- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
Commission File Number
0-24744
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LIFE BANCORP, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1711207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
109 East Main Street
Norfolk, Virginia 23510
(Address of principal executive offices) (Zip Code)
(757) 858-1000
(Registrant's telephone number, including area code)
--------------------------------------------
Securities registered pursuant to Section 12(b)
of the Act:
Not applicable
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock, (par value $0.01 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 [X].
As of March 7, 1997, the aggregate value of the 8,585,729 shares of Common Stock
of the Registrant issued and outstanding on such date, which excludes 1,261,111
shares held by all directors and executive officers of the Registrant and the
Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $171.7 million. This figure is based on the last known trade price
of $20.00 per share of the Registrant's Common Stock on March 7, 1997. Although
directors and executive officers and the ESOP were assumed to be "affiliates" of
the Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 7, 1997: 9,846,840.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1996, are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
<PAGE>
LIFE BANCORP, INC.
FORM 10-K ANNUAL REPORT FOR 1996
TABLE OF CONTENTS
Page
PART I................................................................. 1
Item 1. Business...................................................... 1
General........................................................... 1
Acquisition of Seaboard Bancorp, Inc.............................. 1
Lending Activities................................................ 2
General....................................................... 2
Activity in Loans............................................. 2
Contractual Principal Repayments.............................. 3
Loan Portfolio Composition.................................... 4
Single-Family Residential Loans............................... 5
Multi-Family Residential and Commercial Real Estate Loans..... 6
Construction Loans............................................ 7
Land Loans.................................................... 8
Consumer Loans................................................ 8
Mortgage Banking.............................................. 9
Loans-to-One Borrower Limitations............................. 10
Asset Quality..................................................... 10
General....................................................... 10
Impaired Loans................................................ 11
Troubled Debt Restructurings.................................. 12
Non-Performing Assets......................................... 12
Potential Problem Loans....................................... 13
Allowance for Loan Losses..................................... 13
Other Classified Assets....................................... 15
Allowance for Losses on Real Estate Owned..................... 15
Investments and Mortgage-Backed Securities........................ 16
Investments................................................... 16
Mortgage-Backed Securities.................................... 16
Sources of Funds.................................................. 20
General....................................................... 20
Deposits...................................................... 20
Borrowings.................................................... 22
Stockholders' Equity.......................................... 23
Subsidiaries...................................................... 24
The First Colony Service Corporation.......................... 24
Life Financial Services Corporation........................... 24
Life Capital Corporation...................................... 24
Life Products Corp............................................ 24
Seaboard Equity Corporation................................... 24
Employees......................................................... 24
Competition....................................................... 24
Regulation........................................................ 25
The Company................................................... 25
Federal Activities Restrictions.............................. 25
Limitations on Transactions with Affiliates.................. 26
Restrictions on Acquisitions................................. 26
The Bank...................................................... 27
Insurance of Accounts........................................ 27
Regulatory Capital Requirements.............................. 29
i
<PAGE>
Prompt Corrective Action..................................... 31
Safety and Soundness......................................... 32
Brokered Deposits............................................ 32
Liquidity Requirements....................................... 32
Qualified Thrift Lender Test................................. 33
Restrictions on Capital Distributions........................ 33
Loans-to-One Borrower........................................ 34
Classified Assets............................................ 34
Community Reinvestment....................................... 35
Nationwide Banking........................................... 35
Policy Statement on Nationwide Branching..................... 35
Federal Home Loan Bank System................................ 35
Federal Reserve System....................................... 35
Federal Taxation.................................................. 36
General....................................................... 36
Fiscal Year................................................... 36
Method of Accounting.......................................... 36
Bad Debt Reserves............................................. 36
Distributions................................................. 37
Minimum Tax................................................... 37
Audit by Internal Revenue Service............................. 37
State Taxation.................................................... 37
Item 2. Properties.................................................... 38
Item 3. Legal Proceedings............................................. 40
Item 4. Submission of Matters to a Vote of Security Holders........... 40
PART II................................................................ 40
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 40
Item 6. Selected Financial Data....................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 40
Item 8. Financial Statements and Supplementary Data................... 40
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure.................................................. 40
PART III............................................................... 40
Item 10. Directors and Executive Officers of the Registrant............ 40
Item 11. Executive Compensation........................................ 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions................ 41
PART IV................................................................ 41
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 41
SIGNATURES............................................................. 43
ii
<PAGE>
PART I
Item 1. Business
General
Life Bancorp, Inc. (the "Company") is a Virginia corporation organized
in May 1994, by Life Savings Bank, FSB ("Life Savings" or the "Bank") for the
purpose of acquiring all of the capital stock of the Bank issued in the
conversion of the Bank to stock form (the "Conversion"), which was completed on
October 11, 1994. At such date, the Company offered 10,910,625 shares of common
stock, in connection with the Conversion of the Bank from mutual to stock
ownership, and the Bank reorganized into the holding company form of
organization with the Company becoming the holding company for the Bank. The
only significant assets of the Company are the capital stock of the Bank, the
Company's loan to an Employee Stock Ownership Plan ("ESOP"), and the net
conversion proceeds retained by the Company. To date, the business of the
Company has consisted of the business of the Bank. At December 31, 1996, the
Company had consolidated assets of $1.4 billion, deposits of $732.3 million and
stockholders' equity of $150.9 million.
Life Savings operates twenty retail banking offices in its immediate
market area - South Hampton Roads, Virginia, which consists of the cities of
Chesapeake, Norfolk, Portsmouth, Suffolk and Virginia Beach. Hampton, Newport
News and Williamsburg are also a part of Hampton Roads, the Bank's primary
market area, which, with 1.5 million residents, is the fourth largest
metropolitan statistical area in the Southeast region of the United States and
the 27th largest in the Nation.
Through its retail banking offices, Life Savings delivers a wide range
of banking products and services to meet the needs of individuals, businesses
and organizations. The Bank attracts retail deposits from the general public and
the business community through a variety of deposit products. Deposits are
insured by the Savings Association Insurance Fund ("SAIF"), administered by the
Federal Deposit Insurance Corporation ("FDIC"), within applicable limits.
The Bank's lending activities focus on meeting the needs of individuals
and businesses in its market area by offering permanent and construction
residential loans, second mortgages and equity lines of credit, consumer loans,
commercial real estate and business loans, and lines of credit.
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market(sm) under the symbol "LIFB." The Bank has been in
business since 1935. It is the largest financial institution headquartered in
Hampton Roads and the largest savings bank in Virginia.
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Office of Thrift Supervision
("OTS") and is subject to various reporting and other requirements of the
Securities and Exchange Commission ("SEC"). The Bank is subject to examination
and comprehensive regulation by the OTS, which is the Bank's chartering
authority and primary regulator. The Bank is also regulated by the FDIC, the
administrator of the SAIF. The Bank is subject to certain reserve requirements
established by the Board of Governors of the Federal Reserve System ("FRB") and
is a member of the Federal Home Loan Bank ("FHLB") of Atlanta, which is one of
the 12 regional banks comprising the FHLB System.
Acquisition of Seaboard Bancorp, Inc.
On January 31, 1996, the Company completed its acquisition of Seaboard
Bancorp, Inc. ("Seaboard"), the holding company for Seaboard Savings Bank,
F.S.B., ("Seaboard Savings"). Seaboard Savings, headquartered in Virginia Beach,
operated three offices, one each in the Virginia cities of Chesapeake, Virginia
Beach and Portsmouth, The operations of Seaboard Savings were merged into the
1
<PAGE>
Bank effective February 1, 1996, representing a natural extension of the Bank's
existing operations and strengthening its presence in the Hampton Roads market.
Results of operations of Seaboard, beginning February 1, 1996, are included in
the results of the Company. For additional information regarding the Seaboard
acquisition, see Note 2 to the Consolidated Financial Statements included in
Item 8 hereof.
Lending Activities
General. At December 31, 1996, the Bank's net loans held for investment
totaled $622.4 million, or 43.8% of the total assets at such date. The Bank
originates conventional loans secured by first liens on single-family residences
located primarily in the Hampton Roads area. Conventional residential real
estate loans are loans which are neither insured by the Federal Housing
Administration ("FHA") nor partially guaranteed by the Veterans Administration
("VA"). The Bank also originates loans secured by commercial real estate and
multi-family (over four units) residential properties, consumer loans (including
home equity loans) and construction loans. Virtually all of the Bank's mortgage
loans are secured by properties located in Virginia.
Additional information regarding the Company's loans receivable is
provided in Management's Discussion and Analysis of Financial Condition and
Results of Operations and in Note 5 to the Consolidated Financial Statements
included in Items 7 and 8 hereof.
Activity in Loans. The following table shows the Bank's loan
originations, sales and repayments during the periods indicated. The Bank did
not purchase any loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994
-------------- --------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Gross loans at beginning of period $491,350 $442,055 $386,314
Originations of loans for
investment:
Single-family residential:
Conventional 62,493 54,511 82,014
FHA and VA 4,707 4,228 7,564
Multi-family residential 1,012 365 153
Commercial real estate 32,219 14,369 9,052
Construction 5,902 4,132 8,523
Land loans 2,102 3,320 2,104
Consumer loans 35,777 17,848 13,317
-------- -------- --------
Total originations for investment 144,212 98,773 122,727
Loans originated for sale 880 10,451 5,881
-------- -------- --------
Total originations 145,092 109,224 128,608
Loans acquired from Seaboard 69,525 -- --
Repayments (37,311) (49,478) (59,400)
Loan sales (880) (10,451) (13,467)
-------- -------- --------
Net activity in loans 176,426 49,295 55,741
-------- -------- --------
Gross loans at end of period $667,776 $491,350 $442,055
======== ======== ========
</TABLE>
The lending activities of Life Savings are subject to written
underwriting standards and loan origination procedures established by the Bank's
Board of Directors and management. Applications for consumer loans are taken at
all of the Bank's branch offices by the branch manager or other designated loan
officer. Applications for single-family residential first mortgage loans are
obtained through designated branch offices and loan originators who are
employees of the Bank. The Bank's loan originators will take loan applications
outside of the Bank's offices at the customer's convenience and are compensated
on a salary plus commission basis. Loan applications are forwarded to the Loan
Processing Department, which supervises the process of obtaining credit reports,
appraisals and other documentation supporting the loan request. The Bank
requires that a property's market value be determined in
2
<PAGE>
connection with all new mortgage loans. Such values generally are determined by
an independent appraiser selected from an appraisal panel approved by the Bank's
Board of Directors or by a member of the Bank's internal appraisal staff. Life
Savings requires that title insurance and hazard insurance be maintained on all
security properties and that flood insurance be maintained if the improvements
are within a designated flood hazard area.
Residential mortgage loan applications are obtained through referrals
from real estate brokers and builders, existing customers and walk-in customers.
Residential mortgage loans also are originated through correspondents.
Commercial and multi-family real estate loan applications are obtained from
previous borrowers, direct solicitations by Bank personnel, commercial mortgage
brokers and through referrals. Consumer loans originated by the Bank are
obtained through existing and walk-in customers who have been made aware of the
Bank's programs by advertising and other means. Automobile and boat loans are
also obtained indirectly through an established network of automobile and boat
dealers located in the Hampton Roads area.
Applications for residential and commercial mortgage loans are approved
in accordance with the Bank's Board of Directors' authorization to a Loan
Approval Committee, a committee comprised of certain designated officers of the
Bank. Residential and commercial mortgage loans in excess of $350,000 must be
approved by the Bank's Board of Directors. Loans under $150,000 may be approved
by certain designated officers of the Bank, while loans not exceeding $350,000
may be approved by the Loan Approval Committee. All loans which do not require
approval of the Bank's Board of Directors are submitted to the Board at its next
meeting for review, acknowledgement and approval ratification.
Contractual Principal Repayments. The following table sets forth
scheduled contractual amortization of the Bank's loans at December 31, 1996, as
well as the dollar amount of such loans which are scheduled to mature after one
year which have fixed or adjustable interest rates. Demand loans and loans
having no schedule of repayments and no stated maturity are reported as due in
one year or less. Loans which are callable at the Bank's option at specified
dates are reported at their contractual maturity date and are treated as
adjustable rate loans for purposes of this table.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
in Year(s) Ended December 31,
-----------------------------------------------------------------------------------
Total at
December 31, 2000- 2002- 2008-
1996 1997 1998 1999 2001 2007 2013 Thereafter
---------- -------- -------- -------- -------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable:
First mortgage
loans $589,134 $68,603 $29,502 $24,500 $39,509 $ 95,756 $89,590 $241,674
Consumer and
other loans 78,642 20,606 16,089 12,330 15,440 9,194 3,411 1,572
-------- ------- ------- ------- ------- -------- ------- --------
Total(1) $667,776 $89,209 $45,591 $36,830 $54,949 $104,950 $93,001 $243,246
======== ======= ======= ======= ======= ======== ======= ========
- -----------------------------
<FN>
(1) Of the $578.6 million of loan principal repayments contractually due
after December 31, 1997, $247.7 million have fixed rates of interest
and $330.9 million have adjustable rates of interest.
