was well in
excess of applicable limits. At December 31, 1996, the Bank was required to
maintain tangible capital of 1.5% of adjusted total assets, core capital of 3.0%
of adjusted total assets, and risk-based capital of 8.0% of adjusted risk-
weighted assets. At December 31, 1996, the Bank's tangible capital was $53.0
million, or 9.95% of adjusted total assets, core capital was $53.0 million, or
9.95% of adjusted total assets and risk-based capital was $56.3 million, or
20.60% of adjusted risk-weighted assets, exceeding the requirements by $45.0
million, $37.0 million, and $34.4 million, respectively.
The following table sets forth the Bank's capital position at December 31,
1996, as compared to the minimum regulatory capital requirements imposed by the
OTS at that date.
December 31, 1996
-----------------------
Percent of
Adjusted
Amount Assets
-------- ---------
(Dollars in Thousands)
First Federal Savings Bank
- --------------------------
Tangible Capital:
Regulatory capital................................... $52,973 9.95%
Regulatory requirement............................... $ 7,984 1.50%
------- -----
Excess.......................................... $44,989 8.45%
====== =====
Core Capital:
Regulatory capital .................................. $52,973 9.95%
Regulatory requirement............................... $15,967 3.00%
------- -----
Excess.......................................... $37,006 6.95%
====== =====
Risk-Based Capital:
Regulatory capital................................... $56,254 20.60%
Regulatory requirement............................... $21,846 8.00%
------- -----
Excess......................................... $34,408 12.60%
====== =====
Impact of new accounting standards:
In April 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Statement 121
establishes standards for recognizing and measuring the impairment of long-lived
assets, certain identifiable intangibles, and goodwill, when an entity is unable
to recover the carrying amount of those assets. This statement was effective for
fiscal years beginning after December 15, 1995. SFAS 121 has not had a material
effect on the Company's financial statements.
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights". This Statement amends SFAS 65, "Accounting for Certain Mortgage Banking
Activities", to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. This Statement requires that a mortgage banking enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. SFAS 122 was effective for fiscal years beginning
after December 15, 1995. SFAS 122 was to be applied prospectively and has not
had a material effect on the Company's financial statements.
15
<PAGE>
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which became effective for the Company beginning January 1, 1996.
SFAS No. 123 requires increased disclosure of compensation expense arising from
both fixed and performance stock compensation plans. Such expense is measured as
the fair value of the award at the date it is granted using an option-pricing
model that takes into account the exercise price and expected volatility,
expected dividends on the stock and the expected risk-free rate of return during
the term of the option. The compensation cost would be recognized over the
service period, usually the period from the grant date to the vesting date. SFAS
No. 123 encourages, rather than requires, companies to adopt a new method that
accounts for stock compensation awards based on their estimated fair value at
the date they are granted. Companies are permitted, however, to continue
accounting under Accounting Principles Board ("APB") Opinion No. 25. The Company
will continue to apply APB Opinion No. 25 in their financial statements and has
disclosed pro forma net income and earnings per share in a footnote, determined
as if the Company had applied the new method.
In June, 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. After a transfer of
financial 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. In
addition, a transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996 and is to be applied prospectively. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the company.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
16
<PAGE>
[GRAPHIC OMITTED]
Report of Independent Auditors
The Board of Directors and Stockholders
FFVA Financial Corporation
Lynchburg, Virginia
We have audited the accompanying consolidated statements of financial condition
of FFVA Financial Corporation and Subsidiary as of December 31, 1995 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits 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 FFVA Financial
Corporation and Subsidiary as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
January 31, 1997
17
<PAGE>
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31
-------------------
1995 1996
-------- --------
(Dollars in thousands)
Assets
<S> <C> <C>
Cash and cash equivalents $ 7,683 $ 6,634
Investment securities, held to maturity (estimated market
of $34,045 and $36,498 in 1995 and 1996, respectively) 33,314 36,290
Investment securities, available for sale, at market 34,724 21,652
Investment securities, restricted, at cost 3,075 3,268
Mortgage-backed securities, held to maturity (estimated market
of $36,471 and $46,738 in 1995 and 1996, respectively) 35,946 46,570
Mortgage-backed securities, available for sale, at market 78,844 84,899
Loans receivable, net 291,215 321,528
Foreclosed real estate -- 154
Property and equipment, net 5,665 6,283
Accrued interest receivable 4,092 4,054
Prepaid expenses and other assets 1,004 886
Goodwill 1,728 1,608
-------- --------
Total assets $497,290 $533,826
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $377,975 $397,435
Advances from Federal Home Loan Bank and other borrowed funds 29,250 60,000
Advances from borrowers for taxes and insurance 1,071 917
Other liabilities 935 993
-------- --------
Total liabilities 409,231 459,345
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.10. Authorized 500,000 shares, none issued -- --
Common stock, par value $.10. Authorized 11,500,000 shares, 2,851,832
and 4,692,552 shares outstanding for 1995 and 1996, respectively 285 469
Additional paid-in capital 55,057 45,336
Less unearned ESOP and MSBP shares (4,615) (3,726)
Retained earnings, substantially restricted 35,824 31,220
Unrealized holding gain on securities, available for sale 1,508 1,182
-------- --------
Total stockholders' equity 88,059 74,481
-------- --------
Total liabilities and stockholders' equity $497,290 $533,826
======== ========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Stock on Assets
-------------------- Additional Available Unearned Unearned
Shares Paid-in Retained For ESOP MSBP
Outstanding Amount Capital Earnings Sale, Net Shares Shares Total
----------- ------ ------- -------- --------- ------ ------ -----
(Dollars in thousands, except per-share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 -- $ -- $ -- $ 29,119 $ 634 $ -- $ -- $ 29,753
Net income -- -- -- 4,703 -- -- -- 4,703
Change in unrealized gain (loss)
on assets, available for sale, net -- -- -- -- ( 1,954) -- -- (1,954)
Sale of stock 3,151,832 315 60,761 -- -- (3,149) -- 57,927
Allocated/earned ESOP shares -- -- (47) -- -- 477 -- 430
--------- --- ------ -------- ------- -------- ------- --------
Balance at December 31, 1994 3,151,832 315 60,714 33,822 (1,320) (2,672) -- 90,859
Net income -- -- -- 6,474 -- -- -- 6,474
Change in unrealized gain (loss)
on assets, available for sale, net -- -- -- -- 2,828 -- -- 2,828
Purchase of unearned MSBP
shares -- -- -- -- -- -- (2,276) (2,276)
Repurchase of common stock (300,000) (30) (5,784) (2,706) -- -- -- (8,520)
Cash dividends paid ($.60 per
pre-split share) -- -- -- (1,766) -- -- -- (1,766)
Allocated/earned ESOP shares -- -- 127 -- -- 333 -- 460
--------- --- ------ -------- ------- -------- ------- --------
Balance at December 31, 1995 2,851,832 285 55,057 35,824 1,508 (2,339) (2,276) 88,059
Net income -- -- -- 5,463 -- -- -- 5,463
Change in unrealized gain (loss)
on assets, available for sale, net -- -- -- -- (326) -- -- (326)
Allocation of unearned MSBP
shares -- -- (97) -- -- -- 550 453
Repurchase of common stock,
pre-split (139,000) (14) (2,680) (1,564) -- -- -- (4,258)
Two-for-one stock split 2,713,832 271 (271) -- -- -- -- --
Repurchase of common stock,
post-split (735,712) (73) (7,055) (6,600) -- -- -- (13,728)
Cash dividends paid ($.375 per
share) -- -- -- (1,903) -- -- -- (1,903)
Allocated/earned ESOP shares -- -- 351 -- -- 339 -- 690
Exercise of stock options 1,600 -- 31 -- -- -- -- 31
--------- --- ------ -------- ------- -------- ------- --------
Balance at December 31, 1996 4,692,552 $469 $45,336 $ 31,220 $ 1,182 $ (2,000) $(1,726) $ 74,481
========= === ====== ======== ======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1994 1995 1996
--------- -------- --------
(Dollars in thousands, except per-share data)
Interest income
<S> <C> <C> <C>
Loans $21,735 $25,140 $27,201
Mortgage-backed securities 3,282 6,884 8,662
U.S. Government obligations, agencies, and other investments
including overnight deposits 4,363 5,659 5,130
------- ------- -------
Total interest income 29,380 37,683 40,993
------- ------- -------
Interest expense
Deposits 13,894 17,260 18,382
Borrowed money 889 1,952 2,800
------- ------- -------
Total interest expense 14,783 19,212 21,182
------- ------- -------
Net interest income 14,597 18,471 19,811
Provision for credit losses 600 255 60
------- ------- -------
Net interest income after provision for credit losses 13,997 18,216 19,751
------- ------- -------
Noninterest income
Service charges and fees on loans 496 423 456
Net gain on sale of investments 18 209 251
Net gain (loss) on sale of equipment (3) (9) 1
Other income 385 431 613
------- ------- -------
Total noninterest income 896 1,054 1,321
------- ------- -------
Noninterest expenses
Compensation and other personnel costs 4,037 5,089 5,973
Office occupancy and equipment 923 944 1,039
Federal insurance of accounts 772 780 774
SAIF premium assessment -- -- 2,230
Data processing 677 788 940
Advertising 250 325 328
Net loss on foreclosed real estate 14 11 2
Other 823 1,147 1,283
------- ------- -------
Total noninterest expense 7,496 9,084 12,569
------- ------- -------
Income before income tax expense 7,397 10,186 8,503
Income tax expense 2,694 3,712 3,040
------- ------- -------
Net income $ 4,703 $ 6,474 $ 5,463
======= ======= =======
Primary earnings per share $ .79* $ 1.11* $ 1.06
Fully diluted earnings per share $ .79* $ 1.11* $ 1.05
</TABLE>
* Restated to reflect two-for-one stock split paid June 5, 1996
See notes to consolidated financial statements.
