SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
March 16, 1998
FFVA FINANCIAL CORPORATION
----------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Virginia 0-24668 74-2712490
- ----------------------------- ----------------- ----------------
(State or other jurisdiction (SEC File No.) (IRS Employer
of incorporation) Identification
Number)
925 Main Street, Lynchburg, Virginia 24504
- ----------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 804-845-2371
------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last Report)
<PAGE>
INFORMATION TO BE INCLUDED IN REPORT
------------------------------------
Item 5. Other Events
------------
The Registrant is disclosing its consolidated financial statements for the
years ended December 31, 1996 and 1997.
A copy of the Registrant's consolidated financial statements for the years
ended December 31, 1996 and 1997 is attached hereto as Exhibit 99.1 and is
incorporated herein by reference in its entirety.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- ---------------------------------------------------------------------------
Exhibit 99.1 -- Consolidated Financial Statements for the years ended December
31, 1996 and 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
FFVA FINANCIAL CORPORATION
Date: March 16, 1998 By: /s/ Ronald W. Neblett
------------------------------------------
Ronald W. Neblett
Senior Vice President and Treasurer
EXHIBIT 99.1
<PAGE>
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Contents
Page
Report of Independent Auditors 1
Consolidated Statements of Financial Condition 2
Consolidated Statements of Changes in Stockholders' Equity 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
<PAGE>
-1-
[LETTERHEAD OF CHERRY, BEKAERT & HOLLAND]
[CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS]
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, 1996 and 1997,
and the related consolidated statements of changes in stockholders' equity,
income, and cash flows for each of the three years in the period ended December
31, 1997. 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, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 16, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share, at December 31, 1997. All
previously reported earnings per share amounts have been restated to conform to
the provisions of this new accounting standard.
/s/ Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
January 30, 1998
<PAGE>
-2-
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31
-------------------
1996 1997
-------- ---------
(Dollars in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 6,634 $ 5,739
Investment securities, held to maturity (estimated market of
$36,498 and $48,804 in 1996 and 1997, respectively) 36,290 48,333
Investment securities, available for sale, at market 21,652 43,132
Investment securities, restricted, at cost 3,268 3,550
Mortgage-backed securities, held to maturity (estimated market
of $46,738 and $62,953 in 1996 and 1997, respectively) 46,570 62,756
Mortgage-backed securities, available for sale, at market 84,899 71,603
Loans receivable, net 321,528 327,311
Foreclosed real estate 154 --
Property and equipment, net 6,283 5,946
Accrued interest receivable 4,054 4,619
Prepaid expenses and other assets 886 5,217
Goodwill 1,608 1,488
-------- ---------
Total assets $ 533,826 $ 579,694
========= =========
Liabilities and stockholders' equity
Liabilities
Deposits $397,435 $ 415,765
Advances from Federal Home Loan Bank and other borrowed funds 60,000 82,000
Advances from borrowers for taxes and insurance 917 847
Other liabilities 993 1,707
-------- ---------
Total liabilities 459,345 500,319
-------- ---------
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, 4,692,552
and 4,580,874 shares outstanding for 1996 and 1997, respectively 469 458
Additional paid-in capital 45,336 45,556
Less unearned ESOP and MSBP shares (3,726) (1,750)
Retained earnings, substantially restricted 31,220 33,329
Unrealized holding gain on securities, available for sale 1,182 1,782
-------- ---------
Total stockholders' equity 74,481 79,375
-------- ---------
Total liabilities and stockholders' equity $533,826 $ 579,694
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
-3-
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)
Balance at
December
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 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
($.60 per
pre-split
share) -- -- -- (1,766) -- -- -- (1,766)
Allocated/
earned
ESOP shares -- -- 127 -- -- 333 -- 460
--------- ----- ------- ------- ------- ------- -------- ---------
Balance at
December 31, 1995 2,851,832 285 55,057 35,824 1,508 (2,339) (2,276) 88,059
Net income -- -- -- 5,463 -- -- -- 5,463
Change in
unrealized
gain on
assets,
available
for sale, net -- -- -- -- (326) -- -- (326)
Allocated/earned
MSBP shares -- -- (97) -- -- -- 550 453
Repurchase of
common stock,
pre-split (139,000) (14) (2,680) (1,564) -- -- -- (4,258)
Two-for-one
stock split 2,713,832 271 (271) -- -- -- -- --
Repurchase of
common stock,
post-split (735,712) (73) (7,055) (6,600) -- -- -- (13,728)
Cash dividends
paid ($.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
Net income -- -- -- 6,436 -- -- -- 6,436
Change in
unrealized gain
on assets,
available for
sale, net -- -- -- -- 600 -- -- 600
MSBP Plan:
Issuance of
common stock
to MSBP Plan 56,989 6 1,996 -- -- -- (2,002) --
Allocated/
earned
MSBP shares -- -- (743) -- -- -- 3,728 2,985
Repurchase of
common stock (172,000) (17) (1,649) (2,322) -- -- -- (3,988)
Cash dividends
paid ($.46
per share) -- -- -- (2,005) -- -- -- (2,005)
Allocated/earned
ESOP shares -- -- 575 -- -- 250 -- 825
Exercise of
stock options 3,333 -- 41 -- -- -- -- 41
--------- ----- ------- ------- ------- ------- -------- ---------
Balance at