</FN>
</TABLE>
The scheduled contractual amortization of loans does not reflect the
expected term of the Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments, call
features and due-on-sale clauses, which give the Bank the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are higher than
current mortgage loan rates (due to refinancings at lower rates). Under the
latter circumstances, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
3
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loans held in portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------
1996 (1) 1995 1994 1993 1992
------------------- ------------------- ----------------- ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential:
Conventional $370,956 55.55% $307,584 62.60% $281,507 63.68% $234,085 62.10% $280,261 63.27%
FHA/VA 22,582 3.38 22,209 4.52 21,993 4.97 22,217 5.89 24,205 5.46
Multi-family 22,686 3.40 24,926 5.07 22,663 5.13 23,786 6.31 24,452 5.52
Construction 58,228 8.72 25,351 5.16 21,748 4.92 3,937 1.04 6,046 1.36
Commercial real estate 110,991 16.62 51,239 10.43 44,543 10.08 41,607 11.04 46,634 10.53
Land loans 3,691 0.55 4,986 1.01 2,877 0.65 2,261 0.60 3,758 0.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans 589,134 88.22 436,295 88.80 395,331 89.43 327,893 86.98 385,356 86.99
Consumer loans:
Home equity 34,425 5.16 27,826 5.66 23,768 5.38 26,998 7.16 33,071 7.47
Automobile 31,072 4.65 15,970 3.25 11,402 2.58 11,612 3.08 13,437 3.03
Lines of credit 5,608 0.84 5,803 1.18 6,358 1.44 6,414 1.70 6,765 1.53
Other 7,537 1.13 5,456 1.11 5,196 1.17 4,051 1.08 4,324 0.98
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 78,642 11.78 55,055 11.20 46,724 10.57 49,075 13.02 57,597 13.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable 667,776 100.00% 491,350 100.00% 442,055 100.00% 376,968 100.00% 442,953 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Allowance for loan
losses 9,656 4,438 4,459 3,274 2,741
Loans-in-process 31,631 16,062 11,991 2,703 3,492
Purchase accounting
discount 757 481 581 865 1,343
Unearned discount 1,134 595 579 1,157 2,127
Net deferred loan
origination fees 2,142 2,068 2,875 1,975 2,604
Discount on loans
purchased 51 282 379 484 595
-------- -------- -------- -------- --------
Loans receivable, net $622,405 $467,424 $421,191 $366,510 $430,051
======== ======== ======== ======== ========
<FN>
(1) Includes loans obtained in the Seaboard acquisition.
</FN>
</TABLE>
4
<PAGE>
Single-Family Residential Loans. The Bank's single-family residential
mortgage loans consist of conventional loans and, to a lesser extent,
FHA-insured and VA-guaranteed loans. At December 31, 1996, the Bank's
conventional single-family loans amounted to $371.0 million, or 55.6% of the
total loan portfolio, an increase of $63.4 million, or 20.6%, compared to
December 31, 1995. This increase resulted from the acquisition of Seaboard and a
lower volume of loan sales as well as internal growth in the Bank's loan
portfolio. FHA/VA loans amounted to $22.6 million, or 3.4% of the total loan
portfolio. Substantially all of the Bank's single-family residential mortgage
loans are secured by properties located in Virginia, primarily in the Bank's
Hampton Roads market area and, to a lesser extent, the Richmond, Lynchburg and
Roanoke metropolitan areas. The vast majority of residential mortgage loans
originated by the Bank are originated under terms and documentation which permit
their sale to the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Government National Mortgage Association ("GNMA"). During 1994, and 1995, and,
to a much lesser extent, 1996, the Bank, consistent with its asset/liability
management strategies, sold certain of its longer term fixed-rate residential
mortgage loans. See "- Mortgage Banking Activities."
The single-family residential mortgage loans offered by the Bank
currently consist of fixed-rate loans, adjustable-rate mortgage ("ARM") loans,
loans which have a one-time adjustment feature, and convertible ARMs which
permit the borrower to convert the loan to a fixed-rate.
Fixed-rate loans generally have maturities ranging from ten to thirty
years and are fully amortizing with monthly loan payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. The
Bank's fixed-rate loans are originated under terms, conditions and documentation
which permit them to be sold to U.S. Government-sponsored agencies, such as the
FHLMC and the GNMA, or other investors in the secondary market for mortgages. At
December 31, 1996, $152.5 million, or 39.0%, of the Bank's single-family
residential mortgage loans were fixed-rate loans.
The adjustable-rate loans currently offered by the Bank have interest
rates which initially adjust every one, three, five, seven or ten years in
accordance with a designated index, such as U.S. Treasury obligations, adjusted
to a constant maturity ("CMT"), plus a stipulated margin. The Bank's
adjustable-rate single-family residential real estate loans generally have a cap
of 2% on any increase or decrease in the interest rate at any adjustment date,
and a cap of 6% over the life of the loan, except for certain seven and ten year
ARMs on which the caps are 3% and 5%, respectively. The Bank's adjustable-rate
loans require that any payment adjustment resulting from a change in the
interest rate of an adjustable-rate loan be sufficient to result in full
amortization of the loan by the end of the loan term and, thus, do not permit
any of the increased payment to be added to the principal amount of the loan, or
so-called negative amortization. Certain ARMs permit the borrower, at his or her
option, upon payment of a pre-determined fee, to convert the loan during a
limited time period to a fixed-rate loan based upon a designated index plus a
margin. At December 31, 1996, $241.0 million or 61.0% of the Bank's
single-family residential mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because, as interest rates
increase, the borrower's required loan payment increases to the extent permitted
by the terms of the loan, thereby increasing the potential for default.
Moreover, as interest rates increase, the marketability of the underlying
collateral property may be adversely affected by higher interest rates. The Bank
believes that these risks, which have not had a material adverse effect on the
Bank to date because of the generally declining and lower interest rate
environment in recent years, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
The Bank currently will lend up to 95% of the appraised value of the
property securing a single-family residential loan with a principal amount up to
$300,000. The Bank requires that private mortgage insurance be obtained if the
principal amount of the loan exceeds 80% of the value of the security property,
except for certain special Community Reinvestment loan programs. The Bank's
current policy
5
<PAGE>
is that single-family residential loans with principal amounts greater than
$300,000 and up to $350,000 generally will have loan-to-value ratios of 90% or
less and that single-family residential loans with principal amounts greater
than $350,000 will have loan-to-value ratios of 75% or less.
Multi-Family Residential and Commercial Real Estate Loans. The Bank's
multi-family residential and commercial real estate loans generally are
one-year, three-year or five-year adjustable-rate loans indexed to U.S. Treasury
obligations of similar terms plus a margin. Usually, fees of 1% to 2% of the
principal loan balances are charged to the borrower upon closing. Although terms
for multi-family residential and commercial real estate loans may vary, the
Bank's underwriting standards generally provide for terms of up to 25 years with
amortization of principal over the term of the loan and loan-to-value ratios of
not more than 85% for commercial real estate and multi-family residential loans.
While the Bank originates long-term multi-family residential and commercial real
estate loans, such loans typically include provisions which permit the Bank, at
its sole discretion, to call the loan at predetermined dates, ranging from
annually to up to a ten-year period, throughout the term of the loan. Such call
provisions reduce the interest-rate risk to the Bank of such loans by allowing
the Bank to require repayment of the loan or, more typically, permit the Bank to
renegotiate the interest rate. Generally, the Bank obtains personal guarantees
of the principals as additional security for commercial real estate and
multi-family residential loans and requires that the borrower have at least a
15% equity investment in any commercial real estate property and 10% for any
multi-family property.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of a property's cash flow history, future operating projections,
current and projected occupancy, location and physical condition. The Bank
generally imposes a debt coverage ratio (the ratio of net cash from operations
before payment of debt service to debt service) of not less than 110% for
multi-family loans and commercial real estate loans. The underwriting analysis
also includes credit checks and a review of the financial condition of the
borrower and guarantor(s), if applicable. To substantiate property values for
every commercial real estate and multi-family loan transaction, an appraisal
report is prepared by a state-licensed and certified appraiser commissioned by
the Bank or by the Bank's appraisal staff. All appraisal reports are reviewed by
the Bank's appraisal department prior to the closing of the loan.
At December 31, 1996, loans secured by commercial real estate amounted
to $111.0 million, or 16.6%, of the Bank's total loan portfolio, an increase of
$59.8 million, or 116.6%, compared to $51.2 million, or 10.4%, of the total
portfolio, at December 31, 1995. This increase resulted from the acquisition of
Seaboard as well as the Bank's strategy to increase its market share of well
underwritten commercial real estate loans. The Bank's commercial real estate
loans are secured by office buildings, shopping centers, warehouses and other
industrial buildings, hotels, motels and other commercial properties located
primarily in the Bank's market area.
Multi-family residential loans amounted to $22.7 million, or 3.4%, of
the Bank's total loan portfolio at December 31, 1996, compared to $24.9 million,
or 5.1%, of the total portfolio, at December 31, 1995. Of the Bank's
multi-family residential loans at December 31, 1996, $10.9 million were secured
by properties with 20 units or less and $11.8 million were secured by properties
with 21 units or more.
Multi-family and commercial real estate loans generally have higher
rates and entail different and significant risks when compared to single-family
residential lending because such loans typically involve larger loan balances to
individual borrowers and because the payment experience on such loans is
typically dependent on the successful operation of the project or the borrower's
business. These risks can also be significantly affected by supply and demand
conditions in the local market for apartments, offices, warehouses or other
commercial space. The Bank attempts to minimize its risk exposure by limiting
such lending to proven developers/owners, primarily considering borrowers with
existing
6
<PAGE>
operating performance which can be analyzed, requiring conservative debt
coverage ratios, and periodically monitoring the operation and physical
condition of the collateral.
Construction Loans. The Bank's construction loan portfolio consists of
loans to individuals to construct their primary residences, to custom home
builders and to developers. The loans to individuals and custom home builders
generally have a maximum term of twelve months, have variable rates of interest
based upon the prime rate as quoted in the eastern edition of The Wall Street
Journal ("Prime Rate") plus a margin, have loan-to-value ratios of 85% or less
of the appraised value upon completion and generally do not require the
amortization of principal during the term. The Bank typically requires that
permanent financing, with the Bank or some other lender, be in place prior to
closing a construction loan to an individual, but may make loans without such
requirement to custom home builders or developers.
At December 31, 1996, the majority of the Bank's construction loan
portfolio consisted of construction loans and lines of credit to developers.
Such loans generally have terms of 36 months or less, have maximum loan-to-value
ratios of the lesser of 75% of the appraised value upon completion or 85% of the
discounted prospective future value upon completion and generally do not require
the amortization of the principal during the term. Generally, the loans are made
with adjustable rates of interest based on the Prime Rate plus a margin. The
Bank generally receives origination fees, which range from 0.5% to 2.0% of the
commitment. The majority of such loans consist of loans to selected local
developers with whom the Bank is familiar to build single-family dwellings on
either a pre-sold or speculative basis; however, the Bank generally limits the
number of unsold units which are under construction. The borrower is required to
have a minimum of 15% equity in the project. Loan proceeds are disbursed in
stages after inspections of the project indicate that such disbursements are for
costs already incurred and which have added to the value of the project. The
Bank's construction loans include loans to developers to acquire the necessary
land, develop the site and construct the residential units ("ADC loans"). Upon
the release of any lot to a buyer, the Bank generally requires the developer to
make a payment on the loan equal to the greater of 110% of the pro rata loan
advanced on such lot or 70% of the sales price. The Bank also originates
construction loans for the construction of commercial properties.
At December 31, 1996, construction loans totaled $58.2 million, or 8.7%,
of the total loan portfolio, an increase of $32.9 million, or 129.7%, compared
to $25.4 million, or 5.2% of the loan portfolio at December 31, 1995. This
increase resulted from the acquisition of Seaboard as well as the Bank's
strategy to increase its market share in construction lending. At December 31,
1996, the construction loan portfolio consisted of $53.3 million, which were
secured by commercial properties and $4.9 million, which were secured by
residential properties.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by the Bank's appraisal staff or
independent state-licensed and certified appraisers approved by the Board of
Directors. Officers of the Bank also review and inspect each project prior to
the commencement of construction. In addition, the project is inspected by at
least one officer or contract agent of the Bank prior to every disbursement of
funds during the term of the construction loan. Such inspection includes a
review for compliance with the construction plans, including materials
specifications.