20
<PAGE>
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Page 1
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1994 1995 1996
-------- -------- ---------
(Dollars in thousands)
Operating activities
<S> <C> <C> <C>
Net income $ 4,703 $ 6,474 $ 5,463
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for credit losses 600 255 60
(Gain) loss on disposition of equipment 3 9 (1)
Provision for depreciation and amortization 381 450 604
Amortization of premium on sale of loans 41 26 23
Deferred income taxes 89 142 130
Realized investment security gains, net (18) (209) (251)
Loss on sale of foreclosed real estate -- 9 2
(Increase) decrease in interest receivable (874) (563) 38
(Increase) decrease in other assets 2,806 (840) 139
Increase (decrease) in other liabilities (166) 778 (59)
------- ------- -------
Net cash provided by operating activities 7,565 6,531 6,148
------- ------- -------
Investing activities
Proceeds from maturities of investment securities, held to maturity 7,063 16,316 7,097
Purchases of investment securities, held to maturity, and FHLB stock (33,321) (26,932) (10,266)
Proceeds from sales of investment securities, available for sale 10,938 21,301 22,698
Purchases of investment securities, available for sale (17,564) (65) (9,842)
Proceeds from collections on mortgage-backed securities, held to maturity 13,531 6,570 6,263
Purchase of mortgage-backed securities, held to maturity (30,263) (19,766) (16,887)
Proceeds from sales of and collections on mortgage-backed
securities, available for sale 2,275 4,149 23,555
Purchases of mortgage-backed securities, available for sale (11,749) (37,622) (29,657)
Net increase in loans receivable (7,704) (22,964) (30,396)
Purchases of premises and equipment (479) (1,352) (1,101)
Purchases of foreclosed real estate (168) (120) (212)
Proceeds from sales of foreclosed real estate 483 196 56
Proceeds from sales of equipment -- 161 --
Payment of branch acquisition premiums (goodwill) -- (1,724) --
------- ------- -------
Net cash used by investing activities (66,958) (61,852) (38,692)
------- ------- -------
</TABLE>
(continued)
21
<PAGE>
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Page 2
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1994 1995 1996
-------- -------- -------
(Dollars in thousands)
Financing activities
<S> <C> <C> <C>
Net increase in deposit accounts $ 1,280 $ 19,068 $ 19,460
Acquisition of deposits -- 21,651 --
Proceeds from advances and other borrowed money 15,589 36,880 74,980
Repayments of advances and other borrowed money (16,839) (18,880) (44,230)
Proceeds from sale of stock 61,076 -- --
Purchase of stock by ESOP (3,149) -- --
Allocation of ESOP shares 430 460 690
Repurchase of common stock -- (8,520) (17,986)
Purchase MSBP shares -- (2,276) --
Payment of cash dividends -- (1,766) (1,903)
Allocation of MSBP shares -- -- 453
Proceeds from exercise of options -- -- 31
------- -------- --------
Net cash provided by financing activities 58,387 46,617 31,495
------- -------- --------
Decrease in cash and cash equivalents (1,006) (8,704) (1,049)
Cash and cash equivalents at beginning of year 17,393 16,387 7,683
------- -------- --------
Cash and cash equivalents at end of year $ 16,387 $ 7,683 $ 6,634
======== ======== ========
Supplemental disclosures
Gross unrealized gain (loss) on securities, available for sale $(2,095) $ 2,376 $ 1,861
Deferred income tax 775 (868) (679)
------- -------- --------
Net unrealized gain (loss) on securities, available for sale $(1,320) $ 1,508 $ 1,182
======= ======== ========
Cash paid for:
Interest on deposits and borrowed funds $ 14,828 $ 19,231 $ 21,056
Income taxes 2,797 3,514 2,942
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1994, 1995 and 1996
(Columnar dollars in notes are in thousands, except per-share data)
FFVA Financial Corporation (the "Parent" or "Corporation") is a unitary thrift
holding company whose principal asset is its wholly-owned subsidiary, First
Federal Savings Bank of Lynchburg (the "Bank" or "First Federal"). First Federal
is a federally chartered savings bank, organized under the United States Home
Owner's Loan Act. The Bank has five locations in the City of Lynchburg,
Virginia, and locations at Altavista, Farmville, Keysville, Madison Heights,
South Boston (2) and South Hill, Virginia. In these financial statements the
consolidated group is referred to collectively as the "Company."
The Office of Thrift Supervision ("OTS") is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund ("SAIF").
The accounting and reporting policies of the Company and the Bank conform with
generally accepted accounting principles ("GAAP"). A brief description of
significant accounting policies is presented below.
Note 1 - Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of FFVA Financial
Corporation and its wholly-owned subsidiary, First Federal Savings Bank of
Lynchburg. All material intercompany accounts and transactions have been
eliminated in the consolidation. Prior year amounts are reclassified when
necessary to conform with current year classifications.
Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with maturities of three months or less, when purchased,
to be cash equivalents. Cash and cash equivalents for the years presented
consisted of cash on hand, funds due from banks, and federal funds sold
(overnight deposits).
23
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Debt and equity securities
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115), as of December 31, 1993. SFAS 115 requires that
securities be designated in one of three categories; held to maturity, available
for sale, or trading. On December 13, 1995, the Bank transferred a total of
$57,700,000 investment and mortgage-backed securities from the held to maturity
category to the available for sale category in accordance with the one-time
reclassification granted by the Financial Accounting Standards Board in a
special report concerning the implementation of SFAS 115 (see Notes 3 and 4).