December 31, 1997 4,580,874 $ 458 $45,556 $33,329 $ 1,782 $(1,750) $ -- $ 79,375
========= ===== ======= ======= ======= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
-4-
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1995 1996 1997
------- -------- --------
(Dollars in thousands, except per-share data)
<S> <C> <C> <C>
Interest income
Loans $25,140 $ 27,201 $ 28,858
Mortgage-backed securities 6,884 8,662 9,296
U.S. Government obligations, agencies, and other investments
including overnight deposits 5,659 5,130 5,669
------- -------- --------
Total interest income 37,683 40,993 43,823
------- -------- --------
Interest expense
Deposits 17,260 18,382 19,116
Borrowed money 1,952 2,800 4,043
------- -------- --------
Total interest expense 19,212 21,182 23,159
------- -------- --------
Net interest income 18,471 19,811 20,664
Provision for credit losses 255 60 150
------- -------- --------
Net interest income after provision for credit losses 18,216 19,751 20,514
------- -------- --------
Noninterest income
Service charges and fees on loans 423 456 549
Net gain on sale of investments 209 251 309
Net gain (loss) on sale of equipment ( 9) 1 3
Other income 431 613 831
------- -------- --------
Total noninterest income 1,054 1,321 1,692
------- -------- --------
Noninterest expenses
Compensation and other personnel costs 5,089 5,973 7,711
Office occupancy and equipment 944 1,039 1,115
Federal insurance of accounts 780 774 243
SAIF premium assessment -- 2,230 --
Data processing 788 940 851
Advertising 325 328 289
Other 1,158 1,285 1,761
------- -------- --------
Total noninterest expense 9,084 12,569 11,970
------- -------- --------
Income before income tax expense 10,186 8,503 10,236
Income tax expense 3,712 3,040 3,800
------- -------- --------
Net income $ 6,474 $ 5,463 $ 6,436
======= ======== ========
Basic earnings per share $ 1.11* $ 1.10 $ 1.48
Diluted earnings per share $ 1.10* $ 1.06 $ 1.37
</TABLE>
* Restated to reflect two-for-one stock split paid June 5, 1996
The accompanying notes are an integral part of these financial statements.
<PAGE>
-5-
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Page 1
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1995 1996 1997
-------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 6,474 $ 5,463 $ 6,436
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for credit losses 255 60 150
(Gain) loss on disposition of equipment 9 (1) (3)
Provision for depreciation and amortization 450 604 622
Amortization of premium on sale of loans 26 23 8
Deferred income taxes 142 130 202
Realized investment security gains, net (209) (251) (309)
(Gain) loss on sale of foreclosed real estate 9 2 (3)
(Increase) decrease in interest receivable (563) 38 (565)
(Increase) decrease in other assets (840) 139 (4,352)
Increase (decrease) in other liabilities 778 (59) 142
-------- -------- --------
Net cash provided by operating activities 6,531 6,148 2,328
-------- -------- --------
Investing activities
Proceeds from maturities of investment securities, held to maturity 16,316 7,097 16,822
Purchases of investment securities, held to maturity, and FHLB
stock (26,932) (10,266) (29,140)
Proceeds from sales of investment securities, available for sale 21,301 22,698 12,930
Purchases of investment securities, available for sale ( 65) (9,842) (33,744)
Proceeds from collections on mortgage-backed securities,held to
maturity 6,570 6,263 10,891
Purchase of mortgage-backed securities, held to maturity (19,766) (16,887) (27,077)
Proceeds from sales of and collections on mortgage-backed
securities, available for sale 4,149 23,555 29,380
Purchases of mortgage-backed securities, available for sale (37,622) (29,657) (15,527)
Net increase in loans receivable (22,964) (30,396) (5,941)
Purchases of premises and equipment (1,352) (1,101) (166)
Purchases of foreclosed real estate (120) (212) (198)
Proceeds from sales of foreclosed real estate 196 56 355
Proceeds from sales of equipment 161 -- 4
Payment of branch acquisition premiums (goodwill) (1,724) -- --
-------- -------- --------
Net cash used by investing activities (61,852) (38,692) (41,411)
-------- -------- --------
</TABLE>
(continued)
<PAGE>
-6-
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Page 2
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1995 1996 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Financing activities
Net increase in deposit accounts $ 19,068 $ 19,460 $ 18,330
Acquisition of deposits 21,651 -- --
Proceeds from advances and other borrowed money 36,880 74,980 82,020
Repayments of advances and other borrowed money (18,880) (44,230) (60,020)
Allocation of ESOP shares 460 690 825
Repurchase of common stock (8,520) (17,986) (3,988)
Purchase of MSBP shares (2,276) -- --
Payment of cash dividends (1,766) (1,903) (2,005)
Allocation of MSBP shares -- 453 2,985
Proceeds from exercise of options -- 31 41
-------- -------- --------
Net cash provided by financing activities 46,617 31,495 38,188
-------- -------- --------
Decrease in cash and cash equivalents (8,704) (1,049) (895)
Cash and cash equivalents at beginning of year 16,387 7,683 6,634
-------- -------- --------
Cash and cash equivalents at end of year $ 7,683 $ 6,634 $ 5,739
======== ======== ========
Supplemental disclosures
Gross unrealized gain on securities, available for sale $ 2,376 $ 1,861 $ 2,782
Deferred income tax (868) (679) (1,000)
-------- -------- --------
Net unrealized gain on securities, available for sale 1,508 1,182 $ 1,782
======== ======== ========
Cash paid for:
Interest on deposits and borrowed funds $ 19,231 $ 21,056 $ 22,511
Income taxes 3,514 2,942 4,193
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
-7-
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995, 1996 and 1997
(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.