Construction financing usually has higher interest rates and is
generally considered to involve a higher degree of risk of loss than long-term
financing on improved, owner-occupied real estate. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of value proves to be inaccurate, the Bank may be confronted, at or
prior to the maturity of the loan, with a project, when completed, having a
value which is insufficient to assure full repayment.
7
<PAGE>
Land Loans. The Bank funds land loans to individuals and
builders/developers for their use in future construction activity. Loans in this
category include: residential consumer lot loans; loans for the acquisition and
development of land (loans to finance the purchase of land and the
accomplishment of all improvements required to convert it to developed building
lots); loans for the acquisition of developed building lots; and loans secured
by vacant land. Residential consumer lot loans generally are secured by
unimproved lots in the Bank's market area. Such loans are funded for the purpose
of constructing a residence to be occupied by the borrower. The Bank also makes
land acquisition and development loans to experienced and financially strong
builders and developers in order to provide additional construction and mortgage
lending opportunities for the Bank. Loans are also made available to qualified
builders and developers for the purpose of acquiring unimproved land to be
developed for residential building sites, residential housing subdivisions,
multi-family dwellings, and a variety of commercial uses. Land loans are also
available to facilitate the acquisition of developed lots for the purpose of
single family, townhomes and condominium construction. Land loans are
underwritten and processed by the Bank in much the same manner as commercial
construction and commercial real estate loans. Land lending generally involves
additional risks compared to loans secured by single family properties;
therefore, the Bank carefully evaluates the borrowers' assumptions and their
ability to service the loans if the original assumptions are incorrect due to
changes in market conditions and absorption rates. Land loans amounted to $3.7
million, or 0.6%, of the Bank's total loan portfolio at December 31, 1996.
Consumer Loans. The Bank offers consumer loans in its primary market
area in order to provide a full range of retail financial services to its
customers. At December 31, 1996, consumer loans amounted to $78.6 million, or
11.8%, of the Bank's total loan portfolio, an increase of $23.6 million, or
42.8%, compared to $55.1 million, or $11.2% of the total loan portfolio at
December 31, 1995. This increase resulted from the acquisition of Seaboard as
well as the Bank's strategy to increase its market share in consumer loans.
The largest component of the Bank's consumer loan portfolio is home
equity loans, which are secured by the underlying equity in the borrower's
residence or second home. Home equity loans are amortizing loans and generally
have fixed interest rates for fixed-term loans up to 15 years. Home equity loans
with terms greater than 15 years and up to 30 years have a provision allowing
for the loan to be called every three or five years. At December 31, 1996, home
equity loans amounted to $34.4 million, or 5.2%, of the Bank's total loan
portfolio.
The second largest component of the Bank's consumer loan portfolio is
automobile loans, both for new and used vehicles. The majority of such loans are
originated indirectly through automobile dealers located in the Bank's primary
market area. The term of such loans generally cannot exceed 72 months with
respect to new car financing and 48 months with respect to used car financing.
The Bank requires all borrowers to maintain automobile insurance, including
collision, fire and theft, with the Bank listed as loss payee. At December 31,
1996, automobile loans totaled $31.1 million, or 4.7%, of the total loan
portfolio.
At December 31, 1996, the Bank's remaining consumer loan portfolio was
comprised of secured and unsecured lines of credit, which amounted to $5.6
million, or 0.8%, of the Bank's total loan portfolio, and other consumer loans,
which amounted to $7.5 million, or 1.1%, of the Bank's total loan portfolio at
such date. The secured revolving lines of credit offered by the Bank consist
solely of home equity lines of credit in amounts of up to $100,000. Other
consumer loans include both MasterCard and VISA credit cards, which totaled $1.6
million at December 31, 1996, and other loans such as boat loans and personal
and other consumer credit.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. These risks are not as prevalent in the case of the
Bank's consumer loan portfolio, however, because a high percentage of the
portfolio is comprised of home equity
8
<PAGE>
loans and home equity lines of credit which are secured by real estate and
underwritten in a manner such that they result in a lending risk which is
substantially similar to single-family residential loans.
Mortgage Banking. Due to customer preference for fixed-rate loans,
especially during the declining and relatively lower interest rate environment
in recent years, the Bank continued to originate such loans, and sold a
substantial amount of the long-term (15 years or more), fixed-rate mortgage
loans originated during 1994 and 1995, and, to a lesser extent, during 1996. The
Bank's net gains on sales of mortgage loans amounted to $12,000, $142,000 and
$95,000 during the years ended December 31, 1996, 1995 and 1994, respectively.
The Bank had no mortgage loans held for sale at either December 31, 1996,
December 31, 1995 or December 31, 1994.
The Bank's mortgage loans sold to others are sold in groups or on a
loan-by-loan basis primarily to the FHLMC. A period of 30 to 90 days generally
lapses between the closing of the loan by the Bank and its purchase by an
investor. Mortgages with established interest rates generally will decrease in
value during periods of increasing interest rates. Accordingly, fluctuations in
prevailing interest rates may result in a gain or loss to the Bank as a result
of adjustments to the carrying value of loans held for sale or on sale of loans.
Because of the increasing volatility in interest rates during 1994, the Bank
determined to originate and retain for portfolio more ARM loans and to retain
for portfolio a larger portion of newly originated long-term, fixed-rate
mortgage loans.
During 1995, the flattening yield curve had a dramatic effect on
lending, by making ARM loans less attractive for potential borrowers than fixed
rate loans; however, the Bank was able to originate a total of $109.2 million in
loans, of which $36.7 million were fixed-rate and $72.5 million were
adjustable-rate. Because of the concern for the impact on the net interest
margin and the interest-rate risk position of the Bank, approximately $10.5
million of lower yielding fixed-rate loans were originated for sale in the
secondary market during 1995, compared to $5.9 million during 1994.
Nevertheless, the Bank's net loans receivable rose $46.2 million, or 11.0%, from
$421.2 million ($177.0 million fixed-rate and $244.2 million adjustable-rate) at
the end of 1994, to $467.4 million ($193.2 million fixed-rate and $274.2 million
adjustable-rate) at the end of 1995.
In 1996 the interest rate yield curve steepened slightly to the level
that many potential borrowers preferred ARM loans once again. The Bank
originated $145.1 million in loans during the year, of which $93.2 million were
ARM loans. In an effort to leverage the Company, all except $880,000 of the
loans were retained in its portfolio. The result was that average loans
increased $130.0 million during the year, including the $69.2 million in loans
from the Seaboard acquisition.
Borrowers are generally charged an origination fee, which is a
percentage of the principal balance of the loan. In accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases," the various fees received
by the Bank in connection with the origination of loans are deferred and
amortized as a yield adjustment over the lives of the related loans using the
interest method. However, when such loans are sold, the remaining unamortized
fees (which are all or substantially all of such fees due to the relatively
short period during which such loans are held) are recognized as income.
The Bank generally retains the servicing on loans sold. In addition, the
Bank services substantially all of the loans which are retained in its
portfolio. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, making advances to cover delinquent
payments, making inspections as required of mortgaged premises, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults and generally administering the loans. Funds that
have been escrowed by borrowers for the payment of mortgage-related expenses,
such as property taxes and hazard and mortgage insurance premiums, are
maintained in noninterest-bearing
9
<PAGE>
accounts at the Bank. At December 31, 1996, the Bank had $644,000 deposited in
escrow accounts for its loans serviced for others.
The following table presents information regarding the loans serviced by
the Bank for others at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995 1994
--------------- --------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage loans serviced for others:
FHLMC $131,514 $147,871 $152,359
Virginia Housing Development
Authority ("VHDA") 7,640 7,838 7,960
GNMA 17,646 19,352 20,883
Other investors 166 291 244
-------- -------- --------
Total loans serviced for others $156,966 $175,352 $181,446
======== ======== ========
</TABLE>
The Bank receives fees for servicing mortgage loans, which generally
amount to 0.25% per annum, (0.44% in the case of loans serviced for the GNMA),
on the declining principal balance of the mortgage loans. Such fees serve to
compensate the Bank for the costs of performing the servicing function. Other
sources of loan servicing revenues include late charges on delinquent payments.
For the years ended December 31, 1996, 1995 and 1994, the Bank earned gross fees
of $577,000, $636,000 and $674,000, respectively, from loan servicing.
During 1995 and 1996, in an effort to price conventional, VA and FHA
fixed-rate, fixed-term loans more competitively, the Bank began pricing selected
loans for sale "servicing released." By selling servicing, the Bank is able to
offer a more competitive rate to borrowers resulting in an increased demand for
loans. Relationships were established with several wholesale loan purchasers.
During 1996 and 1995, $781,000 and $1.9 million, respectively, of VA and FHA
fixed-rate, fixed-term loans were sold servicing released to wholesalers.
Loans-to-One Borrower Limitations. Current regulations impose
limitations on the aggregate amount of loans that a savings institution could
make to any one borrower, including related entities. The permissible amount of
loans-to-one borrower follows the national bank standard for all loans made by
savings institutions, which generally does not permit loans-to-one borrower to
exceed 15% of unimpaired capital and surplus. Loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. At December 31,
1996, Life Savings' five largest loans or groups of loans-to-one borrower,
including related entities, ranged from an aggregate of $6.3 million to $9.2
million, and the Bank's loans-to-one borrower limit was $18.2 million at such
date. Of the Bank's five largest loans or groups of loans-to-one borrower at
December 31, 1996, none were deemed to be non-accruing, although one borrower
had an outstanding balance of $6.4 million, of which $1.3 million was classified
as substandard and $3.4 million was designated as special mention due to past
delinquencies and financial difficulties of certain of the principals. See "-
Asset Quality - Potential Problem Loans."
Asset Quality
General. When a borrower fails to make a required payment on a loan, the
Bank attempts to cure the deficiency by contacting the borrower and seeking
payment. These contacts are generally made 15 days after a payment is due. In
most cases, deficiencies are cured promptly. If a delinquency continues, late
charges are assessed and additional efforts are made to collect the loan. While
the Bank prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank generally pursues foreclosure or
other proceedings, as necessary, to minimize any potential loss.
10
<PAGE>
Impaired Loans. Effective January 1, 1995, the Company adopted SFAS No.
114, as amended by SFAS No. 118. SFAS No. 114, as amended, provides that a loan
is impaired when, based on current information and events, it is probable that
the creditor will be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement. SFAS No. 114, as
amended, requires that impaired loans be measured based on the present value of
the expected future cash flows, discounted at the loan's effective interest
rate. The effective interest rate of a loan is defined as the contractual
interest rate, adjusted for any deferred loan fees or costs, premiums or
discounts existing at the inception or acquisition of the loan. If the loan is
collateral dependent, as a practical expedient, impairment can be based on a
loan's observable market price or the fair value of the collateral. The value of
the loan is adjusted through a valuation allowance created through a charge
against income. Residential mortgages, consumer installment obligations and
credit cards may be excluded. Loans that were treated as in-substance
foreclosures under previous accounting pronouncements are considered to be
impaired loans and under SFAS No. 114, as amended, will remain in the loan
portfolio.
A loan may be placed on non-accrual status and not classified as an
impaired loan when in the opinion of management, based on current information
and events, it is probable that the Bank will collect all principal and interest
amounts due substantially consistent with the contractual terms of the loan
agreement. Interest income for impaired loans is generally recognized on an
accrual basis unless it is deemed inappropriate to do so. In those cases in
which the receipt of interest payments is deemed more uncertain, the cash basis
of income recognition is utilized. Loans are placed on non-accrual status when,
in the judgment of management, the probability of timely collection of interest
is deemed to be insufficient to warrant further accrual. As a matter of policy,
the Bank does not accrue interest on loans past due 90 days or more except when
the estimated value of the collateral and collection efforts are deemed
sufficient to ensure full recovery. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income.
The following table sets forth information relating to the Bank's
recorded investment in impaired loans at or during the periods indicated. Since
the data relating to impaired loans was not collected until January 1, 1995, the
date the Company adopted SFAS No. 114, as amended, certain data for periods
prior to such date is not available.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 (1) 1995 1994
--------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Impaired loans for which there is a related
allowance for credit losses $9,022 $4,223 $4,129
Impaired loans for which there is no related
allowance for credit losses -- -- --
Total impaired loans $9,022 $4,223 $4,129
====== ====== ======
Allowance for credit losses on impaired
loans $3,500 $ 768 $ 702
====== ====== ======
Average impaired loans during the period $9,659 $4,493 N/A
====== ====== ======
Interest income recognized on impaired
loans during the time within the period that
the loans were impaired $ 506 $ 430 N/A
====== ====== ======
Interest income recognized on impaired
loans using a cash-basis method of
accounting during the time within the
period that the loans were impaired $ 506 $ 430 N/A
====== ====== ======
<FN>
- -----------------------------
(1) Includes loans obtained in the Seaboard acquisition which were designated as impaired loans by the Bank.