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 119, Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments (SFAS 119), as of January 1, 1995. SFAS 119
requires information about all derivative financial instruments, including
separate disclosures for instruments held or issued for trading and non-trading
purposes. In addition, certain amendments have been made to SFAS 105 and SFAS
107 relating to additional disclosures for derivative financial instruments and
the fair value of financial instruments.
Investment securities, held to maturity
Investment securities, held to maturity, are stated at cost, and adjusted for
amortization of premium and accretion of discount using the interest method over
the terms of the securities. This category of securities is not adjusted to
market value as management has the ability and maintains the positive intent to
hold these securities to maturity.
Mortgage-backed and related securities, held to maturity
Mortgage-backed securities, held to maturity, represent participating interests
in pools of 5 to 30-year first-mortgage loans originated and serviced by the
issuers of the securities. These securities are purchased with the positive
intent and ability of being held to their maturity and are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using the interest method over the
remaining period to contractual maturity, adjusted for prepayments.
Securities, available for sale
Securities classified as available for sale consist of U.S. Government and
agency securities, corporate obligations, and mortgage-backed securities and
other related mortgage-backed products. Securities classified as available for
sale are carried at their current market value. The difference between the
amortized cost and current market value, net of deferred income tax, is
reflected as a component of equity capital and is designated as unrealized
holding gain/loss on securities available for sale.
Investment securities, restricted
Due to the nature of, and restrictions placed upon the Company's common stock
investment in the Federal Home Loan Bank of Atlanta, these securities have been
classified as restricted equity securities and carried at cost which
approximates market. These restricted securities are not subject to the
investment security classifications of SFAS 115.
24
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Loans and allowance for credit losses
The allowance for credit losses is maintained at a level considered by
management to be adequate to absorb future loan losses currently inherent in the
loan portfolio. Management's assessment of the adequacy of the allowance is
based upon type and volume of the loan portfolio, past loan loss experience,
existing and anticipated economic conditions, and other factors which deserve
current recognition in estimating future loan losses. Additions to the allowance
are charged to operations. Loans are charged to the allowance account, partially
or wholly, at the time management determines collectibility is not probable.
Recoveries on previously charged off loans are credited to the allowance
account. Management's assessment of the adequacy of the allowance is subject to
evaluation and adjustment by the Company's regulators.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), Accounting by Creditors for Impairment of a Loan
(as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures). The effect of adopting these new accounting
standards was immaterial to the operating results of the Company for the years
ended December 31, 1995 and 1996.
Under SFAS 114, a loan is considered to be impaired when it is probable that the
Company will be unable to collect all principal and interest amounts according
to the contractual terms of the loan agreement. The allowance for credit losses
related to loans identified as impaired is primarily based on the excess of the
loan's current outstanding principal balance over the estimated fair market
value of the related collateral. For a loan that is not collateral-dependent,
the allowance is recorded at the amount by which the outstanding principal
balance exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's original effective interest rate. Prior to January 1,
1995, the allowance for credit losses for all loans which would have qualified
as impaired under the new accounting standards was primarily based upon the
estimated fair market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
Foreclosed real estate
Foreclosed real estate consists of property acquired in settlement of loans,
whether through actual foreclosure or in-substance foreclosure on delinquent
loans. Such property is stated initially at the lower of cost or fair value and
is subsequently maintained at the lower of cost or fair value less estimated
cost to sell.
Property, equipment and depreciation
The various classes of property are stated at cost and are depreciated by the
straight-line method over estimated useful lives of 20 to 40 years for buildings
and 3.5 to 10 years for furniture and equipment. Leasehold improvements are
capitalized and amortized by the straight-line method over the shorter of their
estimated useful lives or the terms of the leases. Repairs are expensed as
incurred. The cost and accumulated depreciation of property are eliminated from
the accounts upon disposal of the property, and any resulting gain or loss is
included in the determination of net income.
25
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Income taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect of a change in tax rates
upon deferred taxes is recognized in income in the period that includes the
enactment date.
Prior to 1996, savings banks that met certain definitional tests and other
conditions prescribed by the Internal Revenue Code were allowed, within
limitations, to deduct from taxable income an allowance for bad debts based on
actual loss experience, a percentage of taxable income (8%) before such
deduction, or an amount based on a percentage of eligible loans. The cumulative
bad debt reserve, upon which no taxes have been paid, was approximately
$6,330,000 as of December 31, 1996.
As a result of 1996 tax legislation, the Company will compute its tax bad debt
deduction by use of the actual charge-off method, for tax years beginning with
1996. According to the legislation, "applicable excess reserves" must be
recaptured as taxable income over five years beginning with fiscal year 1997.
Thrifts can delay those payments by two years if they meet a residential lending
requirement. The amount to be recaptured is the excess of the accumulated
reserves since 1987 over the amount allowed by use of the actual charge-off
method for those years. Since the Bank has provided deferred taxes on those bad
debt reserves accumulated since 1987, management does not believe that the
legislation will have a material effect on the Company's financial statements.
Loan origination fees, costs, discounts and premiums
Loan origination and commitment fees and certain direct loan origination costs
are deferred. Upon the expiration of unfunded commitments, the related fees are
recognized in income as loan fees. Loan origination fees on loans and funded
commitments and their related direct costs are amortized into income on loans as
yield adjustments over the contractual life of related loans using the
level-yield method.
Discounts and premiums on loans purchased are recognized as income using the
level-yield method over the average life of the loan.
Sales of foreclosed real estate
If foreclosed real estate is sold on financing terms more favorable than the
prevailing market terms for loans with similar collateral, a loss is imputed and
recognized in the financial statements for the year of the sale.
Advertising
The Company expenses advertising costs as incurred. Such expenses are shown in
the consolidated statements of income; no amounts of advertising are carried as
assets.
26
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Earnings per share
Earnings per share of common stock for the years ended December 31, 1995 and
1996 have been determined by dividing the net income for the twelve-month period
by the calculated weighted-average number of common stock and common stock
equivalents. The December 31, 1994 calculation was computed as if the conversion
from mutual ownership to stock ownership had occurred on the first day of the
fiscal year rather than on October 12, 1994. Shares acquired by the employee
stock ownership plans (ESOP) are accounted for in accordance with AICPA
Statement of Position 93-6 and are not considered in the weighted-average shares
outstanding until the shares have been earned by the employees and/or committed
to be released. The weighted-average number of common and common equivalent
shares outstanding for the periods indicated are as follows:
Primary Fully Diluted
Shares Shares
--------- -------------
October 12, 1994 - December 31, 1994 5,994,038* 5,994,038*
January 1, 1995 - December 31, 1995 5,864,284* 5,864,284*
January 1, 1996 - December 31, 1996 5,136,962 5,220,295
*Restated to reflect two-for-one stock split paid June 5, 1996
Conversion to stock ownership
On October 12, 1994, the Corporation was formed to be the parent company of the
Bank. Net proceeds from the sale of the Corporation's common stock, after
deducting conversion expenses and underwriters' discounts of $1,960,000, were
$61,076,640 and are reflected as common stock and additional paid-in capital in
the accompanying consolidated statements of financial condition (see Note 14).
As part of the conversion to stock form, the Company formed an ESOP for the
eligible employees. The ESOP purchased common stock of the Company issued in the
conversion. The purchase was funded by a loan from the Company. In accordance
with generally accepted accounting principles, the unpaid balance of the ESOP
loan has been eliminated from the Company's consolidated statements of financial
condition. Stockholders' equity has been reduced by the aggregate purchase price
of the shares owned by the ESOP net of shares that have been released.
Contributions to the ESOP by the Company are made to fund the principal and
interest payments on the debt of the ESOP. As of December 31, 1996, 114,934
shares had been released and 200,000 shares remain unallocated.