Reclassification of financial statement presentation
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 financial statement presentation. Such
reclassifications had no effect on net income or retained earnings as previously
reported.
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).
<PAGE>
-8-
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Investment 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.
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, 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 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 classified as available for sale consist of U.S. Government and
agency securities, investment grade corporate obligations, mortgage-backed
securities, other related mortgage-backed products and certain equity
securities. 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. Gains or losses on disposition of securities are computed on
the specific identification on the cost of each security.
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.
Loans and allowance for credit losses
Loans receivable are stated at the amount of unpaid principal, net of
participation or whole-loan interest owned by others, less the allowance for
loan losses, undisbursed loans in process, and net deferred loan origination
fees and discounts. 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.
<PAGE>
-9-
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
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, 1996 and 1997.
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,
less estimated cost to sell at the date acquired.
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.
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
$6,265,000 as of December 31, 1997.
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.
<PAGE>
-10-
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
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.
Conversion to stock ownership
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, 1997, 139,934
shares had been released and 175,000 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.
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 17).
<PAGE>
-11-
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
In June 1996, the FASB issued Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS 125). 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 was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. SFAS 125 has not had a material effect on the financial statements of the
Company.
In February 1997, the FASB issued Earnings per Share (SFAS 128). This statement
is effective for financial statements, including interim periods issued for
periods ending after December 15, 1997. SFAS 128 provides for the calculation of
basic and diluted earnings per share, and requires comparative information for
prior periods to be restated to conform with this standard. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in earnings of an entity, similar to fully diluted
earnings per share (see Note 16). All previously reported earnings per share
amounts have been restated to conform to the provisions of this new accounting
standard.
In June 1997, the FASB issued Reporting Comprehensive Income (SFAS 130), which
established standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 is
effective for financial statements for periods beginning after December 15,
1997, and requires comparative information for earlier years to be restated.
Currently it is expected the only additional component of comprehensive income
to be disclosed under the provisions of this statement is the changes in
unrealized holding gains or losses on securities available for sale.
In June 1997, the FASB also issued Disclosures about Segments of an Enterprise
and Related Information (SFAS 131), which changes the way public companies
report information about segments of their business in annual financial
statements and requires segment information in quarterly reports to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company has not determined what
additional disclosures may be required by the provisions of this statement.
In February 1998, the FASB issued Employers' Disclosures about Pensions and
Other Postretirement Benefits (SFAS 132), which revises employers' disclosures
about pension and other postretirement benefit plans. SFAS 132 does not change
the measurement or recognition of those plans, but requires additional
information on changes in benefit obligations and fair values of plan assets,
and eliminates certain disclosures previously required by SFAS Nos. 87, 88 and
106. SFAS 132 is effective for fiscal years beginning after December 15, 1997.
The Company has not determined what additional disclosures may be required by
the provisions of this statement.
<PAGE>
-12-
Notes to Consolidated Financial Statements
Note 2 - Merger with One Valley
On December 16, 1997, the Company entered into a definitive Agreement and Plan
of Merger with One Valley Bancorp of West Virginia, Inc. ("One Valley"),
providing for the merger of the Company with, and into, One Valley. One Valley
is a $4.6 billion multi-bank holding company, located in Charleston, West
Virginia. The agreement has been approved by the boards of directors of both
companies and is subject to the approval of the shareholders of both companies
and appropriate regulatory agencies. The merger is expected to be accounted for
as a pooling of interest and will result in a tax-free exchange of 1.05 shares
of One Valley's common stock for each share of common stock of the Company.
The Company incurred nonrecurring expenses totaling $2.1 million as a result of
the signing of a definitive agreement to merge with One Valley. A total of $1.5
million of the additional expense resulted from the accelerated vesting of stock
benefit plans and is included in compensation expense. The remaining $600,000
was attributable to professional fees and is included in other expense. In
addition, it is estimated that another $1.1 million of merger expenses will be
incurred in the first quarter of 1998.