</FN>
</TABLE>
11
<PAGE>
Troubled Debt Restructurings. Under Generally Accepted Accounting
Principles ("GAAP"), the Bank is required to account for certain loan
modifications or restructurings as "troubled debt restructurings." In general,
the modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank, for economic or legal reasons related to the
borrower's financial difficulties, grants a concession to the borrower that the
Bank would not otherwise consider under current market conditions. Debt
restructurings or loan modifications for a borrower do not necessarily always
constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in non-accrual loans. The Bank had $2.5
million of troubled debt restructurings, net of specific reserves, at December
31, 1996. Included in the Bank's troubled debt restructurings at December 31,
1996, is one loan with a carrying value of $1.1 million, net of specific
reserves, which is secured by an office warehouse complex. At December 31, 1996,
this loan was classified substandard. The loan was added as a troubled debt
restructuring as a result of the purchase of Seaboard Savings. At December 31,
1996, this loan was current. The remaining $1.4 million of troubled debt
restructurings at December 31, 1996, consisted of multi-family and commercial
properties located in Virginia Beach and Norfolk.
Non-Performing Assets. The following table sets forth information
relating to the Bank's net carrying value of its non-performing assets and
troubled debt restructurings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1996 (1) 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accruing loans:
Mortgage loans:
Single-family:
Conventional $1,498 $ 859 $ 341 $ 943 $ 1,554
FHA/VA 698 245 102 163 139
Multi-family -- -- 297 185 --
Commercial 46 436 778 39 1,812
Consumer loans 308 195 98 182 151
------ ------ ------- ------- -------
Total non-accruing loans 2,550 1,735 1,616 1,512 3,656
Real estate owned, net (2) 1,202 622 870 9,368 15,016
------ ------ ------- ------- -------
Total non-performing assets $3,752 $2,357 $ 2,486 $10,880 $18,672
====== ====== ======= ======= =======
Troubled debt restructurings, net (3) $2,464 $4,525 $ 8,511 $ 9,698 $ 8,857
====== ====== ======= ======= =======
Total non-performing assets and
troubled debt restructurings $6,216 $6,882 $10,997 $20,578 $27,529
====== ====== ======= ======= =======
Non-accruing loans to total loans
held for investment 0.41% 0.37% 0.38% 0.41% 0.85%
====== ====== ======= ======= =======
Total non-performing assets to total
assets 0.26% 0.21% 0.25% 1.41% 2.70%
====== ====== ======= ======= =======
Total non-performing assets and
troubled debt restructurings to
total assets 0.44% 0.63% 1.10% 2.67% 3.98%
====== ====== ======= ======= =======
<FN>
- -----------------------------
(1) Includes assets obtained in the Seaboard acquisition.
(2) Amounts are net of the allowance for real estate owned which amounted to $30,000, $33,000, $0, $5.1
million and $386,000 at December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
(3) Amounts are net of specific valuation allowances which totaled $3.5 million, $719,000, $990,000, $0 and
$0 at December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
</FN>
</TABLE>
12
<PAGE>
The Bank's real estate owned ("REO") at December 31, 1996, consisted of
18 properties, substantially each of which had carrying values of less than
$175,000. During 1996, the Bank sold 12 properties (8 single family residences,
2 hotel condominiums, 1 multi-family dwelling and one parcel of land which was
acquired through a deed in lieu of foreclosure) for an aggregate sales price of
approximately $4.0 million. After satisfying superior liens, deductions for
valuation allowances, repairs, holding costs and settlement expenses, the Bank
realized a net gain on the sale of these properties of $300,000. Additional
information regarding the Company's REO is in Management's Discussion and
Analysis of Financial Condition and Results of Operations and in Note 7 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.
Potential Problem Loans. In addition to the loans included in the above
impaired loans and non-performing assets and troubled debt restructurings
tables, at December 31, 1996, the Bank had loans totaling $10.2 million which,
even though they were not impaired or categorized as a non-performing asset or
troubled debt restructuring, were designated as substandard or special mention.
At December 31, 1996, the Bank had eight performing loans totaling $5.5
million to five borrowers, which the Bank had designated as substandard. One
such loan, a performing construction loan, is secured by a retirement home under
construction in Virginia Beach. In August 1996 the partially constructed
building was substantially destroyed by fire and the Bank classified the loan as
substandard. At December 31, 1996, the loan was current as the borrower
continues to fund the interest payments and plans to rebuild. Of the remaining
seven loans, two loans totaling $1.5 million are secured by commercial
properties located in Norfolk, Virginia; three loans, totaling $600,000, are
secured by commercial properties in Virginia Beach; and two loans, totaling
$200,000, are secured by various multi-family properties and developed lots in
Norfolk, Virginia. At this time, the Bank does not anticipate losses on any of
these loans.
Additionally, at December 31, 1996, there were three performing loans,
totaling $4.7 million, to two borrowers which the Bank had designated as special
mention. All three of these loans are secured by multi-family dwelling units in
Norfolk and Virginia Beach. At this time, the Bank does not anticipate losses on
any of these loans.
Allowance for Loan Losses. Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Company, the amount of the Company's classified assets,
the status of past due principal and interest payments, general economic
conditions, particularly as they relate to the Company's market area, and other
factors related to the collectibility of the Company's loan portfolio.
Management reviews the allowance for loan losses on a monthly basis and makes
provisions for loan losses as deemed appropriate in order to maintain the
adequacy of the allowance.
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency ("OCC"), the FDIC and the FRB, issued the Policy
Statement regarding an institution's allowance for loan and lease losses. The
Policy Statement, which reflects the position of the issuing regulatory agencies
and does not necessarily constitute GAAP, includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement sets forth the following quantitative measures
which examiners may use to determine the reasonableness of an allowance: (i) 50%
of the portfolio that is classified doubtful; (ii) 15% of the portfolio that is
classified substandard; and (iii) for the portions of the portfolio that have
not been classified (including loans designated special mention), estimated
credit losses over the upcoming twelve months based on facts and circumstances
available on the evaluation date. While the Policy Statement sets forth this
quantitative measure, such guidance is not intended as a "floor" or "ceiling."
Upon review of the Policy Statement, in 1994, the Bank reconsidered its policy
for establishing its
13
<PAGE>
allowance for loan losses and made certain adjustments to the model it uses in
order to make provisions to the allowance.
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period $4,438 $4,459 $3,274 $2,741 $3,102
Allowance acquired from
Seaboard 5,185 -- -- -- --
Provisions (credited) charged to
operations (265) 454 1,431 715 894
Loans charged-off:
Mortgage loans:
Single-family (159) (157) (278) (109) (91)
Multi-family (38) (174) (291) (5) (194)
Construction -- -- -- -- --
Commercial -- (291) (233) (167) (840)
Residential lots -- -- -- (4) (3)
Consumer loans (395) (166) (266) (167) (358)
------ ------ ------ ------ ------
Total (592) (788) (1,068) (452) (1,486)
Other charge-off (837) -- -- -- --
Recoveries:
Mortgage loans:
Single-family 11 21 162 24 161
Multi-family -- 58 333 63 2
Construction -- -- -- -- --
Commercial 1,657 158 218 73 10
Consumer loans 59 76 109 110 58
------ ------ ------ ------ ------
Total 1,727 313 822 270 231
------ ------ ------ ------ ------
Allowance at end of period $9,656 $4,438 $4,459 $3,274 $2,741
====== ====== ====== ====== ======
Allowance for loan losses to
total non-accruing loans at
end of period 378.67% 255.79% 275.93% 216.53% 74.97%
====== ====== ====== ====== ======
Allowance for loan losses
to total impaired loans
at end of period (1) 107.03% 105.09% 108.00% N/A N/A
====== ====== ====== ======= =======
Allowance for loan losses
to total loans held for
investment at end of period 1.55% 0.95% 1.06% 0.89% 0.64%
====== ====== ====== ======= =======
- -----------------------------
<FN>
(1) Since the data relating to impaired loans was not collected until
January 1, 1995, the date the Company adopted SFAS No. 114, as amended,
certain data for periods prior to such date is not available.
</FN>
</TABLE>
The Bank's model for calculating the minimum loan loss allowance applies
varying ratios to different types of loans, which are aggregated. However, the
Bank does not currently allocate its allowance for loan losses individually to
its various categories of loans.
14
<PAGE>
The other charge-off in 1996 recognizes a potential loss from a fraud
perpetrated upon the Bank, of which $137,000 was recovered in the first quarter
of 1997. Additional claims and recoveries are pending, and the Bank continues to
diligently pursue all areas of collection; however, there can be no assurance
that there will be additional recoveries.
In July 1996, the Bank acquired by deed in lieu of foreclosure certain
properties located in Williamsburg, Virginia in settlement of a previously
charged-off deficiency relating to three Williamsburg hotels sold in October
1994. The acquired property was subsequently sold for $3.3 million and settled
on September 30, 1996. After satisfying superior liens on the property and other
costs associated with the acquisition and sale, the Bank netted a loan loss
recovery of $1.4 million and a gain on sale of REO of $206,000. This sizable
recovery during 1996 more than offset normally determined adjustments to the
Bank's loan loss allowance and resulted in a net loan loss credit for 1996 of
$265,000.
As of December 31, 1996, the Bank's allowance for loan losses amounted
to 54.0% of its substandard loans and 378.7% of total non-accruing loans.
Based on facts and circumstances currently available to the Company,
management believes that the allowance for loan losses was adequate at December
31, 1996. However, there can be no assurances that additions to such allowance
will not be necessary in future periods, which would adversely affect the
Company's results of operations.
Other Classified Assets. Federal regulations require that each insured
savings association review the classification of its assets on a regular basis.
In addition, in connection with examinations of insured institutions, federal
examiners have authority to identify problem assets and, if appropriate, require
re-classification. There are three classifications for problem assets:
"substandard," "doubtful" and "loss." Substandard assets have one or more
defined weaknesses and have the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristics that
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that its continuance as an asset is not warranted. Another
category designated "special mention" also must be established and maintained
for assets which do not currently require classification as substandard,
doubtful or loss, but have potential weaknesses or risk characteristics that
could result in future problems.
At December 31, 1996, the Bank had $17.9 million of assets classified
substandard, and $135,000 classified as doubtful and $45,000 classified as loss.
In addition, at such date, $4.7 million were categorized as special mention.
Allowance for Losses on Real Estate Owned. In 1992, the Bank established
an allowance for losses on REO.
The following table sets forth the activity in the allowance for losses
on REO during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 33 $ -- $ 5,060 $ 386 $ --
Allowance acquired from
Seaboard 8 -- -- -- --
Provisions charged to operations 61 41 746 6,290 3,177
Losses charged-off (72) (11) (5,808) (1,701) (3,047)
Recoveries -- 3 2 85 256
---- ---- ------- ------- -------
Allowance at end of period $ 30 $ 33 $ -- $ 5,060 $ 386
==== ==== ======= ======= =======
</TABLE>
15
<PAGE>
The 1995 provision and $230,000 of the 1994 provision were made to
absorb periodic charges to the allowance for losses on REO necessary to reflect
the fair value of the Bank's REO. Substantially all the Bank's allowance for
losses on REO at December 31, 1993, were related to three hotel properties owned
by the Bank, which were sold during 1994. Additionally, $516,000 of the 1994
provision and the provisions during 1993 and 1992 were related to those same
hotel properties. The provision in 1994 reflected a final valuation upon the
sale of the hotel properties, while the provisions in 1993 reflect, to a large
extent, an outside valuation received by management of the Bank as well as sales
negotiations with respect to the hotels and, to a lesser extent, an OTS
examination in the fourth quarter of 1993 which resulted in the Bank making
provisions with respect to certain other REO properties. The provision in 1992
was due primarily to adjustments to the carrying values of the hotels upon the
Bank's consideration of the results of an OTS examination during the fourth
quarter of that year. See " - Non-Performing Assets."
Investments and Mortgage-Backed Securities
Investments. Federally-chartered savings institutions have authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and state and municipal
governments, certificates of deposit at federally-insured banks and savings
institutions, certain bankers' acceptances and Federal funds. Subject to various
restrictions, federally-chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally-chartered savings
institutions are otherwise authorized to make directly.
At December 31, 1996, investment securities totaled $30.7 million all of
which were classified as available-for-sale. At such date, the remaining
investment securities had a contractual maturity of between 1 month and 9.2
years, and the portfolio had a weighted average yield of 6.82%.
The following table sets forth information regarding the amortized cost
and estimated market value of the Company's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ---------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
obligations:
Held-to-maturity -- -- -- -- $18,414 $17,984
Available-for-sale $31,316 $30,742 $17,957 $18,025 -- --
Mutual Funds:
Available-for-sale -- -- 5,000 5,015 -- --
------- ------- ------- ------- ------- -------
$31,316 $30,742 $22,957 $23,040 $18,414 $17,984
======= ======= ======= ======= ======= =======
</TABLE>
Additional information regarding the Company's investments is discussed
in the "Financial Condition" section of Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Notes 3 and 4 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.