Impact of new accounting standards
In April 1995, the Financial Accounting Standards Board ("FASB") issued
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (SFAS 121). This statement established standards for recognizing
and measuring the impairment of long-lived assets, certain identifiable
intangibles, and goodwill, when an entity is unable to recover the carrying
amount of those assets. This statement was effective for the year beginning
January 1, 1996. SFAS 121 has not had a material effect on the Company's
financial statements.
27
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
In May 1995, the FASB issued Accounting for Mortgage Servicing Rights (SFAS
122). This statement amended Accounting for Certain Mortgage Banking Activities
(SFAS 65), to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others however those servicing
rights are acquired. This statement requires that a mortgage banking enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. This statement was effective for the year beginning
January 1, 1996. SFAS 122 has not had a material effect on the Company's
financial statements.
In October 1995, the FASB issued Accounting for Stock-Based Compensation (SFAS
123), which became effective for the Company beginning January 1, 1996. This
statement required increased disclosure of compensation expense arising from
both fixed and performance stock compensation plans. Such expense is measured as
the fair value of the award at the date it is granted using an option-pricing
model that takes into account the exercise price and expected volatility,
expected dividends on the stock and the expected risk-free rate of return during
the term of the option. The compensation cost is recognized over the service
period, usually the period from the grant date to the vesting date. SFAS 123
encourages, rather than requires, companies to adopt a new method that accounts
for stock compensation awards based on their estimated fair value at the date
they are granted. Companies are permitted, however, to continue accounting under
Accounting Principles Board ("APB") Opinion No. 25. The Company has elected to
continue to apply APB Opinion No. 25 in their financial statements. Pro forma
net income and earnings per share are presented in accordance with the
requirements of SFAS 123 (see Note 15).
In June 1996, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 125 (SFAS 125), Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. After a transfer of
financial 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. In
addition, a transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the Company.
Note 2 - Interest-earning deposits
Cash and cash equivalents included interest-earning federal funds sold
(overnight deposits) totaling $4,413,000 at December 31, 1995 and $1,270,000 at
December 31, 1996.
28
<PAGE>
Notes to Consolidated Financial Statements
Note 3 - Investment securities
Investments consisted of U.S. Government and agency securities, corporate, and
other securities as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
--------- ----- ------- ------------
Held to maturity
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $31,482 $ 746 $ 19 $32,209
Other asset-backed securities 1,832 13 9 1,836
------- ------- ------- -------
$33,314 $ 759 $ 28 $34,045
======= ======= ======= =======
Available for sale
U.S. Government and agency obligations $10,996 $ 308 $ 16 $11,288
Corporate obligations 20,618 225 53 20,790
FHLMC preferred stock and other corporate
equity securities 2,598 48 -- 2,646
------- ------- ------- -------
$34,212 $ 581 $ 69 $34,724
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
--------- ----- ------ ------------
Held to maturity
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $35,558 $ 315 $ 117 $35,756
Other asset-backed securities 732 10 -- 742
------- ------- ------- -------
$36,290 $ 325 $ 117 $36,498
======= ======= ======= =======
Available for sale
U.S. Government and agency obligations $ 5,999 $ 64 $ -- $ 6,063
Corporate obligations 9,985 126 3 10,108
FHLMC/FNMA preferred stock and other
corporate equity securities 5,481 -- -- 5,481
------- ------- ------- -------
$21,465 $ 190 $ 3 $21,652
======= ======= ======= =======
</TABLE>
29
<PAGE>
Notes to Consolidated Financial Statements
Note 3 - Investment securities (continued)
The amortized cost and estimated market value of the debt securities at December
31, 1996, are as follows in thousands. Expected maturities may differ from
contractual maturities because issuers may have the right to call some
obligations without penalty.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,000 $ 8,118 $ 7,014 $ 7,047
Due after one year through five years 22,311 22,455 7,974 8,121
Due after five years 5,979 5,925 996 1,003
------- ------- ------- -------
36,290 36,498 15,984 16,171
Other equity securities -- -- 5,481 5,481
------- ------- ------- -------
$36,290 $36,498 $21,465 $21,652
======= ======= ======= =======
</TABLE>
Note 4 - Mortgage-backed securities
The amortized costs and estimated market values of mortgage-backed securities
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
---------- ----- ------ ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, held to maturity $ 35,946 $ 701 $ 176 $ 36,471
Mortgage-backed securities, available for sale 76,980 1,866 2 78,844
-------- -------- -------- --------
112,926 $ 2,567 $ 178 $115,315
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
--------- ----- ------ -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, held to maturity $ 46,570 $ 484 $ 316 $ 46,738
Mortgage-backed securities, available for sale 83,224 1,756 81 84,899
-------- -------- -------- --------
$129,794 $ 2,240 $ 397 $131,637
======== ======== ======== ========
</TABLE>
30
<PAGE>
Notes to Consolidated Financial Statements
Note 4 - Mortgage-backed securities (continued)
Gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows:
1994 1995 1996
---- ---- ----
Gross realized gains
U.S. Government and agency securities $ 96 $ 215 $ 135
Mortgage-backed securities 10 -- 99
Option fees earned -- -- 42
---- ------ -----
$106 $ 215 $ 276
==== ====== =====
Gross realized losses
U.S. Government and agency securities $178 $ 6 $ 25
Mortgage-backed securities 3 -- --
Mutual funds invested in mortgage-backed securities 18 -- --
---- ------ -----
$199 $ 6 $ 25
==== ====== =====
Approximate income tax on net gain (loss) $(34) $ 76 $ 90
==== ====== =====
Note 5 - Loans receivable
Loans receivable at the end of each year were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1995 1996
-------- ---------
Mortgage loans:
<S> <C> <C>
Residential, one to four family $220,433 $232,237
Residential, multi-family 15,361 15,226
Construction 9,453 12,554
Land and land development loans 2,494 1,939
Commercial 30,414 35,006
Other loans:
Consumer loans 19,514 31,097
Loans to depositors secured by savings 1,317 1,292
------- -------
Total 298,986 329,351
Less:
Undisbursed portion of loans in process (3,585) (3,533)
Deferred loan fees and costs, net (969) (980)
Allowance for credit losses (3,217) (3,310)
-------- -------
Total $291,215 $321,528
======= =======
</TABLE>
Residential real estate loans have been pledged under a blanket floating lien to
the Federal Home Loan Bank of Atlanta as collateral for advances from that bank
(see Note 11).
31
<PAGE>
Notes to Consolidated Financial Statements
Note 5 - Loans receivable (continued)
An analysis of the allowance for credit losses is as follows:
Year Ended December 31
------------------------
1994 1995 1996
------ ------- ------
Balance at beginning of year $2,576 $3,054 $3,217
Provision charged to operations 600 255 60
Loans charged off (198) (154) (27)
Recoveries of loans charged off 76 62 60
----- ----- -----
Balance at end of year $ 3,054 $3,217 $3,310
===== ===== =====
At December 31, 1995 and 1996, the Company had no loans that were specifically
classified as impaired. During the year ended December 31, 1995, the Company
recognized as impaired two related loans with an average aggregate balance of
approximately $1,095,000. The loans were renegotiated during 1995 to correct the
impairment.
Note 6 - Loan servicing
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these loans
are summarized as follows:
December 31
-----------------------
1994 1995 1996
------ ------ -----
FHLMC $ 8,206 $ 6,961 $ 5,821
Other investors 88 86 85
------ ------ ------
$ 8,294 $ 7,047 $ 5,906
====== ====== ======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $65,000 and $57,000 at December 31, 1995 and 1996, respectively.
Note 7 - Foreclosed real estate
Foreclosed real estate acquired in settlement of loans, at the lower of cost or
fair value, totaled $-0- at December 31, 1995 and $154,000 at December 31, 1996.