Note 3 - Interest-earning deposits
Cash and cash equivalents included interest-earning federal funds sold
(overnight deposits) totaling $1,270,000 at December 31, 1996 and $1,410,000 at
December 31, 1997.
Note 4 - Investment securities
Investments consisted of U.S. Government and agency securities, corporate, and
other securities as follows:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------
Gross Unrealized
Amortized ----------------- Estimated
Costs Gains Losses Market Value
--------- ------- ------- -------------
<S> <C> <C> <C> <C>
Held to maturity
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>
<PAGE>
-13-
Notes to Consolidated Financial Statements
Note 4 - Investment securities (continued)
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------
Gross Unreaized
Amortized ----------------- Estimated
Costs Gains Losses Market Value
--------- ------- ------- ------------
<S> <C> <C> <C> <C>
Held to maturity
U.S. Government and agency obligations $46,443 $ 476 $ 28 $46,891
Other asset-backed securities 1,890 23 -- 1,913
------- ------- ------- -------
$48,333 $ 499 $ 28 $48,804
======= ======= ======= =======
Available for sale
U.S. Government and agency obligations $11,964 $ 41 $ 4 $12,001
Corporate obligations 25,243 348 3 25,588
FHLMC/FNMA preferred stock and other
corporate equity securities 5,175 368 -- 5,543
------- ------- ------- -------
$42,382 $ 757 $ 7 $43,132
======= ======= ======= =======
</TABLE>
The amortized cost and estimated market value of the debt securities at December
31, 1997 are as follows. 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 $19,444 $19,509 $ 6,988 $ 7,001
Due after one year through five years 25,181 25,568 20,073 20,269
Due after five years through ten years -- -- 9,183 9,360
Due after ten years 3,708 3,727 963 959
------- ------- ------- -------
48,333 48,804 37,207 37,589
Other equity securities -- -- 5,175 5,543
------- ------- ------- -------
$48,333 $48,804 $42,382 $43,132
======= ======= ======= =======
</TABLE>
Note 5 - Mortgage-backed securities
The amortized costs and estimated market values of mortgage-backed securities
are summarized as follows:
<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>
<PAGE>
-14-
Notes to Consolidated Financial Statements
Note 5 - Mortgage-backed securities (continued)
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------
Gross Unrealized
Amortized ------------------- Estimated
Costs Gains Losses Market Value
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, held to maturity $ 62,756 $ 389 $ 192 $ 62,953
Mortgage-backed securities, available for sale 69,571 2,032 -- 71,603
-------- -------- -------- --------
$132,327 $ 2,421 $ 192 $134,556
======== ======== ======== ========
</TABLE>
Gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Gross realized gains
U.S. Government and agency securities $ 215 $ 135 $ 9
Mortgage-backed securities -- 99 200
Option fees earned -- 42 --
Corporate equity securities -- -- 107
------ ------- -------
$ 215 $ 276 $ 316
====== ======= =======
Gross realized losses
U.S. Government and agency securities $ 6 $ 25 $ 7
====== ====== ======
Approximate income tax on net gains $ 76 $ 90 $ 111
====== ====== ======
</TABLE>
Note 6 - Loans receivable
Loans receivable at the end of each year were as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Mortgage loans:
Residential, one to four family $ 236,094 $ 234,216
Residential, multi-family 15,226 15,658
Construction 12,554 9,048
Land and land development loans 1,939 1,942
Commercial 31,149 29,683
Other loans:
Consumer loans 31,097 42,091
Loans to depositors secured by savings 1,292 1,261
--------- ---------
Total 329,351 333,899
Less:
Undisbursed portion of loans in process (3,533) (2,165)
Deferred loan fees and costs, net (980) (1,061)
Allowance for credit losses (3,310) (3,362)
--------- ---------
Total $ 321,528 $ 327,311
========= =========
</TABLE>
<PAGE>
-15-
Notes to Consolidated Financial Statements
Note 6 - Loans receivable (continued)
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 12).
An analysis of the allowance for credit losses is as follows:
Year Ended December 31
---------------------------
1995 1996 1997
--------- ------- --------
Balance at beginning of year $ 3,054 $ 3,217 $3,310
Provision charged to operations 255 60 150
Loans charged off ( 154) ( 27) ( 100)
Recoveries of loans charged off 62 60 2
------- ------ -------
Balance at end of year $ 3,217 $ 3,310 $3,362
======= ====== =======
The Company evaluates impairment of its residential mortgage and consumer loans
on a collective basis. Commercial loans are individually evaluated. At December
31, 1996 and 1997, the Company had no loans that were specifically classified as
impaired.
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:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Interest removed on non-accrued loans or not accrued on loans
under foreclosure $ 151 $ 35 $ 20
Net interest reserved (recovered) on delinquent loans ( 89) ( 92) ( 5)
------ ------ ------
Reduced (recovered) income $ 62 $( 57) $ 15
===== ====== =====
</TABLE>
Note 7 - 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
-------------------------
1995 1996 1997
------- ------- -------
FHLMC $ 6,961 $ 5,821 $ 4,248
Other investors 86 85 79
------ ------ ------
$ 7,047 $ 5,906 $ 4,327
====== ====== ======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $57,000 and $40,000 at December 31, 1996 and 1997, respectively.