Mortgage-Backed Securities.The Bank maintains a significant portfolio of
mortgage-backed securities as a means of investing in housing-related mortgage
instruments without the costs associated
16
<PAGE>
with originating mortgage loans for portfolio retention and with limited credit
risk of default which arises in holding a portfolio of loans to maturity.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest in
a pool of single-family or multi-family mortgages. The principal and interest
payments on mortgage-backed securities are passed from the mortgage servicer,
through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Bank. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the FHLMC, the
Federal National Mortgage Association ("FNMA") and the GNMA. The Bank also
invests in certain privately issued, credit enhanced mortgage-backed securities
rated AAA or AA by national securities rating agencies.
The FHLMC, a public corporation chartered by the U.S. Government, issues
participation certificates backed principally by conventional mortgage loans.
The FHLMC guarantees the timely payment of interest and the ultimate return of
principal on participation certificates. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for mortgage loans. The FNMA guarantees the timely payment of principal and
interest on FNMA securities. FHLMC and FNMA securities are not backed by the
full faith and credit of the United States, but, because the FHLMC and the FNMA
are U.S. Government-sponsored enterprises, these securities are considered to be
among the highest quality investments with minimal credit risks. The GNMA is a
government agency within the Department of Housing and Urban Development which
is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs, which limit is currently $214,600. A number of
private institutions have also established their own home securitization
programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a specified range and have varying
maturities. The underlying pool of mortgages can be composed of either
fixed-rate or adjustable-rate loans. As a result, the risk characteristics of
the underlying pool of mortgages, (i.e., fixed-rate or adjustable rate) as well
as prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed, pass-through security thus approximates the life of the
underlying mortgages.
Mortgage-backed securities include regular and residual interests in
Collateralized Mortgage Obligations ("CMO"), including CMOs which qualify as a
Real Estate Mortgage Investment Conduit ("REMIC") under the Internal Revenue
Code of 1986, as amended ("Code") (CMOs and REMICs sometimes are referred to
collectively as "mortgage-related securities"). CMOs have been developed in
response to investor concerns regarding the uncertainty of cash flows associated
with the prepayment option of the underlying mortgagor and are typically issued
by governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. A CMO can be collateralized with
loans or by securities which are insured or guaranteed by the FNMA, the FHLMC or
the GNMA. In contrast to pass-through mortgage-backed securities, in which cash
flow is received pro rata by all security holders, the cash flow from the
mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By allocating
the principal and interest cash flows from the underlying collateral among the
separate CMO classes, different classes of bonds are created, each with its own
stated maturity, estimated average life, coupon rate and prepayment
characteristics.
The short-term classes of a CMO usually carry a lower coupon rate than
the longer term classes and, therefore, the interest differential cash flow on a
residual interest is greatest in the early years of the
17
<PAGE>
CMO. As the early coupon classes are extinguished, the residual cash flow
declines. Thus, the longer the lower coupon classes remain outstanding, the
greater the cash flow accruing to CMO residuals. Generally, as interest rates
decline, prepayments accelerate, the interest differential narrows, and the
future cash flow from the CMO declines. Conversely, as interest rates increase,
prepayments generally decrease, generating a larger future cash flow to the
residual class.
A senior-subordinated structure often is used with CMOs to provide
credit enhancement for securities which are backed by collateral which is not
guaranteed by the FNMA, FHLMC or GNMA. These structures divide mortgage pools
into two risk classes: a senior class and one or more subordinated classes. The
subordinated classes provide protection to the senior class. When cash flow is
impaired, debt service goes first to the holders of senior classes. In addition,
incoming cash flows also may go into a reserve fund to meet any future
shortfalls of cash flow to holders of senior classes. The holders of
subordinated classes may not receive any funds until the holders of senior
classes have been paid and, when appropriate, until a specified level of funds
has been contributed to the reserve fund.
Certain mortgage-related securities, including REMIC residuals, are
classified as "high-risk mortgage securities" under OTS Thrift Bulletin 52 ("TB
52"). Pursuant to TB 52, a savings institution such as the Bank generally may
only acquire high-risk mortgage securities, which are defined as any
mortgage-related security that at the time of purchase, or at any subsequent
date, meets any of the three tests set forth therein, to reduce its overall
interest-rate risk. An institution with strong capital and earnings and adequate
liquidity and that has a closely supervised trading department may acquire such
securities if they are reported as trading assets or available-for-sale at
market value. At December 31, 1996, the Bank had one mortgage-related security
designated as a high-risk mortgage security under TB 52. This security had a
carrying value of approximately $332,000 and was acquired by the Bank in the
acquisition of Seaboard.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which minimize credit risk. In addition, mortgage-backed securities
are more liquid than individual mortgage loans and may be used to collateralize
certain obligations of the Bank. At December 31, 1996, $291.4 million, or 41.5%,
of the Bank's mortgage-backed securities were pledged to secure various
obligations of the Bank. Mortgage-backed securities issued or guaranteed by the
FNMA or the FHLMC (except interest-only securities or the residual interests in
CMOs) are weighted at no more than 20.0% for risk-based capital purposes,
compared to a weight of 50.0% to 100.0% for residential loans. See "Regulation -
The Bank Regulatory Capital Requirements."
In addition to mortgage-backed securities issued by FNMA, FHLMC or GNMA,
commonly called agency securities, the Bank invests in highly rated, investment
grade, private label mortgage-backed securities structured in the form of a
REMIC. At December 31, 1996, included in the Company's aggregate total of $706.1
million mortgage-backed securities there were $168.5 million ($139.6 million
fixed-rate and $28.9 million adjustable-rate) in REMICs. Of this amount $147.4
million were rated AAA by at least two nationally recognized rating agencies.
The remaining $21.1 million were rated AA.
The Bank's mortgage-backed securities are classified as either
"held-to-maturity" or "available-for-sale" based upon the Bank's intent and
ability to hold such securities to maturity at the time of purchase, in
accordance with GAAP. At December 31, 1996, mortgage-backed securities (both
held-to-maturity and available-for-sale) totaled $706.1 million. At such date,
the held-to-maturity mortgage-backed securities totaled $141.0 million ($10.2
million adjustable-rate and $130.8 million fixed-rate), and the available-for
sale totaled $565.1 million ($390.9 million adjustable-rate and $174.2 million
fixed-rate). The Bank classified all mortgage-backed securities purchased during
1996 as available-for-sale, providing the Bank with increased asset and
liability management flexibility to react to yield curve and interest rate
changes. At December 31, 1996, the Company's mortgage-backed securities
available-for-sale had an unrealized gain of $2.3 million, net of taxes, which
was added to stockholders' equity at such date per
18
<PAGE>
SFAS No. 115. Higher interest rates will cause the carrying value of the
available-for-sale portfolio to be reduced, which will result in an adjustment
to stockholders' equity. Additional information on Life's mortgage-backed
securities portfolio may be found in Notes 3, 4 and 22 of the Notes to
Consolidated Financial Statements included in Item 8 hereof. The tables below
present the Bank's mortgage-backed securities on the basis of these
classifications, which are included in the Bank's Consolidated Financial
Statements. In accordance with SFAS No. 115, the mortgage-backed securities of
the Bank, which are held-to-maturity, are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts using a method which
approximates a level yield, while mortgage-backed securities available-for-sale
are carried at the current market value, net of taxes.
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- --------------------------- ---------------------------
Held to Available for Held to Available for Held to Available for
Maturity Sale Maturity Sale Maturity Sale
------------ ------------- ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 71,457 $179,930 $ 88,934 $169,961 $212,870 $ 47,735
FNMA 58,007 156,503 67,907 92,007 177,251 47,552
GNMA 1,485 64,631 1,738 3,538 2,089 3,581
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities 130,949 401,064 158,574 265,506 392,210 98,868
-------- -------- -------- -------- -------- --------
REMICs:
FHLMC 10,025 1,363 10,028 -- 10,034 --
FNMA -- 9,743 -- 10,612 -- 11,398
Private label -- 149,153 -- 114,607 -- 3,439
-------- -------- -------- -------- -------- --------
Total REMICs 10,025 160,259 10,028 125,219 10,034 14,837
-------- -------- -------- -------- -------- --------
Total mortgage-backed and
REMICs, net $140,974(1) $561,323(1) $168,602(2) $390,725(2) $402,244(3) $113,705(3)
======== ======== ======== ======== ======== ========
Total market value $141,269 $565,086 $169,195 $393,587 $388,252 $107,264
======== ======== ======== ======== ======== ========
<FN>
(1) At December 31, 1996, $165.2 million and $366.8 million of the Bank's
mortgage-backed securities had fixed rates and adjustable rates,
respectively, and $141.4 million and $28.9 million of the Bank's REMICs
had fixed rates and adjustable rates, respectively.
(2) At December 31, 1995, $219.5 million and $204.5 million of the Bank's
mortgage-backed securities had fixed rates and adjustable rates,
respectively, and $87.3 million and $48.1 million of the Bank's REMICs
had fixed rates and adjustable rates, respectively.
(3) At December 31, 1994, $299.0 million and $192.1 million of the Bank's
mortgage-backed securities had fixed rates and adjustable rates,
respectively, and $17.8 million and $7.0 million of the Bank's REMICs
had fixed rates and adjustable rates, respectively.
</FN>
</TABLE>
At December 31, 1996, the weighted average contractual maturity of the
Bank's mortgage-backed securities and REMICs was approximately 22 years. The
actual maturity of a mortgage-backed security is less than its stated maturity
due to prepayments of the underlying mortgages. At such date, the estimated
average life and duration of the Bank's mortgage-backed securities and REMICs
were 4.4 and 3.1 years, respectively. Prepayments that are faster than
anticipated may shorten the life of the security and could adversely affect its
yield to maturity. The yield is based upon the interest income and the
amortization of any premium or discount related to the mortgage-backed security.
In accordance with GAAP, premiums and discounts are amortized to provide a level
yield over the estimated lives of the mortgage-backed securities, which decrease
and increase interest income, respectively. The prepayment assumptions used to
determine the amortization period for premiums and discounts can significantly
affect the yield of the mortgage-backed security; therefore, these assumptions
are reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors,
19
<PAGE>
including the type of mortgages, the coupon rate, the age of mortgages, the
geographical location of the real estate collateralizing the mortgages and
general levels of market interest rates, the difference between the interest
rates on the underlying mortgages and the prevailing mortgage interest rates
generally is the most significant determinant of the rate of prepayments. During
periods of falling mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, the
Bank may be subject to reinvestment risk because, to the extent that the Bank's
mortgage-related securities amortize or prepay faster than anticipated, the Bank
may not be able to reinvest the proceeds of such repayments and prepayments at
comparable rates. The declining yields earned during recent periods is a direct
response to falling interest rates and accelerated prepayments.
In an effort to reduce the Bank's exposure to interest-rate risk, during
1994, 1995 and 1996, the Bank increased its investment in adjustable rate
mortgage-backed securities and REMICs. At December 31, 1996, of the Bank's
$706.1 million in mortgage-backed securities and REMICs, net, $401.1 million, or
56.8%, had adjustable rate features. As of December 31, 1996, $359.7 million of
the Bank's adjustable securities were backed by mortgages which adjust to a
margin over the one-year U.S. Treasury obligation adjusted to a CMT.
Additional information regarding the Company's mortgage-backed
securities is discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Notes 3 and 4 to the Consolidated
Financial Statements included in items 7 and 8 hereof.
Sources of Funds
General. The Company's principal source of funds for use in lending,
investments and for other general business purposes includes deposits,
borrowings from the FHLB of Atlanta and other sources, including securities sold
under agreements to repurchase ("Repos") and stockholders' equity. The Company
also derives funds from amortization and prepayments of outstanding loans and
mortgage-backed securities, from sales of loans and from maturing investment
securities. Loan repayments are a relatively stable source of funds, while
deposits inflows and outflows are significantly influenced by general interest
rates and money market conditions. The Company uses borrowings to supplement
deposits.
Deposits. The Bank's current deposit products include passbook accounts,
negotiable order of withdrawal ("NOW") accounts, money market deposit accounts,
certificates of deposit ranging in terms from 14 days to 10 years and
noninterest-bearing personal and business checking accounts. The Bank's deposit
products also include Individual Retirement Account ("IRA") certificates, Keogh
accounts and other retirement accounts.
The Bank's deposits are obtained from residents in its immediate market
area and, with respect to larger (over $95,000 certificates of deposit), from
depositors throughout the United States. The Bank attracts local deposit
accounts by offering a wide variety of accounts, competitive interest rates, and
convenient branch office locations and service hours. The Bank utilizes
traditional marketing methods to attract new customers and savings deposits,
including print media, radio and television advertising and direct mail. The
Bank also accepts a substantial amount of its deposits from out-of-state through
deposit brokers; however, the Bank does not actively solicit such funds nor does
it pay any brokerage fees in accepting such deposits.