The net loss on foreclosed real estate consisted of:
Year Ended December 31
------------------------
1994 1995 1996
------ ------ ------
Maintenance, utilities, taxes and insurance $ 14 $ 2 $ -
Net loss on sale of foreclosed real estate - 9 2
------ ------ ----
Net loss $ 14 $ 11 $ 2
====== ====== ====
32
<PAGE>
Notes to Consolidated Financial Statements
Note 8 - Property, equipment and depreciation
Property and equipment were as follows:
December 31
---------------------
1995 1996
--------- ---------
Land $ 1,474 $ 1,474
Building 4,162 4,586
Leasehold improvements 31 24
Furniture, fixtures and equipment 3,128 3,463
Autos 56 83
-------- -------
8,851 9,630
Less accumulated depreciation 3,186 3,347
-------- -------
Net property and equipment $ 5,665 $ 6,283
======== =======
Note 9 - Accrued interest receivable
Accrued interest receivable was as follows:
December 31
--------------------
1995 1996
--------- ---------
Interest on loans $ 1,968 $ 2,147
Interest and dividends on investment securities 1,361 1,065
Interest on mortgage-backed securities 763 842
------- -------
$ 4,092 $ 4,054
======= =======
Note 10 - Deposits
Savings deposits, summarized by interest rate, were as follows:
December 31
---------------------
1995 1996
---------- ---------
Negotiable order of withdrawal deposits
2.25% to 3.50% $ 76,306 $ 76,692
Non-interest bearing 6,218 6,790
--------- ---------
Total NOW deposits 82,524 83,482
Passbook and statement deposits, 3.00% 33,956 34,520
Certificates of deposit 261,495 279,433
--------- ---------
$ 377,975 $ 397,435
========= =========
33
<PAGE>
Notes to Consolidated Financial Statements
Note 10 - Deposits (continued)
Certain large certificates of deposit, including municipal deposits, are
collateralized by mortgage-backed securities with market values at December 31,
1995 and 1996 of approximately $1,623,000 and $1,424,000, respectively.
The aggregate amounts of certificates of deposit with minimum denominations of
$100,000 were $30,865,000 and $40,589,000 at December 31, 1995 and 1996,
respectively.
At December 31, 1996, scheduled maturities of certificates of deposit by actual
maturity for fixed-rate certificates and by the next repricing date for
variable-rate certificates and the weighted-average-contract rates were as
follows:
Weighted-
Maturity in Average Rate Balance
----------------------- ---------------- --------------
One year or less 5.214% $ 158,156
One to three years 5.610% 86,648
More than three years 6.505% 34,629
-----------
$ 279,433
===========
Note 11 - Borrowed funds
At December 31, 1996, the Company had $41,000,000 in outstanding advances from
the Federal Home Loan Bank of Atlanta (FHLB - Atlanta) and $19,000,000 in
outstanding reverse repurchase agreements.
The following table sets forth certain information regarding advances and other
borrowings at the dates or for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Average balance outstanding $ 30,702 $50,236
Maximum amount outstanding at any month-end during the period 43,250 60,000
Balance outstanding at end of period 29,250 60,000
Weighted-average interest rate during the period 6.36% 5.57%
Weighted-average interest rate at the end of period 5.97% 5.69%
</TABLE>
34
<PAGE>
Notes to Consolidated Financial Statements
Note 11 - Borrowed funds (continued)
The following table sets forth the repayment schedule at December 31, 1996,
which includes interest rates and amounts due by year in thousands:
Year Due Interest Rate Amount
-------- ------------- ------
1997 5.66% $ 56,000
1998 5.51% 2,000
2000 6.16% 2,000
-----------
$ 60,000
===========
Residential real estate loans aggregating $54,667,000 at December 31, 1996, have
been pledged as collateral for advances from the FHLB - Atlanta under a blanket
floating lien agreement.
The par value of the mortgage-backed securities collateralizing the reverse
repurchase agreements was $19.5 million at December 31, 1996.
Note 12 - SAIF premium assessment
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% of insured deposits as of September 30,
1996. Based on the Company's deposits as of March 31, 1995, the date for
measuring the amount of the special assessment pursuant to the Act, the Company
paid a special assessment of $2,230,000 on November 27, 1996 to capitalize the
SAIF. The FDIC has lowered the premium for deposit insurance to a level
necessary to maintain the SAIF at its required reserve level. The Bank's premium
for deposit insurance for 1997 is currently .0648% of assessable deposits.
Note 13 - Income taxes
The provision for income taxes, in thousands, is summarized as follows:
Year Ended December 31
-----------------------
1994 1995 1996
------ ------- ------
Federal $2,379 $3,293 $2,565
State 226 277 345
----- ----- -----
2,605 3,570 2,910
Deferred tax expense 89 142 130
----- ----- -----
Total provision for income taxes $2,694 $3,712 $3,040
===== ===== =====
35
<PAGE>
Notes to Consolidated Financial Statements
Note 13 - Income taxes (continued)
The provision for income tax expense differs from that computed at the statutory
tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
Amount Percent of Pretax Income
------------------------ ------------------------
1994 1995 1996 1994 1995 1996
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $2,515 $3,463 $2,891 34.0 34.0 34.0
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 149 183 228 2.0 1.8 2.7
Other 30 66 (79) .4 .6 (.9)
------ ------ ------ ---- ---- ----
Income tax expense $2,694 $3,712 $3,040 36.4 36.4 35.8
====== ====== ====== ==== ==== ====
</TABLE>
The significant components of the net deferred tax (liability) asset are listed
as follows:
<TABLE>
<CAPTION>
December 31
--------------------
1995 1996
--------- ---------
Components of the deferred tax asset
<S> <C> <C>
Tax bad debt reserves $ 700 $ 727
Deferred income 240 150
Stock bonus plan 166 163
------- ------
1,106 1,040
Valuation allowance - -
------- ------
Total deferred tax asset 1,106 1,040
------- ------
Components of the deferred tax liability
Accelerated depreciation (230) (281)
Loan sale imputed gain (13) (8)
Pension expense (33) (51)
Unrealized appreciation on securities, available for sale (868) (679)
-------- -------
Total deferred tax liability (1,144) (1,019)
-------- -------
Net deferred tax (liability) asset $ (38) $ 21
======== ======
</TABLE>
The Company's federal income tax returns have been examined by tax authorities
through 1992.
36
<PAGE>
Notes to Consolidated Financial Statements
Note 14 - Restricted retained earnings
In accordance with the current regulations concerning conversion from a mutual
to a stock organization, the Bank was required to establish a liquidation
account equal to its net worth as of the latest statement of financial condition
contained in the final offering circular. Such liquidation account is to be
maintained, as of the eligibility record date December 31, 1992, for the benefit
of depositors who continue to maintain their deposits in the Bank after the
conversion, in the event of a complete liquidation of the Bank. If, however, on
any annual closing date of the Bank subsequent to December 31, 1992, the amount
in any deposit account is less than the amount in such deposit account on
December 31, 1992, then the interest in the liquidation account relating to such
deposit account would be reduced by the amount of such reduction, and such
interest will cease to exist if such deposit account is closed. The Bank may not
declare or pay a cash dividend, or repurchase any of its capital stock if the
effect thereof would cause the net worth of the Bank to be reduced below either
the amount required for the liquidation account or the minimum regulatory
capital requirements. At December 31, 1996, the unadjusted liquidation account
totaled $30,017,000, and minimum regulatory capital was $21,846,000.