<PAGE>
-16-
Notes to Consolidated Financial Statements
Note 8 - Foreclosed real estate
Foreclosed real estate acquired in settlement of loans, at the lower of cost or
fair value, totaled $154,000 at December 31, 1996 and $-0- at December 31, 1997.
The net gain (loss) on foreclosed real estate consisted of:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Maintenance, utilities, taxes and insurance $( 2) $ - $( 4)
Net gain (loss) on sale of foreclosed real estate ( 9) ( 2) 7
------ ------ -------
Net gain (loss) $( 11) $( 2) $ 3
====== ====== =======
</TABLE>
Note 9 - Property, equipment and depreciation
Property and equipment were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Land $ 1,474 $ 1,474
Building 4,586 4,589
Leasehold improvements 24 19
Furniture, fixtures and equipment 3,463 3,622
Autos 83 73
-------- -------
9,630 9,777
Less accumulated depreciation 3,347 3,831
-------- -------
Net property and equipment $ 6,283 $ 5,946
======== =======
</TABLE>
Depreciation expense was $406,000, $484,000 and $502,000 for 1995, 1996 and
1997, respectively.
Note 10 - Accrued interest receivable
Accrued interest receivable was as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1997
--------- -------
<S> <C> <C>
Interest on loans $ 2,147 $ 2,139
Interest and dividends on investment securities 1,065 1,663
Interest on mortgage-backed securities 842 817
-------- -------
$ 4,054 $ 4,619
======== ======
</TABLE>
<PAGE>
-17-
Notes to Consolidated Financial Statements
Note 11 - Deposits
Savings deposits, summarized by interest rate, were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1997
--------- --------
<S> <C> <C>
Negotiable order of withdrawal deposits
2.25% to 4.89% $ 76,692 $ 79,997
Non-interest bearing 6,790 9,657
-------- -------
Total NOW deposits 83,482 89,654
Passbook and statement deposits, 3.00% 34,520 37,343
Certificates of deposit 279,433 288,768
-------- -------
$ 397,435 $415,765
======== =======
</TABLE>
Certain large certificates of deposit, including municipal deposits, are
collateralized by investment securities with market values at December 31, 1996
and 1997 of approximately $1,424,000 and $1,252,000, respectively.
The aggregate amounts of certificates of deposit with denominations of $100,000
or more were $40,589,000 and $43,182,000 at December 31, 1996 and 1997,
respectively.
At December 31, 1997, 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 5.355% $ 173,616
One to three years 5.972% 98,035
More than three years 5.822% 17,117
---------
$ 288,768
=========
Note 12 - Borrowed funds
At December 31, 1997, the Company had $67,000,000 in outstanding advances from
the Federal Home Loan Bank of Atlanta (FHLB - Atlanta) and $15,000,000 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 Dezcember 31
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
Average balance outstanding $50,236 $71,994
Maximum amount outstanding at any month-end during the period 60,000 82,000
Balance outstanding at end of period 60,000 82,000
Weighted-average interest rate during the period 5.57% 5.62%
Weighted-average interest rate at the end of period 5.69% 5.41%
</TABLE>
<PAGE>
-18-
Notes to Consolidated Financial Statements
Note 12 - Borrowed funds (continued)
The following table sets forth the repayment schedule at December 31, 1997,
which includes interest rates and amounts due by year:
Year Due Interest Rate Amount
-------- ------------- ------
1998 5.20% $ 57,000
2000 5.88% 25,000
---------
$ 82,000
=========
Residential real estate loans aggregating $89,333,000 at December 31, 1997, 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 $16,025,000 at December 31, 1997.
Note 13 - 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.
Note 14 - Income taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1995 1996 1997
------------------------------
<S> <C> <C> <C>
Federal $ 3,293 $ 2,565 $ 2,396
State 277 345 284
------- -------- -------
3,570 2,910 2,680
Tax effect of stock plan allocations - - 918
Deferred tax expense 142 130 202
------- -------- -------
Total provision for income taxes $ 3,712 $ 3,040 $ 3,800
======= ======== =======
</TABLE>
<PAGE>
-19-
Notes to Consolidated Financial Statements
Note 14 - 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
------------------------- -------------------------
1995 1996 1997 1995 1996 1997
------------------------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $3,463 $2,891 $3,480 34.0 34.0 34.0
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 183 228 187 1.8 2.7 1.8
Other 66 ( 79) 133 .6 ( .9) 1.3
------ ------ ---- ---- ----- ----
Income tax expense $3,712 $3,040 $3,800 36.4 35.8 37.1
====== ====== ====== ==== ==== ====
</TABLE>
The significant components of the net deferred tax (liability) asset are listed
as follows:
<TABLE>
<CAPTION>
December 31
--------------------
1996 1997
--------- ---------
Components of the deferred tax asset
<S> <C> <C>
Tax bad debt reserves $ 727 $ 765
Deferred income 150 95
Stock bonus plan 163 21
------- ------
1,040 881
Valuation allowance - -
-------- ------
Total deferred tax asset 1,040 881
-------- ------
Components of the deferred tax liability
Accelerated depreciation ( 281) ( 309)
Loan sale imputed gain ( 8) ( 4)
Pension expense ( 51) ( 70)
Unrealized appreciation on securities, available for sale ( 679) ( 1,000)
-------- -------
Total deferred tax liability ( 1,019) ( 1,383)
-------- -------
Net deferred tax (liability) asset $ 21 $( 502)
========= ========
</TABLE>
The Company's federal income tax returns have been examined by tax authorities
through 1992.