The Bank has been competitive in the types of accounts and interest
rates it has offered on its deposit products, but does not necessarily seek to
match the highest rates paid by competing institutions. During 1996, deposits
increased by $125.2 million or 20.6%, including $66.8 million from the
acquisition of Seaboard. The overall increase in deposits was primarily due to
increases in certificates
20
<PAGE>
of deposit which totaled $578.9 million or 79.1% of the Bank's deposit portfolio
at December 31, 1996. During 1996, the majority of this increase was in
certificates of deposit with remaining maturities of less than one year.
Certificates of deposit with remaining maturities of one year or less increased
from 57.1% of the Bank's total certificates of deposit at December 31, 1994, to
64.1% of the Bank's total certificates of deposit at December 31, 1995 and to
69.2% at December 31, 1996. Additionally, the Bank's money market accounts
increased both in terms of dollars and as a percent of total deposits as a
result of the Bank's successful marketing campaign offering a tiered money
market account having rates highly competitive with money market funds. The Bank
intends to continue its efforts to attract certificates of deposit and checking
accounts as a principal source of funds for supporting its lending and
investment activities.
The following table sets forth certain information relating to the
Bank's deposits at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------
1996 (1) 1995 1994
---------------------------- ----------------------------- ----------------------------
Percent Percent Percent
of Total of Total of Total
Amount Deposits Amount Deposits Amount Deposits
------------ ------------ ------------ ------------ ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 29,496 4.03% $ 26,294 4.33% $ 23,445 3.98%
Money market accounts 68,704 9.38 34,025 5.60 39,274 6.68
Noninterest-bearing
checking accounts 2,557 0.35 1,403 0.23 909 0.16
-------- ------ -------- ------- -------- ------
Total demand deposits 100,757 13.76 61,722 10.16 63,628 10.82
-------- ------ -------- ------- -------- ------
Passbook savings
deposits 52,521 7.17 58,208 9.59 65,441 11.12
-------- ------ -------- ------- -------- ------
Certificates of deposit:
6 months or less 277,716 37.92 216,139 35.60 173,287 29.46
7-12 months 122,624 16.74 96,038 15.82 88,842 15.10
13-36 months 141,348 19.30 127,827 21.05 144,083 24.49
More than 36 months 37,189 5.08 47,205 7.78 52,981 9.01
-------- ------ -------- ------- -------- ------
Total certificates 578,877 79.05 487,209 80.25 459,193 78.06
-------- ------ -------- ------- -------- ------
Purchase accounting -
Seaboard 167 .02 N/A N/A
-------- ------ -------- --------
Total deposits $732,322 100.00% $607,139 100.00% $588,262 100.00%
======== ====== ======== ====== ======== ======
<FN>
- -----------------------------
(1) Includes deposits from the acquisition of Seaboard
</FN>
</TABLE>
The following table sets forth the activity in the Bank's deposits
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance $607,139 $588,262 $528,932
Deposits acquired from Seaboard 66,854 N/A N/A
Net increase (decrease)
before interest credited 35,291 (611) 43,610
Interest credited 23,038 19,488 15,720
-------- -------- --------
Net increase in deposits 125,183 18,877 59,330
-------- -------- --------
Ending balance $732,322 $607,139 $588,262
======== ======== ========
</TABLE>
21
<PAGE>
The following table sets forth, by various interest rate categories, the
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1995 1994
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
3.00% to 3.99% $ 68 $ 1,370 $ 36,262
4.00% to 4.99% 32,834 49,946 199,631
5.00% to 6.99% 521,509 401,781 186,033
7.00% to 8.99% 21,703 29,747 29,694
9.00% to 10.99% 2,763 4,365 7,562
11.00% and over -- -- 11
-------- -------- --------
$578,877 $487,209 $459,193
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of the Bank's
certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
Over Six Over One Over Two
Months Year Years
Six Months Through Through Through Over
and Less One Year Two Years Three Years Three Years
-------------- -------------- -------------- --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
3.00% to 3.99% $ 5 $ -- $ 62 $ -- $ 1
4.00% to 4.99% 21,546 9,993 1,140 155 --
5.00% to 6.99% 253,299 107,300 89,319 42,255 29,336
7.00% to 8.99% 2,229 5,331 1,286 5,005 7,852
9.00% to 10.99% 637 -- 1,448 678 --
-------- -------- ------- ------- -------
$277,716 $122,624 $93,255 $48,093 $37,189
======== ======== ======= ======= =======
</TABLE>
At December 31, 1996, the Bank had $84.0 million of certificates of
deposit in amounts of $100,000 or more, of which $24.0 million was scheduled to
mature in three months, $17.3 million was scheduled to mature in over three
months through six months, $15.7 million was scheduled to mature in over six
months through 12 months and $27.0 million was scheduled to mature in over 12
months.
Additional information regarding the Company's deposits is discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Note 10 to the Consolidated Financial Statements included in
Items 7 and 8 hereof.
Borrowings. The Company's borrowings are comprised of (i) advances from
the FHLB of Atlanta, which totaled $261.7 million at December 31, 1996; (ii)
Repos considered as borrowings, which totaled $259.0 million at December 31,
1996; and (iii) other borrowings, which totaled $5.2 million at December 31,
1996. The Company's borrowings are generally used to fund lending, investments
and other ordinary course of business activities.
The Bank may obtain advances from the FHLB of Atlanta upon the security
of the common stock it owns in that bank and certain of its residential mortgage
loans and securities, provided certain standards related to credit-worthiness
have been met. Such advances are made pursuant to several credit programs, each
of which has its own interest rate and range of maturities. From time to time
the Company also enters into agreements to sell securities under terms which
require it to repurchase the same or substantially similar securities by a
specified date. Repos are considered borrowings which are secured by the sold
securities. Historically, Repos were generally short-term (90 days or less) in
nature;
22
<PAGE>
however, longer-term (greater than 90 days up to three years) Repos have
recently become available, and the Company has utilized such in managing its
asset and liability structure. The Company continuously reviews alternative
sources of borrowings and in this regard has more recently increased its use of
advances from the FHLB of Atlanta relative to Repos due to the FHLB of Atlanta's
lower costing advances.
In addition to FHLB advances and Repos, the Company's borrowings at
December 31, 1996, include $5.2 million of a long-term CMO financing originated
in 1985, for $32.1 million through a wholly owned, single purpose finance
subsidiary of the Bank. Such obligation, which had an average rate of 11.6%
during the year ended December 31, 1996, is not due to mature until 2016, but,
due to significant prepayments, the balance has been amortized much more rapidly
than initially anticipated.
Additional information regarding the Company's borrowings, including
maturities, is discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Notes 11, 12 and 13 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.
The following table sets forth certain information relating to the
Company's borrowings at the dates or for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------- -------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances:
Maximum balance $261,711 $185,336 $196,727
Average balance $161,646 $166,725 $180,741
Balance at end of period $261,711 $148,636 $174,977
Weighted average rate:
at end of period 5.67% 6.16% 6.16%
during the period 6.14% 6.11% 5.04%
Repurchase agreements:
Maximum balance $361,145 $195,000 $ 65,468
Average balance $258,417 $114,058 $ 11,475
Balance at end of period $259,000 $162,000 $ 65,468
Weighted average rate:
at end of period 5.60% 6.02% 6.03%
during the period 5.67% 6.17% 6.45%
Other borrowings:
Maximum balance $ 6,518 $ 7,015 $ 9,590
Average balance $ 5,869 $ 6,807 $ 8,660
Balance at end of period $ 5,227 $ 6,518 $ 7,744
Weighted average rate:
at end of period 11.63% 11.64% 11.65%
during the period 11.63% 11.63% 11.61%
</TABLE>
Stockholders' Equity. Stockholders' equity provides a source of
permanent funding, allows for future growth and provides the Company with a
cushion to withstand unforeseen, adverse developments. At December 31, 1996,
stockholders' equity totaled $150.9 million or 10.6% of total assets.
Additional information regarding the Company's stockholders' equity is
discussed in the "Financial Condition" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations and in Note 4 to the
Consolidated Financial Statements included in Items 7 and 8 hereof.
23
<PAGE>
Subsidiaries
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or in secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of December 31, 1996, the Bank was authorized to invest up to approximately
$28.4 million in the stock of, or in loans to, service corporations. As of
December 31, 1996, the net book value of the Bank's investment in stock,
unsecured loans, and conforming loans in its service corporations was $2.5
million.
The Bank has five active, wholly-owned subsidiaries. A brief description
of the activities of these five subsidiaries is set forth as follows.
The First Colony Service Corporation. The First Colony Service
Corporation ("First Colony") engages in activities permissible for service
corporations under OTS regulations. First Colony acts as trustee for the Bank's
secured lending activity. As of December 31, 1996, First Colony's total assets
amounted to $124,000.
Life Financial Services Corporation. Life Financial Services Corporation
("Life Financial") was incorporated in November 1993, for the purpose of
offering the Bank's accountholders and the general public a full range of
non-FDIC insured investment products including annuities, insurance, general
securities, mutual funds and financial planning services. Life Financial is a
duly licensed insurance agent/agency under the laws of the Commonwealth of
Virginia. As of December 31, 1996, Life Financial's total assets amounted to
$433,000.
Life Capital Corporation. Life Capital Corporation ("Life Capital") is a
single-purpose finance subsidiary of the Bank. During 1985, Life Capital issued
$32.1 million of debt securities secured principally by mortgage-backed
securities. At December 31, 1996, $5.2 million of such long-term debt remained
outstanding. See "- Sources of Funds - Borrowings." As of December 31, 1996,
Life Capital's total assets amounted to $7.5 million.
Life Products Corp. The activities of Life Products Corp. ("Life
Products") consisted of owning and operating three hotel properties located in
Williamsburg, Virginia, each acquired by the Bank through foreclosure, which
were sold in 1994. As of December 31, 1996, Life Products' total assets amounted
to $450. See "- Asset Quality - Non-Performing Assets."
Seaboard Equity Corporation. Seaboard Equity Corporation ("Seaboard
Equity") engages in activities permissible for service corporations under OTS
regulations and acts as trustee on certain of the loans acquired from Seaboard.
At December 31, 1996, Seaboard Equity's total assets amounted to $575.
Employees
The Company and the Bank (including the Bank's wholly-owned
subsidiaries) had an aggregate of 227 full-time employees and 14 part-time
employees as of December 31, 1996. None of these employees is represented by a
collective bargaining agreement. The Company and the Bank each believes that it
enjoys excellent relations with its personnel.
Competition
The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings associations, credit unions and commercial banks located
in the Hampton Roads area of Virginia, including many large financial
institutions which have greater financial and marketing resources available to
them. In addition, during
24
<PAGE>
times of high interest rates, the Bank has faced additional significant
competition for investors' funds from short-term money market securities, mutual
funds and other corporate and government securities. The ability of the Bank to
attract and retain savings deposits depends on its ability to generally provide
a rate of return, liquidity and risk comparable to that offered by competing
investment opportunities.
The Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks and mortgage
banking companies. The Bank competes for loans principally through the interest
rates and loan fees it charges, the efficiency and quality of services it
provides borrowers and the convenient locations of its branch office network.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
Regulation
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
The Company. The Company is a registered savings and loan holding
company and is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company with only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk such that
the liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- The Bank - Qualified
Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the regulatory authority to approve
emergency thrift acquisitions and where each subsidiary savings association
meets the QTL test, as set forth below, the activities of the Company and any of
its subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. No multiple savings and
loan holding company or subsidiary thereof, which is not a savings association,
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings association; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings association; (iv) holding or managing properties used
or occupied by a subsidiary savings association; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987, to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation
25
<PAGE>
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. The activities described in (i) through (vi) above may only
be engaged in after giving the OTS prior notice and being informed that the OTS
does not object to such activities. In addition, the activities described in
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act ("FRA"). An affiliate of a savings association is any
company or entity which controls, is controlled by or is under common control
with the savings association. In a holding company context, the parent holding
company of a savings association (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the FRA place restrictions on
loans to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans-to-one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1996, the Bank was in compliance with the above
restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered
26
<PAGE>
associations or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings associations).
The FRB may approve an application by a bank holding company to acquire
control of a savings association. A bank holding company that controls a savings
association may merge or consolidate the assets and liabilities of the savings
association with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the Bank Insurance Fund ("BIF") with the approval of the
appropriate federal banking agency and the FRB. As a result of these amended
provisions, there have been a number of acquisitions of savings associations by
bank holding companies in recent years.