Note 15 - Retirement plans and employee benefit programs
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's compensation during the last five years of employment. The
Company's funding policy is to contribute annually the maximum amount allowed by
law. Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
Net periodic pension cost for 1994, 1995 and 1996 include the following
components based on the actuaries' report in thousands:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1994 1995 1996
------- -------- ---------
<S> <C> <C> <C>
Service cost, benefits earned during the period $ 219 $ 203 $ 245
Interest cost on projected benefit obligation 305 324 375
Actual return on plan assets (245) (257) (327)
Net amortization and deferral 58 58 58
------ ------- ------
Net periodic pension cost $ 337 $ 328 $ 351
====== ======= ======
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements
Note 15 - Retirement plans and employee benefit programs (continued)
The following table sets forth the funded status of the plan and the amounts
recognized in the Company's statements of financial condition:
<TABLE>
<CAPTION>
December 31
----------------------------
1994 1995 1996
-------- ------- -------
Accumulated benefit obligation including $2,637,000,
<S> <C> <C> <C>
$2,995,000, and $3,489,000 in vested benefits $2,747 $3,124 $3,641
Additional benefits due to projected future compensation levels 1,635 1,700 1,921
------ ------ ------
Projected benefit obligation 4,382 4,824 5,562
------ ------ ------
Plan assets at fair value 3,452 4,398 5,078*
------ ------ ------
Projected benefit obligation in excess of plan assets (930) (426) (484)
Unrecognized prior service cost 807 742 676
Unrecognized net (gain) loss 272 (129) 34
Unrecognized transitional asset (99) (92) (84)
------ ------ ------
Prepaid pension cost $ 50 $ 95 $ 142
====== ====== ======
</TABLE>
* Includes $294,000 of savings deposits in the Bank at December 31, 1996.
Assumptions used in determining the net periodic pension cost were:
1994 1995 1996
---- ---- -----
Discount rate 7.5% 7.5% 7.5%
Rate of increase in compensation levels 6.0% 6.0% 6.0%
Expected long-term rate of return on assets 7.5% 7.5% 7.5%
Employee stock ownership plan
The Company has an ESOP covering all full-time employees, over the age of 21,
with at least one year of service. The ESOP borrowed funds from the Company to
purchase 314,934 (157,467 pre-split) shares of the Company's common stock, the
loan being collateralized by the common stock. Contributions by the Company,
along with dividends received on unallocated shares, are used to repay the loan
with shares being released from the Company's lien proportional to the loan
repayments. Annually on December 31, the released shares are allocated to the
participants in the same proportion that their wages bear to the total
compensation of all the participants. A total of 33,304 (16,652 pre-split) and
33,852 shares of the Company's common stock were released for allocation to the
Plan Participants during the years ended December 31, 1995 and 1996,
respectively.
38
<PAGE>
Notes to Consolidated Financial Statements
Note 15 - Retirement plans and employee benefit programs (continued)
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as a reduction of
stockholders' equity in the consolidated statements of financial condition. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt. The total amount
charged to expense for the years ended December 31, 1995 and 1996, based on SOP
No. 93-6, was $460,000 and $690,000, respectively. The fair value of the 200,000
unearned ESOP shares at December 31, 1996 was $4,100,000. There were no
commitments to repurchase ESOP shares.
Recognition and retention plan
The stockholders approved the establishment of a Management Stock Bonus Plan
(MSBP) and Trust (the plan) on April 27, 1995. The plan states that the Trust
shall not purchase more than 4% of the aggregate shares of common stock issued
by the Company in the mutual-to-stock conversion of the Bank (252,146 post-split
shares). During 1995, the Bank purchased 160,000 post-split shares of the
Company's common stock at an average adjusted price of $14.25 per share to be
awarded to directors, officers and employees in accordance with the provision of
the plan. The costs of the shares held by the plan are recorded as unearned
compensation, a contra equity account, and are recognized as an expense in
accordance with the vesting requirements under the plan. For the years ended
December 31, 1995 and 1996, the amounts included in compensation expense were
$453,000 and $628,000, respectively. The status of the shares in this plan at
December 31, 1996 is shown as follows:
Unawarded Awarded
Shares Shares
--------- --------
Total established by plan 126,073 -
Granted (123,552) 123,552
Vested - -
-------- --------
Balance at December 31, 1995 2,521 123,552
Granted - -
Vested - (24,714)
Forfeiture 838 (838)
Two-for-one stock split 3,359 98,000
-------- --------
Balance at December 31, 1996 6,718 196,000
======== ========
39
<PAGE>
Notes to Consolidated Financial Statements
Note 15 - Retirement plans and employee benefit programs (continued)
Stock option plans
The stockholders also approved the establishment of a stock option plan on April
27, 1995 for directors, officers and employees. The exercise price under the
plan is $12.50 per share, the fair market price, adjusted for the stock split,
on the date of the grant. Both non-incentive stock options, and incentive stock
options may be granted under the plan. Rights to exercise options granted vest
at the rate of 20% per year, beginning on the first anniversary of the grant. A
summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
Available Options Vested and
for Grant Outstanding Exercisable
--------- ----------- -----------
<S> <C> <C> <C>
At inception 315,183 -- --
Granted (308,884) 308,884 --
Vested -- -- --
-------- ------- ------
Balance at December 31, 1995 6,299 308,884 --
Granted -- -- --
Vested -- (61,777) 61,777
Exercised -- -- (4,333)
Forfeiture 2,096 (2,096) --
Two-for-one stock split 8,395 245,011 60,777
-------- ------- ------
Balance at December 31, 1996 16,790 490,022 118,221
======== ======= =======
</TABLE>
The Company applies APB Opinion 25 in accounting for employee stock option
plans. Accordingly, no compensation cost has been recognized in 1995 and 1996.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.89%; dividend yields of 3.20%; volatility factor of 27%; and
a weighted-average expected life of the option of 6.76 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1995 1996
------- -------
Pro forma net income $ 5,908 $ 4,865
Pro forma earnings per share
Primary $ 1.01 $ .95
Fully diluted $ 1.01 $ .93
40
<PAGE>
Notes to Consolidated Financial Statements
Note 16 - Commitments and contingencies
The Company had outstanding commitments to purchase mortgage-backed securities
having a face value of $9,669,000 for $9,889,000 as of December 31, 1995.
Additionally, the Company was contingently liable for the possible purchase of
$5,000,000 of 7% FHLMC participations as a result of the sale of a "put" option
expiring in February 1996.
There were no outstanding commitments to purchase or sell securities at December
31, 1996.
The Company is lessee under a ten-year lease, effective January 1991, for its
branch bank space in River Ridge Mall, Lynchburg, Virginia. Base rent is due
monthly in advance. Rent may be increased due to increases in real estate taxes
and insurance. In addition to rent, monthly charges for the marketing fund and
pro rata utilities are billed to the Company. The minimum annual rental
commitment under the above noncancelable lease is $34,200 through December 31,
2000. Total rent expense in 1994, 1995 and 1996 for all cancelable and
non-cancelable leases was $54,000, $55,000 and $59,000, respectively.
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist primarily of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statements of financial condition. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments as follows.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
<TABLE>
<CAPTION>
Contract or Notional Amount
---------------------------
December 31
---------------------------
1995 1996
--------- --------
Financial instruments whose contract amounts represent credit risk
<S> <C> <C>
Commitments to finance real estate acquisitions and construction $ 3,818 $ 3,962
Unfunded lines-of-credit 21,037 19,955
------- -------
$24,855 $23,917
======= =======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counter-party.
Collateral normally consists of real property.
Fixed rate loan commitments totaled $3,027,000, and adjustable rate loan
commitments totaled $935,000 at December 31, 1996. All present outstanding
commitments expire in 90 days or less.
The Company had issued $1,520,000 and $791,000 in standby letters of credit as
of December 31, 1995 and 1996, respectively; a portion of which is
collateralized by cash on deposit with the Company. A standby letter of credit
represents a potential liability of the Company in the event that certain
contractual obligations of the Company's loan customers are not met, but the
Company does not expect to fund these letters of credit.