<PAGE>
-20-
Notes to Consolidated Financial Statements
Note 15 - 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, 1997, the unadjusted liquidation account
totaled $30,017,000, and minimum regulatory capital was $24,161,000.
Note 16 - Earnings per share
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
(a)Net income available to shareholders $ 6,474 $ 5,463 $ 6,436
=========== =========== ===========
Denominator:
Weighted-average shares outstanding 6,074,184 5,211,750 4,548,360
Less: ESOP weighted-average shares (266,060) (231,031) (198,981)
----------- ----------- -----------
(b)Basic EPS weighted-average shares outstanding 5,808,124 4,980,719 4,349,379
Effect of dilutive securities:
Incremental shares attributable to the Stock Option
Plan and Management Stock Bonus Plan 62,743 168,988 342,283
----------- ----------- -----------
(c)Diluted EPS weighted-average shares outstanding 5,870,867 5,149,707 4,691,662
Basic earnings per share (a/b) $ 1.11 $ 1.10 $ 1.48
=========== =========== ===========
Diluted earnings per share (a/c) $ 1.10 $ 1.06 $ 1.37
=========== =========== ===========
</TABLE>
Earnings per share amounts for 1995 and 1996 have been restated to comply with
the provisions of SFAS 128.
<PAGE>
-21-
Notes to Consolidated Financial Statements
Note 17 - 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 1995, 1996 and 1997 include the following
components based on the actuaries' report:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1995 1996 1997
------- --------- ----------
<S> <C> <C> <C>
Service cost, benefits earned during the period $ 203 $ 245 $ 287
Interest cost on projected benefit obligation 324 375 421
Actual return on plan assets ( 257) ( 327) ( 412)
Net amortization and deferral 58 58 92
-------- -------- --------
Net periodic pension cost $ 328 $ 351 $ 388
======= ========= =========
</TABLE>
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
------------------------------
1995 1996 1997
------- --------- --------
<S> <C> <C> <C>
Accumulated benefit obligation including $2,995,000,
$3,489,000, and $4,105,000 in vested benefits $ 3,124 $ 3,641 $ 4,291
Additional benefits due to projected future compensation levels 1,700 1,921 2,272
--------- -------- --------
Projected benefit obligation 4,824 5,562 6,563
-------- -------- -------
Plan assets at fair value 4,398 5,078 5,856 *
-------- -------- -------
Projected benefit obligation in excess of plan assets ( 426) ( 484) ( 707)
Unrecognized prior service cost 742 676 611
Unrecognized net (gain) loss ( 129) 34 366
Unrecognized transitional asset ( 92) ( 84) ( 76)
--------- -------- --------
Prepaid pension cost $ 95 $ 142 $ 194
====== ======== =======
</TABLE>
* Includes $604,000 of savings deposits in the Bank at December 31, 1997.
Assumptions used in determining the net periodic pension cost were:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.25%
Rate of increase in compensation levels 6.0% 6.0% 6.00%
Expected long-term rate of return on assets 7.5% 7.5% 7.50%
</TABLE>
<PAGE>
-22-
Notes to Consolidated Financial Statements
Note 17 - Retirement plans and employee benefit programs (continued)
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 post-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 33,852 and 25,000 shares of the Company's common
stock were released for allocation to the plan participants during the years
ended December 31, 1996 and 1997, respectively.
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, 1996 and 1997, based on SOP
No. 93-6, was $690,000 and $825,000, respectively. The fair value of the 175,000
unearned ESOP shares at December 31, 1997 was $6,847,000.
Recognition and retention plan
The stockholders approved the establishment of a Management Stock Bonus Plan
(MSBP) and Trust (the plan) on April 27, 1995. 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.
All shares which had been previously awarded to directors, officers, and
employees became fully vested on December 16, 1997, the date of the signing of a
definitive merger agreement with One Valley. In addition, the Company issued
56,989 shares to the MSBP Trust in conjunction with the vesting of the awards.
For the years ended December 31, 1995, 1996 and 1997, the amounts included in
compensation expense were $453,000, $628,000 and $2,072,000, respectively.