The Bank. The OTS has extensive regulatory authority over the operations
of savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority over all savings associations and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
Insurance of Accounts. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, and are backed by the full faith and
credit of the United States Government. As insurer, the FDIC is authorized to
conduct examinations of, and to require reporting by, FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious threat to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
On September 30, 1996, the President signed into law the Omnibus
Consolidated Appropriations Act. Part of this act, the Deposit Insurance Funds
Act of 1996 ("BIF/SAIF Legislation"), provides for, among other things, the
resolution of the FDIC premium disparity between BIF and SAIF insured financial
institutions. Prior to the legislation, most insured depository institutions
holding BIF-assessable deposits paid the statutory minimum of $2,000 for deposit
insurance while most insured depository institutions with SAIF-assessable
deposits, such as the Bank, paid the statutory minimum of 23 basis points (100
basis points being equal to 1%).
The BIF/SAIF Legislation required a one-time special assessment to
recapitalize the SAIF. The assessment, based on the amount of SAIF-assessable
deposits held by an institution as of March 31, 1995, was effective on September
30, 1996, and, in accordance with final rules adopted by the FDIC, was paid
27
<PAGE>
in November 1996. The FDIC determined that, in order to fully capitalize the
SAIF to statutorily mandated levels, all SAIF insured depository institutions
(except certain "weak institutions") were assessed 65.7 basis points on
SAIF-assessable deposits as of March 31, 1995. If an institution had merged with
or acquired another institution since March 31, 1995, it was required to add to
its special assessment base the March 31, 1995 assessable deposits of the
institution that was acquired.
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") previously discussed the financial reporting issues
relating to a special assessment, and, in November 1995, indicated that
institutions with SAIF-assessable deposits should accrue the liability when the
legislation is enacted and the related charge should be reported as a component
of operating expenses in the period that includes the enactment date. The EITF
further determined that the charge should not be reported as an extraordinary
item.
Consistent with the BIF/SAIF Legislation, the Bank's pro-rata one-time
special assessment to recapitalize the SAIF was $4.4 million. In conformity with
the applicable FASB guidelines, the Bank accrued this liability on September 30,
1996, resulting in the additional one-time increase in FDIC premiums, and paid
the assessment in November 1996.
Effective January 1, 1997, the BIF/SAIF Legislation requires that SAIF
members have the same risk-based assessment schedule as BIF members, ranging
from 0 basis points for "well-capitalized institutions" to 27 basis points for
"weak institutions." Additionally, the legislation provides for a sharing
formula to meet the Financing Corporation bond obligation ("FICO Bonds")1
between members of the SAIF and the BIF. Beginning January 1, 1997, FICO Bond
assessments of 6.4 and 1.3 basis points will be added to any regular premium for
SAIF-assessable institutions and BIF-assessable institutions, respectively,
until December 31, 1999. Thereafter, about 2.4 basis points will be added to
regular premium assessments for all insured depositories, achieving full
pro-rata FICO sharing. The BIF/SAIF Legislation also provides for the
conditional merger of the BIF and the SAIF no earlier than January 1, 1999. When
the funds are merged, the FICO Bond premium will be equal for all members of the
new fund.
As a "well capitalized institution", the Bank previously paid the lowest
SAIF insurance premium rate of 23 basis points on insured deposits for the
fourth quarter of 1996. Since the SAIF became fully capitalized as of October 1,
1996, the regular assessment rate for SAIF-member institutions was lowered
retroactively to that date. Until January 1, 1997, FICO payments could be made
only from assessments on SAIF-member institutions; therefore, during the fourth
quarter of 1996 the SAIF premium assessment should have been only the amount
necessary to cover the FICO obligations. Overpayment of fourth quarter FDIC
premiums (currently estimated at approximately 1.25 basis points, or $88,300 for
the Bank) will be refunded or credited toward future FDIC insurance premiums.
Beginning January 1, 1997, unless the base rate for "well capitalized
institutions" is modified, the Bank's FDIC premium should be 6.4 basis points
(the FICO Bond obligation). Based on deposit levels at December 31, 1996, this
will reduce the Bank's annual premium assessment by approximately $1.2 million.
The BIF/SAIF Legislation provides for the conditional merger of the BIF
and the SAIF on January 1, 1999, depending upon the outcome of re-chartering
issues associated with the legislation. By March 31, 1997, the Secretary of the
Treasury is required to conduct a study and prepare a report to Congress
addressing all issues which the Secretary considers relevant with respect to the
development of
- -----------------------------
1 FICO Bonds were issued in an attempt undertaken between 1987 and 1989 to
provide funds for the ailing Federal Savings and Loan Insurance Corporation
("FSLIC") without a direct taxpayer expense. Since the establishment of the SAIF
in 1989, a portion of the SAIF premiums has been earmarked to satisfy the $780
million in annual interest obligations on FICO Bonds, interest that continues
until 2019.
28
<PAGE>
a common charter for all insured depository institutions and the abolition of
separate and distinct charters between banks and savings institutions.
Regulatory Capital Requirements. Federally insured savings associations
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings associations. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
Current OTS capital standards require savings associations to satisfy
three different capital requirements. Under these standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8.0% of
"risk-weighted" assets. For purposes of the regulation, core capital generally
consists of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets, with only a limited exception
for purchased mortgage servicing rights ("PMSRs"). The Bank had no PMSRs at
December 31, 1996. Both core and tangible capital are further reduced by an
amount equal to a savings association's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). At December 31, 1996, the Bank had no investment in
subsidiaries which was impermissible and required to be deducted from its
capital calculation. See Note 14 of the Notes to Consolidated Financial
Statements included in Item 8 hereof.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital does not exceed the savings association's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-accruing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities). Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the following
generally are not limited: taxes paid in prior carryback years and future
reversals of existing taxable temporary differences. To the extent that the
realization of deferred tax assets depends on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. At December 31,
1996, the Bank had $64,000 of net deferred tax assets under SFAS No. 109
included in the Bank's other assets. See Note 16 of the Notes to Consolidated
Financial Statements included in Item 8 hereof.
29
<PAGE>
Effective November 28, 1994, the OTS revised its interim policy issued
in August 1993, under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS policy, savings institutions
must value securities available-for-sale at amortized cost for regulatory
capital purposes. This means that in computing regulatory capital, savings
institutions should add back any unrealized losses and deduct any unrealized
gains, net of income taxes, on securities reported as a separate component of
GAAP capital. The Bank adopted SFAS No. 115 on January 1, 1994. At December 31,
1996, the application of SFAS No. 115 resulted in a net increase in retained
earnings of $2.0 million ($3.2 million net of income tax of $1.2 million) on
mortgage-backed securities available-for-sale.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest-rate risk
will be subject to a deduction of its interest-rate risk component from total
capital for purposes of calculating risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. An institution with a greater
than "normal" interest-rate risk is defined as an institution that would suffer
a loss of net portfolio value exceeding 2.0% of the estimated market value of
its assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest-rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest-rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest-rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest-rate risk and the effective
date of each quarter's interest-rate risk component. However, in October 1994,
the Director of the OTS indicated that it would waive the capital deductions for
institutions with a greater than "normal" risk until the OTS publishes an
appeals process. The OTS has indicated that no savings institution will be
required to deduct capital for interest-rate risk until further notice. In any
event, management of the Bank does not believe that the OTS' adoption of an
interest-rate risk component to the risk-based capital requirement will
adversely affect the Bank's regulatory capital position.
30
<PAGE>
The following is a reconciliation of the Bank's equity determined in
accordance with GAAP to the four components of regulatory capital at December
31, 1996.
<TABLE>
<CAPTION>
Tier 1
Equity Tangible Core Risk-Based Risk-Based
Capital Capital Capital Capital Capital
------------ ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Stockholders' equity,
substantially $ 127,844 $ 127,844 $ 127,844 $127,844 $127,844
restricted
Unrealized gain on securities
available-for-sale, net of tax (1,968) (1,968) (1,968) (1,968) (1,968)
---------- ---------- ---------- -------- --------
Adjusted GAAP capital $ 125,876 125,876 125,876 125,876 125,876
==========
Unallowable land loans -- -- -- (787)
Intangible assets (4,821) (4,821) (4,821) (4,821)
General valuation allowances -- -- -- 5,973
---------- ---------- -------- --------
Regulatory capital measure 121,055 121,055 121,055 126,241
Minimum capital required 21,195 42,390 23,570 47,139
---------- ---------- -------- --------
Excess $ 99,860 $ 78,665 $ 97,485 $ 79,102
========== ========== ======== ========
Total assets per Thrift Report $1,418,659
Total risk-weighted assets ========== $589,241 $589,241
======== ========
Total tangible assets $1,412,973 $1,412,973
========== ==========
Capital ratio 8.9% 8.6% 8.6% 20.5% 21.4%
Regulatory capital category:
Well capitalized, equal
to or greater than N/A 5.0% 6.0% 10.0%
---------- ---------- -------- --------
Excess N/A 3.6% 14.5% 11.4%
========== ========== ======== ========
</TABLE>
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions.
Prompt Corrective Action. Under Section 38 of the FDIA as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. In early September 1992, the federal
banking agencies, including the OTS, adopted substantially similar regulations
which are intended to implement Section 38 of the FDIA. These regulations became
effective December 19, 1992. Under the regulations, 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 of 6.0% or more, has a Tier I
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 risk-based capital ratio of 4.0% or more and a
Tier I 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 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a Tier I leverage capital
ratio that is less than 4.0% (3.0% under 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
Tier I 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%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which a federal banking
agency may
31
<PAGE>
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). At December 31, 1996, the Bank was
in the "well capitalized" category.
Safety and Soundness. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating to
(i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest-rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be appropriate.
The compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss. In addition, each federal banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality, earnings and stock valuation as the agency determines to be
appropriate. Effective August 9, 1995, the federal banking agencies, including
the OTS, implemented final rules and guidelines concerning standards for safety
and soundness required to be prescribed by regulation pursuant to Section 39 of
the FDIA. In general, the standards relate to (1) operational and managerial
matters; (2) asset quality and earnings; and (3) compensation. The operational
and managerial standards cover (a) internal controls and information systems,
(b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e)
interest rate exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the asset quality and earnings standards, the Savings Bank would
be required to establish and maintain systems to (i) identify problem assets and
prevent deterioration in those assets, and (ii) evaluate and monitor earnings
and ensure that earnings are sufficient to maintain adequate capital reserves.
Finally, the compensation standard states that compensation will be considered
excessive if it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. Effective October 1, 1996, the
federal banking agencies also adopted quality and earnings standards. If a
savings institution fails to meet any of the standards promulgated by
regulation, then such institution will be required to submit a plan within 30
days to the OTS specifying the steps it will take to correct the deficiency. In
the event that a savings institution fails to submit or fails in any material
respect to implement a compliance plan within the time allowed by the federal
banking agency, Section 39 of the FDIA provides that the OTS must order the
institution to correct the deficiency and may (1) restrict asset growth; (2)
require the savings institution to increase its ratio of tangible equity to
assets; (3) restrict the rates of interest that the savings institution may pay;
or (4) take any other action that would better carry out the purpose of prompt
corrective action. The Bank believes that it has been and will continue to be in
compliance with each of the standards as they have been adopted by the OTS.
Brokered Deposits. The FDIC has promulgated regulations implementing
limitations on brokered deposits pursuant to FDICIA. Under the regulations,
well-capitalized institutions are subject to no brokered deposit limitations,
while adequately capitalized institutions are able to accept, renew or roll over
brokered deposits only (i) with a waiver from the FDIC, and (ii) subject to the
limitation that they do not pay an effective yield on any such deposit which
exceeds by more than (a) 75 basis points the effective yield paid on deposits of
comparable size and maturity in such institution's normal market area for
deposits accepted in its normal market area, or (b) by 120 percent for retail
deposits and 130 percent for wholesale deposits, respectively, of the current
yield on comparable maturity U.S. treasury obligations for deposits accepted
outside the institution's normal market area. Undercapitalized institutions are
not permitted to accept brokered deposits and may not solicit deposits by
offering an effective yield that exceeds by more than 75 basis points the
prevailing effective yields on insured deposits of comparable maturity in the
institution's normal market area or in the market area in which such deposits
are being solicited. At December 31, 1996, the Bank was a well-capitalized
institution and was not subject to restrictions on brokered deposits. See
"Business - Sources of Funds - Deposits."
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable
32
<PAGE>
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. At the
present time, the required minimum liquid asset ratio is 5%. Additionally,
current regulations require that short-term liquid assets must continue at least
1% of the average daily balance of net withdrawable accounts and current
borrowings. The Bank, as a component of its overall asset and liability
management strategy, maintains qualifying liquid assets at levels which exceed
regulatory requirements and at December 31, 1996, had a total regulatory
liquidity of 9.2% and a short-term regulatory liquidity of 1.1%.