41
<PAGE>
Notes to Consolidated Financial Statements
Note 17 - Financial instruments with off-balance-sheet risk
During 1996, the Company entered into interest rate swap agreements ("swaps")
for purposes of managing its interest rate sensitivity. The Company designates
swaps to on-balance-sheet instruments to alter the interest rate characteristics
of such instruments and to modify interest rate sensitivity. Swaps involve the
periodic exchange of payments over the life of the agreements. Amounts received
or paid on swaps are used to manage interest rate sensitivity. At December 31,
1996, the Company had two swap agreements outstanding, the net effect of which
is to effectively convert $7.0 million of variable rate FHLB advances to a fixed
rate of 5.20% until January 1998 and $8.0 million of variable rate FHLB advances
to a fixed rate of 5.27% until February 1999. Changes in the fair value of swaps
are not reflected in the accompanying financial statements. The estimated fair
value of these instruments at December 31, 1996 was $245,000. There were no
interest rate swaps outstanding at December 31, 1995.
The Company's credit exposure on swaps is limited to the value of the swaps that
have become favorable to the Company in the event of nonperformance by the
counterparties. The Company does not require collateral from counterparties on
its existing agreements. The Company actively monitors the credit ratings of
counterparties and does not anticipate nonperformance by the counterparties with
which it transacts its swaps.
Note 18 - Significant group concentrations of credit risk
The Company grants residential, commercial, and installment loans to customers
mainly in the Central and Southside regions of Virginia. The Company has a loan
portfolio, consisting principally of residential mortgage loans and is not
dependent upon any particular economic sector although the portfolio as a whole
may be affected by general economic factors of the Central and Southside
Virginia regions.
The Company maintains cash balances at several financial institutions located
within its market area. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. Uninsured balances aggregated
$3,063,000 at December 31, 1995 and $3,342,000 at December 31, 1996. The Company
has invested in bonds issued by major national corporations. Such bond
investments, with par values aggregating $20,500,000 at December 31, 1995 and
$9,000,000 at December 31, 1996, have been limited to $3,000,000 par value in
any one issuer.
Note 19 - Related-party transactions
The Company has made loans in the ordinary course of business to various
officers and directors generally collateralized by the individuals' personal
residences or by savings accounts in the Savings Bank. The aggregate balances of
such loans which exceed $60,000 in aggregate outstanding amount to any executive
officer or director, in thousands, is summarized as follows:
1995 1996
-------- --------
Beginning balance $ 295 $ 272
Additions - -
Repayments (23) (25)
--------- --------
Ending balance $ 272 $ 247
======== ========
42
<PAGE>
Notes to Consolidated Financial Statements
Note 20 - Reduced income
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received.
This activity resulted in lost income shown as follows:
Year Ended December 31
----------------------
1994 1995 1996
------- ---- --------
Interest removed on non-accrued loans or not accrued on
loans under foreclosure $ 23 $151 $ 35
Net interest reserved (recovered) on delinquent loans (55) (89) (92)
---- ---- ----
Reduced (recovered) income $(32) $ 62 $(57)
==== ==== ====
Note 21 - Regulatory capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
As of December 31, 1996, the most recent notification from the Office of Thrift
Supervision categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Bank is required by the Office of Thrift Supervision to maintain capital at
least sufficient to meet three requirements: tangible capital, core capital, and
risk-based capital. Management has determined that the Bank's capital meets and
exceeds all three capital requirements shown as follows as of December 31, 1995
and 1996.
43
<PAGE>
Notes to Consolidated Financial Statements
Note 21 - Regulatory capital (continued)
Tangible and core capital levels are shown as a percentage of adjusted total
assets. Risk-based capital levels are shown as a percentage of risk-weighted
assets.
<TABLE>
<CAPTION>
First Federal Savings Bank
--------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
------------------------ -------------------- -----------------------
December 31, 1995
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $ 69,518 $69,518 $ 69,518
Goodwill and other intangible assets (1,728) (1,728) (1,728)
Qualifying general loan allowance -- -- 3,193
---------- ------- --------
Regulatory capital computed 67,790 13.66% 67,790 13.66% 70,983 26.76%
Minimum capital requirement 7,444 1.50 14,888 3.00 21,222 8.00
---------- ----- ------- ----- -------- -----
Regulatory capital excess 60,346 12.16% $52,902 10.66% $ 49,761 18.76%
========== ===== ======= ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
First Federal Savings Bank
--------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
------------------------ -------------------- -----------------------
December 31, 1996
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $ 55,763 $ 55,763 $ 55,763
Unrealized gain on securities,
available for sale (1,182) (1,182) (1,182)
Goodwill and other intangible assets (1,608) (1,608) (1,608)
Qualifying general loan allowance -- -- 3,281
-------- -------- --------
Regulatory capital computed 52,973 9.95% 52,973 9.95% 56,254 20.60%
Minimum capital requirement 7,984 1.50 15,967 3.00 21,846 8.00
-------- ------ -------- ----- -------- -----
Regulatory capital excess 44,989 8.45% $ 37,006 6.95% $ 34,408 12.60%
======== ====== ======== ===== ======== =====
</TABLE>
Note 22 - Disclosures about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For cash and short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment securities and mortgage-backed securities
The fair value of investment securities and mortgage-backed securities is
determined by reference to exchange or dealer- quoted market prices. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
44
<PAGE>
Notes to Consolidated Financial Statements
Note 22 - Disclosures about fair value of financial instruments (continued)
Loans receivable
For certain homogeneous categories of loans, such as some residential mortgages
and consumer loans, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated 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 maturities.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Long-term debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to extend credit, standby letters of credit, and financial
guarantees written
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit-worthiness of the counter-parties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counter-parties at the reporting date.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- --------- -------
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,683 $ 7,683 $ 6,634 $ 6,634
Investment securities 71,113 71,844 61,210 61,418
Mortgage-backed securities 114,790 115,315 131,469 131,637
Loans receivable, net 291,215 298,056 321,528 326,366
Financial liabilities
Deposits 377,975 381,270 397,435 397,640
Advances from Federal Home Loan Bank
and other borrowed funds 29,250 29,383 60,000 60,017
Unrecognized financial instruments
Commitments to purchase securities 9,889 9,959 - -
Standby letters of credit issued 1,520 1,520 791 791
Interest rate swaps - - - 245
</TABLE>
45
<PAGE>
Notes to Consolidated Financial Statements
Note 23 - Condensed parent company information
The following shows FFVA Financial Corporation's condensed financial condition
as of and for the years ended December 31, 1995 and 1996 and operations and cash
flows for the years 1994, 1995 and 1996:
<TABLE>
<CAPTION>
Balance Sheets
1995 1996
---- ----
Assets
<S> <C> <C>
Cash $ 1,084 $ 443
Investments 65 490
Investment in bank subsidiary 66,411 52,037
Loan to bank subsidiary's ESOP 2,339 2,000
Note receivable from bank subsidiary 18,000 19,000
Other assets 160 511
-------- -------
Total assets $ 88,059 $ 74,481
======== =======
Liabilities and stockholders' equity
Liabilities $ - $ -
Stockholders' equity 88,059 74,481
-------- -------