Awarded
Shares
---------
Balance at December 31, 1995 123,544
Granted -
Vested ( 24,714)
Forfeiture ( 838)
Two-for-one stock split 98,000
--------
Balance at December 31, 1996 195,992
Granted -
Vested ( 195,992)
Forfeiture -
--------
Balance at December 31, 1997 -
========
<PAGE>
-23-
Notes to Consolidated Financial Statements
Note 17 - 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 were granted under the plan. Rights to exercise options granted were
scheduled to vest at the rate of 20% per year. On December 16, 1997, all awarded
options became fully vested and exercisable as a result of the signing of the
definitive merger agreement with One Valley. A summary of the stock option
activity is as follows:
Options Vested and
Outstanding Exercisable
----------- -----------
Balance at December 31, 1995 308,884 -
Granted - -
Vested ( 61,777) 61,777
Exercised - ( 4,333)
Forfeiture ( 2,096) -
Two-for-one stock split 245,011 60,777
---------- --------
Balance at December 31, 1996 490,022 118,221
Granted - -
Vested ( 490,022) 490,022
Exercised - ( 4,381)
Forfeiture - -
---------- ---------
Balance at December 31, 1997 - 603,862
========== =========
The Company applies APB Opinion 25 in accounting for employee stock option
plans. Accordingly, no compensation costs have been recognized in 1996 and 1997.
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.
<PAGE>
-24-
Notes to Consolidated Financial Statements
Note 17 - Retirement plans and employee benefit programs (continued)
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 1997
------- ------- -------
Pro forma net income $ 5,908 $ 4,865 $ 5,854
Pro forma earnings per share
Basic $ 1.02 $ .98 $ 1.35
Diluted $ 1.01 $ .94 $ 1.25
Note 18 - Commitments and contingencies
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 1995, 1996 and 1997 for all cancelable and
noncancelable leases was $55,000, $59,000 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
-----------------------
1996 1997
-------- ---------
Financial instruments whose contract amounts represent credit risk
<S> <C> <C>
Commitments to finance real estate acquisitions and construction $ 3,962 $ 3,274
Unfunded lines-of-credit 19,955 21,045
-------- ---------
$ 23,917 $ 24,319
======== ========
</TABLE>
<PAGE>
-25-
Notes to Consolidated Financial Statements
Note 18 - Commitments and contingencies (continued)
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. In addition, the Company had
undisbursed commitments on construction loans of $3,533,000 and $2,165,00 at
December 31, 1996 and 1997, respectively.
Fixed rate loan commitments totaled $2,070,000, and adjustable rate loan
commitments totaled $1,204,000 at December 31, 1997. All present outstanding
commitments expire in 90 days or less.
The Company had issued $791,000 and $1,153,000 in standby letters of credit as
of December 31, 1996 and 1997, 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.
There were no outstanding commitments to purchase or sell securities at December
31, 1997.
Note 19 - 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,
1997, 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 was $245,000 at December 31, 1996 and $80,000 at
December 31, 1997.
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 20 - 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.
<PAGE>
-26-
Notes to Consolidated Financial Statements
Note 20 - Significant group concentrations of credit risk (continued)
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
$3,342,000 at December 31, 1996 and $4,983,000 at December 31, 1997. The Company
has invested in bonds issued by major national corporations. Such corporate bond
investments, with par values aggregating $9,000,000 at December 31, 1996 and
$23,000,000 at December 31, 1997, have been limited to $3,000,000 par value in
any one issuer.
Note 21 - 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 is summarized as follows:
<TABLE>
1996 1997
-------- --------
<S> <C> <C>
Beginning balance $ 272 $ 247
Additions - 75
Repayments ( 25) ( 30)
-------- -------
Ending balance $ 247 $ 292
======= ======
</TABLE>
Note 22 - 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 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, 1996
and 1997.
<PAGE>
-27-
Notes to Consolidated Financial Statements
Note 22 - 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
---------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
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>
<TABLE>
<CAPTION>
First Federal Savings Bank
-----------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
---------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
GAAP Capital $ 62,546 $ 62,546 $ 62,546
Unrealized gain on securities,
available for sale (1,657) (1,657) (1,657)
Goodwill and other intangible assets (1,488) (1,488) (1,488)
Qualifying general loan allowance - - 3,351
-------- --------- ---------
Regulatory capital computed 59,401 10.35% 59,401 10.35% 62,752 20.78%
Minimum capital requirement 8,611 1.50 17,222 3.00 24,161 8.00
------- ------ --------- ------ --------- ------
Regulatory capital excess $50,790 8.85% $ 42,179 7.35% $ 38,591 12.78%
======= ====== ========= ====== ========= =====
</TABLE>
<PAGE>
-28-
Notes to Consolidated Financial Statements
Note 23 - 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.
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.
<PAGE>
-29-
Notes to Consolidated Financial Statements
Note 23 - Disclosures about fair value of financial instruments (continued)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 6,634 $ 6,634 $ 5,739 $ 5,739
Investment securities 61,210 61,418 95,015 95,486
Mortgage-backed securities 131,469 131,637 134,359 134,556
Loans receivable, net 321,528 326,366 327,311 334,157
Financial liabilities
Deposits 397,435 397,640 415,765 416,137
Advances from Federal Home Loan Bank
and other borrowed funds 60,000 60,017 82,000 82,385
Unrecognized financial instruments
Standby letters of credit issued - 791 - 1,153
Interest rate swaps - 245 - 80
</TABLE>
Note 24 - Condensed parent company information
The following shows FFVA Financial Corporation's condensed financial condition
as of and for the years ended December 31, 1996 and 1997 and operations and cash
flows for the years 1995, 1996 and 1997:
Balance Sheets
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Assets
Cash $ 443 $ 964
Investments 490 2,370
Investment in bank subsidiary 52,037 60,796
Loan to bank subsidiary's ESOP 2,000 1,750
Note receivable from bank subsidiary 19,000 13,000
Other assets 511 568
-------- -------
Total assets $ 74,481 $ 79,448
======== =======
Liabilities and stockholders' equity
Liabilities $ - $ 73
Stockholders' equity 74,481 79,375
-------- -------
Total liabilities and stockholders' equity $ 74,481 $ 79,448
======== =======
</TABLE>
<PAGE>
-30-
Notes to Consolidated Financial Statements
Note 24 - Condensed parent company information (continued)
Statements of Income
<TABLE>
<CAPTION>
1995 1996 1997
--------- ------- --------
<S> <C> <C> <C>
Dividends from bank subsidiary $ - $20,000 $ -
Interest income 1,750 803 1,066
Other income - 6 161
--------- ------- --------
1,750 20,809 1,227
Noninterest expense 141 163 699
--------- ------- --------
Income before income tax expense and equity
in undistributed earnings of subsidiary 1,609 20,646 528
Income tax expense 612 246 400
--------- ------- --------
Income before equity in undistributed earnings
of subsidiary 997 20,400 128
Equity in undistributed earnings of subsidiary 5,477 5,063 6,308
Distribution of subsidiary retained earnings - (20,000) -
--------- -------- --------
Net income $ 6,474 $ 5,463 $ 6,436
======== ======= ========
</TABLE>
<PAGE>
-31-
Notes to Consolidated Financial Statements
Note 24 - Condensed parent company information (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 6,474 $ 5,463 $ 6,436
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiary ( 5,477) ( 5,063) ( 6,308)
Dividend from subsidiary - 20,000 -
Realized investment security gains, net - - ( 107)
Increase (decrease) in other liabilities ( 73) - 3
Increase in other assets ( 33) ( 97) ( 225)
-------- --------- ---------
Net cash provided by (used in) operations 891 20,303 ( 201)
-------- --------- ---------
Cash flows from investing activities
Net (increase) decrease in loans receivable 9,333 ( 661) 6,250
Purchase of investment securities ( 65) ( 425) ( 2,000)
Proceeds from sale of investment securities - - 422
-------- --------- --------
Net cash provided by (used in) investing activities 9,268 ( 1,086) 4,672
-------- --------- --------
Cash flows from financing activities
Proceeds from exercise of stock options - 31 41
Issuance of MSBP shares - - 2,002
Repurchase of common stock ( 8,520) ( 17,986) ( 3,988)
Payment of cash dividends ( 1,766) ( 1,903) ( 2,005)
-------- --------- ---------
Net cash used in financing activities (10,286) ( 19,858) ( 3,950)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents ( 127) ( 641) 521
Cash and cash equivalents at beginning of year 1,211 1,084 443
-------- --------- --------
Cash and cash equivalents at end of year $ 1,084 $ 443 $ 964
======== ========= ========
</TABLE>
<PAGE>
-32-
Notes to Consolidated Financial Statements
Note 25 - Quarterly condensed consolidated statements of income - unaudited
<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
====== ====== ======= =======
Basic earnings per share .300* .330 .070 .380
Diluted earnings per share .300* .320 .070 .370
Dividends paid per share .075* .100 .100 .100
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 10,632 $ 10,927 $ 11,050 $ 11,214
Interest expense 5,516 5,772 5,865 6,006
-------- ------- -------- -------
Net interest income 5,116 5,155 5,185 5,208
Provision for credit losses -- -- -- 150
-------- ------- -------- -------
Net interest income after provision for credits 5,116 5,155 5,185 5,058
Net gain on sale of investments 39 84 178 8
Noninterest income 304 306 371 402
Noninterest expense 2,491 2,522 2,466 4,491
-------- ------- -------- -------
Income before income tax expense 2,968 3,023 3,268 977
Income tax expense 1,074 1,093 1,186 447
-------- ------- -------- -------
Net income $ 1,894 $ 1,930 $ 2,082 $ 530
====== ====== ======= ========
Basic earnings per share .43 .45 .48 .12
Diluted earnings per share .40 .42 .44 .11
Dividends paid per share .10 .12 .12 .12
</TABLE>
*Restated to reflect two-for-one stock split paid June 5, 1996
<PAGE>
-33-
Notes to Consolidated Financial Statements
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.