Total liabilities and stockholders' equity $ 88,059 $ 74,481
======== =======
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Dividends from bank subsidiary $ -- $ -- $ 20,000
Interest income 519 1,750 803
Other income -- -- 6
------ ------ --------
519 1,750 20,809
Noninterest expense 5 141 163
------ ------ --------
Income before income tax expense and equity
in undistributed earnings of subsidiary 514 1,609 20,646
Income tax expense 194 612 246
------ ------ --------
Income before equity in undistributed earnings of
subsidiary 320 997 20,400
Equity in undistributed earnings of subsidiary 4,383 5,477 5,063
Distribution of subsidiary retained earnings -- -- (20,000)
------ ------ --------
Net income $4,703 $6,474 $ 5,463
====== ====== ========
</TABLE>
46
<PAGE>
Notes to Consolidated Financial Statements
Note 23 - Condensed parent company information (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 4,703 $ 6,474 $ 5,463
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiary (4,383) (5,477) (5,063)
Dividend from subsidiary -- -- 20,000
Increase (decrease) in other liabilities 73 (73) --
Increase in other assets -- (33) (97)
-------- -------- --------
Net cash provided by operations 393 891 20,303
-------- -------- --------
Cash flows from investing activities
Net (increase) decrease in loans receivable (26,570) 9,333 (661)
Purchase of subsidiary stock (30,538) -- --
Purchase of investment securities -- (65) (425)
-------- -------- --------
Net cash provided by (used in) investing activities (57,108) 9,268 (1,086)
-------- -------- --------
Cash flows from financing activities
Proceeds from exercise of stock options -- -- 31
Proceeds from sale of stock 57,926 -- --
Repurchase of common stock -- (8,520) (17,986)
Payment of cash dividends -- (1,766) (1,903)
-------- -------- --------
Net cash provided by (used in) financing activities 57,926 (10,286) (19,858)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,211 (127) (641)
Cash and cash equivalents at beginning of year -- 1,211 1,084
-------- -------- --------
Cash and cash equivalents at end of year $ 1,211 $ 1,084 $ 443
======== ======== ========
</TABLE>
47
<PAGE>
Notes to Consolidated Financial Statements
Note 24 - Quarterly condensed consolidated statements of income - unaudited
<TABLE>
<CAPTION>
1995
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 8,608 $ 9,421 $ 9,724 $ 9,930
Interest expense 4,103 4,808 5,085 5,216
------- ------- ------- -------
Net interest income 4,505 4,613 4,639 4,714
Provision for credit losses 75 75 75 30
------- ------- ------- -------
Net interest income after provision for credit losses 4,430 4,538 4,564 4,684
Net gain on sale of investments 46 52 100 11
Noninterest income 184 173 240 248
Noninterest expense 2,093 2,220 2,391 2,380
------- ------- ------- -------
Income before income tax expense 2,567 2,543 2,513 2,563
Income tax expense 935 940 923 914
------- ------- ------- -------
Net income $ 1,632 $ 1,603 $ 1,590 1,649
======= ======= ======= =====
Earnings per share, primary .270* .270* .280* .300*
Earnings per share, fully diluted .270* .270* .280* .300*
Dividends paid per share .075* .075* .075* .075*
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 9,986 $10,155 $10,407 $10,445
Interest expense 5,199 5,215 5,361 5,407
------- ------- ------- -------
Net interest income 4,787 4,940 5,046 5,038
Provision for credit losses 60 -- -- --
------- ------- ------- -------
Net interest income after provision for credit losses 4,727 4,940 5,046 5,038
Net gain on sale of investments 91 -- 9 151
Noninterest income 242 290 262 276
Noninterest expense 2,569 2,631 4,753 2,616
------- ------- ------- -------
Income before income tax expense 2,491 2,599 564 2,849
Income tax expense 882 889 206 1,063
------- ------- ------- -------
Net income $ 1,609 $ 1,710 $ 358 $ 1,786
======= ======= ======= =======
Earnings per share, primary .300* .320 .070 .370
Earnings per share, fully diluted .300* .320 .070 .370
Dividends paid per share .075* .100 .100 .100
</TABLE>
*Restated to reflect two-for-one stock split paid June 5, 1996
48
<PAGE>
Notes to Consolidated Financial Statements
Note 25 - Branch acquisition
On August 18, 1995, pursuant to a Branch Sale Agreement between Crestar Bank and
the Company's subsidiary, the Bank acquired selected assets and assumed all
deposits of Crestar's Keysville, Virginia branch office. The Bank received net
funds of approximately $17.8 million in cash, $1.6 million in selected loans,
and $451,000 in office premises and equipment in exchange for assuming deposit
liabilities of $21.7 million.
The acquisition was accounted for under the purchase method of accounting
whereby the purchase price was allocated to the underlying assets acquired and
liabilities assumed based on their value at the date of acquisition. The excess
purchase price over the value of net assets acquired was recorded as goodwill of
$1.7 million which is being amortized over 15 years. The results of operations
of the acquired branch have been included with those of the Bank, and therefore
of the Company, since the acquisition date.
Note 26 - Capital stock
On April 25, 1996, the Company's Board of Directors approved a two-for-one split
of the Company's common stock in the form of a 100% stock dividend payable June
5, 1996 to stockholders of record as of May 15, 1996. A total of 2,713,832
shares of common stock was issued in connection with the split. The stated par
value per share was not changed from $0.10. A total of $271,383 was reclassified
from the Company's additional paid-in capital account to the Company's common
stock account. Appropriate share and per-share amounts have been restated to
retroactively reflect the stock split.
49
<PAGE>
Stock Price Information - There were 4,642,552 shares of common stock of
FFVA Financial Corporation outstanding on March 1, 1997, held by approximately
1,600 stockholders of record (not including the number of persons or entities
holding the stock in nominee or street name through various brokerage firms).
The graph and table reflect the stock price as published by the Nasdaq National
Market and the dividends paid for the respective periods.
<TABLE>
<CAPTION>
Quarter Div./Share
Ended High Low Paid
----- ---- --- ----
<S> <C> <C> <C>
March 1995(1) $11.50 $9.32 $0.075
June 1995(1) $14.13 $11.25 $0.075
September 1995(1) $14.63 $13.38 $0.075
December 1995(1) $14.63 $13.38 $0.075
March 1996(1) $16.13 $13.50 $0.075
June 1996 $18.50 $14.63 $0.100
September 1996 $18.50 $15.75 $0.100
December 1996 $22.00 $17.75 $0.100
</TABLE>
- -----------------------------
(1) Restated to reflect two-for-one stock split paid June 5, 1996.
Federal regulations may limit dividend amounts.
53
EXHIBIT 23
<PAGE>
[LOGO]
- -----------------
CHERRY
BEKAERT &
HOLLAND
CERTIFIED PUBLIC
ACCOUNTANTS &
CONSULTANTS
- -----------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated January 31,
1997, on the financial statements of FFVA Financial Corporation for the year
ended December 31, 1996, into the Registration Statement on Form S-8, with
respect to the Company's Stock Option Plan originally filed by FFVA Financial
Corporation with the Securities and Exchange Commission on September 28, 1995.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
March 20, 1997
Lynchburg, Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,364
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,270
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 106,551
<INVESTMENTS-CARRYING> 86,128
<INVESTMENTS-MARKET> 86,504
<LOANS> 324,838
<ALLOWANCE> 3,310
<TOTAL-ASSETS> 533,826
<DEPOSITS> 397,435
<SHORT-TERM> 56,000
<LIABILITIES-OTHER> 1,910
<LONG-TERM> 4,000
0
0
<COMMON> 469
<OTHER-SE> 74,012
<TOTAL-LIABILITIES-AND-EQUITY> 533,826
<INTEREST-LOAN> 27,201
<INTEREST-INVEST> 13,792
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 40,993
<INTEREST-DEPOSIT> 18,382
<INTEREST-EXPENSE> 21,182
<INTEREST-INCOME-NET> 19,811
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 251
<EXPENSE-OTHER> 12,569
<INCOME-PRETAX> 8,503
<INCOME-PRE-EXTRAORDINARY> 8,503
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,463
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 8.16
<LOANS-NON> 1,760
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,217
<CHARGE-OFFS> 27
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 3,310
<ALLOWANCE-DOMESTIC> 1,664
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,646
</TABLE>