Qualified Thrift Lender Test. Under legislation adopted by Congress in
1996, a savings association can comply with the QTL test by either meeting the
QTL test set forth in the Home Owners' Loan Act, as amended ("HOLA") and
implementing regulations or qualifying as a domestic building and loan
association as defined in the Code. A savings association that does not comply
with the QTL test must either convert to a bank charter or comply with the
following restrictions on its operations: (i) the 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 association shall be restricted to those of a national bank; (iii)
the association shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the association ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
The QTL test set forth in the HOLA requires that Qualified Thrift
Investments ("QTIs") represent 65% of portfolio assets on a monthly average
basis in nine out of every 12 months. Portfolio assets are defined as total
assets less intangibles, property used by a savings association in its business
and liquidity investments in an amount not exceeding 20% of assets. Generally,
QTIs are residential housing related assets. The 1996 amendments allow small
business loans, credit card loans, student loans and loans for personal, family
and household purposes to be included without limitation as qualified
investments. At December 31, 1996, 95.1% of the Bank's assets were invested in
QTIs which exceeded the percentage required to qualify the Bank under the QTL
test.
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval. See "- Regulatory Capital Requirements."
33
<PAGE>
Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions during any calendar year up to 75% of net income over
the most recent four-quarter period.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association (a Tier 3 association is an association that does
not meet current minimum capital requirements or has been notified by the OTS
that it will be treated as a Tier 3 association because it is in need of more
than normal supervision and, consequently, a Tier 3 association cannot make any
capital distribution without obtaining prior OTS approval) as a result of such a
determination. The Bank currently is a Tier 1 institution for purposes of the
regulation dealing with capital distributions.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, institutions
would only be permitted to make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined under "- Prompt Corrective Action" above. Because the
Bank is a subsidiary of a holding company, the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital distribution. The
Bank does not believe that the proposal will adversely affect its ability to
make capital distributions if it is adopted substantially as proposed.
OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.
Loans-to-One Borrower. The permissible amount of loans-to-one borrower
generally follows the national bank standard for all loans made by savings
institutions. The national bank standard generally does not permit loans-to-one
borrower to exceed the greater of $500,000 or 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities. For information about the largest borrowers from the
Bank, see "Business - Lending Activities - Loans-to-One Borrower Limitations."
Classified Assets. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets, with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital up to certain amounts, while
specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree
34
<PAGE>
with an insured institution's classifications and amounts reserved. See
"Business - Asset Quality - Other Classified Assets."
Community Reinvestment. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. Public disclosure of an institution's CRA
rating is required, and the OTS is required to provide a written evaluation of
an institution's CRA performance utilizing a four tiered descriptive rating
system. The Bank received an "outstanding" rating as a result of its last
evaluation in June 1996.
Nationwide Banking. The Bank may face additional competition from
commercial banks headquartered outside of the Commonwealth of Virginia as a
result of the enactment of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, which becomes fully effective on June 1, 1997, and which
will allow banks and bank holding companies headquartered outside of Virginia to
enter the Bank's market through acquisition, merger or de novo branching. For
further information about the Bank's competition, see "Business - Competition."
Policy Statement on Nationwide Branching. Currently, OTS regulations
permit nationwide branching to the extent allowed by federal statute which
generally permits a federally chartered savings association to establish branch
offices outside of its home state if the association meets the domestic building
and loan test in Section 7701(a)(19) of the Code or the asset composition test
of subparagraph (c) of that section, and if, with respect to each state outside
of its home state where the association has established branches, the branches,
taken alone, also satisfy one of the two tax tests. An association seeking to
take advantage of this authority would have to have a branching application
approved by the OTS, which would consider the regulatory capital of the
association and its record under the CRA, as amended, among other things.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers a home financing
credit function for 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 Bank 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 or 5% of its advances from the FHLB of Atlanta,
whichever is greater. At December 31, 1996, the Bank had $13.1 million in FHLB
stock, which was in compliance with this requirement.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW checking
accounts) and non-personal time deposits. At December 31, 1996, the Bank was in
compliance with applicable requirements. However, because required reserves must
be maintained in the form of vault cash or a noninterest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.
35
<PAGE>
Federal Taxation
General. The Company and the Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Bank.
Fiscal Year. The Company and the Bank and its subsidiaries file a
consolidated federal income tax return on a calendar year basis.
Method of Accounting. The Bank maintains its books and records for federal
income tax purposes using the accrual method of accounting. The accrual method
of accounting, for income tax purposes, generally requires that items of income
be recognized when all events have occurred that establish the right to receive
the income and the amount of income can be determined with reasonable accuracy,
and that items of expense be deducted at the later of (i) the time when all
events have occurred that establish the liability to pay the expense and the
amount of such liability can be determined with reasonable accuracy or (ii) the
time when economic performance with respect to the item of expense has occurred.
Bad Debt Reserves. On August 20, 1996, as part of the Small Business Job
Protection Act of 1996 ("SBJPA"), Congress enacted legislation which, among
other things, substantially changed the method savings institutions use to
compute deductions for bad debt. Since 1952, savings institutions have received
special tax treatment with respect to calculating deductions for bad debt
reserves. Generally, most businesses compute bad debt deductions by using the
specific charge-off method, which allows a taxpayer to deduct the amount of any
debt that becomes wholly or partially worthless during the year. Under previous
law, a qualified savings institution, such as the Bank, could elect to use one
of two reserve methods of accounting, -- the experience method or the percentage
of taxable income method. To qualify, 60% of a savings institution's assets had
to consist of "qualifying assets" such as cash, government obligations, or loans
secured by residential real property. If a savings institution used the reserve
method, it was required to establish and maintain a reserve for bad debts and
charge actual losses against the reserve. Regardless of whether a savings
institution experienced actual losses, it was allowed to deduct annual additions
to its bad debt reserve that were computed by using either the percentage of
taxable income method or the experience method. A savings institution's reserve,
however, was subject to recapture if it converted to a commercial bank, was
acquired by a commercial bank, or failed to satisfy the 60% qualified asset
test. The SBJPA prohibits the continued use of the percentage of taxable income
method for all savings institutions. While savings institutions with less than
$500 million in assets may still use the experience method, all others will be
required to use the specific charge-off method.
Additionally, the SBJPA changes the law regarding the recapture of bad
debt reserves accumulated before 1988 and requires all savings institutions to
recapture their post-1987 reserves. Reserves accumulated after 1987 must be
restored to taxable income ratably over a six-year period starting after
December 31, 1995, unless the institution meets a residential loan requirement,
in which case the recapture may be suspended on a per annum basis for up to two
years. A savings institution with more than $500 million in assets, such as the
Bank, is generally required to recapture its entire post-1987 additions to its
bad debt reserve. The Bank has determined that approximately $1.4 million of
post-1987 tax reserves are subject to recapture. Since the Bank previously
established a deferred tax liability corresponding to its post-1987 tax
reserves, the effects of the recapture are not material to the Bank's financial
condition or results of operations. These new recapture provisions make it
substantially easier for savings institutions to convert to a commercial bank
charter, diversify their assets, or merge into a commercial bank.
The SBJPA also repeals certain other provisions in present tax law
applicable only to savings institutions, including special rules applicable to
foreclosures; a reduction in the dividends received deduction; the ability of a
savings institution to use net operating losses to offset its income from a
36
<PAGE>
residual interest in a REMIC; and the denial of a portion of certain tax credits
to a savings institution. The Bank has not determined what effect, if any, these
changes may have on its financial condition or results of operations.
Distributions. While the Bank maintains a bad debt reserve, if it were to
distribute cash or property to its sole stockholder having a total fair market
value in excess of its accumulated tax-paid earnings and profits, or were to
distribute cash or property to its stockholder in redemption of its stock, the
Bank would generally be required to recognize as income an amount which, when
reduced by the amount of federal income tax that would be attributable to the
inclusion of such amount in income, is equal to the lesser of: (i) the amount of
the distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Bank with respect to qualifying real property loans (to the
extent that additions to such reserve exceed the additions that would be
permitted under the experience method) and (b) the amount of the Bank's
supplemental bad debt reserve.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after August 8, 1986,) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses). Net operating losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.
Audit by Internal Revenue Service. The Bank's consolidated federal income
tax returns for taxable years through December 31, 1990, have been closed for
the purpose of correct examination by the Internal Revenue Service.
State Taxation
The Commonwealth of Virginia imposes a tax at the rate of 6.0% on the
"Virginia taxable income" of the Bank and the Company. Virginia taxable income
is equal to federal taxable income with certain adjustments. Significant
modifications include the subtraction from federal taxable income of interest or
dividends on obligations or securities of the United States that are exempt from
state income taxes.
37
<PAGE>
Item 2. Properties
The following table sets forth certain information relating to the
Company's offices at December 31, 1996.
<TABLE>
<CAPTION>
Net Book Value of
Property and
Leasehold
Owned or Improvements at Deposits at
Location Leased December 31, 1996 December 31, 1996
- -------------------------------- --------- ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Main Office:
109 East Main Street Owned (1) $ 6,728 $142,606
Norfolk, Virginia 23510
Branch Offices:
7420 Granby Street Owned 358 88,102
Norfolk, Virginia 23505
944 Independence Boulevard Owned 617 57,124
Virginia Beach, Virginia 23455
3225 High Street Owned 467 48,262
Portsmouth, Virginia 23707
6056 East Indian River Road Owned 136 44,536
Virginia Beach, Virginia 23462
Military Circle Shopping Center Owned 206 39,182
East Ring Road
Norfolk, Virginia 23502
213 Battlefield Boulevard, South Owned 44 38,683
Chesapeake, Virginia 23320
3921 Poplar Hill Road Owned 153 37,153
Chesapeake, Virginia 23321
2336 East Little Creek Road Owned (2) 29 34,010
Norfolk, Virginia 23518
2008 Cromwell Drive Owned 199 33,903
Norfolk, Virginia 23509
1316 North Great Neck Road Owned (3) 116 30,697
Virginia Beach, Virginia 23454
501 S. Independence Boulevard Owned 730 27,284
Virginia Beach, Virginia 23452
6201 Portsmouth Boulevard Owned 182 25,276
Portsmouth, Virginia 23701
728 West 21st Street Leased (4) 6 23,107
Norfolk, Virginia 23517
(Footnotes on following page)
38
<PAGE>
3801 Pacific Avenue Owned $ 208 $ 14,966
Virginia Beach, Virginia 23451
330 West Constance Road Owned 507 13,587
Suffolk, Virginia 23434
601 Lynnhaven Parkway Owned 418 13,427
Virginia Beach, Virginia 23452
1400 Kempsville Road Leased (5) 28 7,673
Chesapeake, Virginia 23320
4530 East Virginia Beach Boulevard Owned (6) 2,368 7,327
Norfolk, Virginia 23502
2089 General Booth Boulevard Owned 273 5,417
Virginia Beach, Virginia
23454-5801
Other Properties:
120 East Main Street Owned 1,809 N/A
------- -------
Norfolk, Virginia 23510
$15,582 $732,322
======= ========
<FN>
- -----------------------------
(1) Building is an eight-story office building with Bank operations occupying
two stories. Approximately 70% of the space currently is leased and the
Bank anticipates entering into additional leases within the next few
months.
(2) The branch office building is owned by the Bank and the land is leased.
The land lease expires in September 2000.
(3) The branch office building is owned by the Bank and the land is leased.
The land lease expires in March 2008; the Bank has options through March
2028.
(4) Lease expires in December 1999; the Bank has options through December
2019.
(5) Lease expires in March 2001; the Bank has options through March 2011.
(6) Building also serves as the Bank's operations center.
</FN>
</TABLE>
39
<PAGE>
Item 3. Legal Proceedings.
The Company and the Bank are involved in routine legal proceedings
occurring in the ordinary course of business which, in the aggregate, are
believed by management to be immaterial to the financial condition of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information required herein is incorporated by reference from page 64
of the Registrant's 1996 Annual Report to Stockholders ("Annual Report").
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from the
table on page 5 of the Registrant's 1996 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required herein is incorporated by reference from pages 6
through 22 of the Registrant's 1996 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
23 through 62 of the Registrant's 1996 Annual Report.
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference from pages 4
to 7 of the Registrant's Proxy Statement dated March 17, 1997, ("Proxy
Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages 8
through 16 of the Registrant's Proxy Statement.
40
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages 2
and 3 of the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference to pages 13
and 14 of the Registrant's Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. Financial Statements.
The following financial statements are filed as part of this report and
are incorporated herein by reference from the Registrant's 1996 Annual
Report.
<TABLE>
<CAPTION>
Annual Report
Page Number
<S> <C>
Index to Consolidated Financial Statements:
Report of Independent Auditor....................................................... 23
Consolidated Balance Sheets as of December 31, 1996 and 1995........................ 24
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994.................................................. 25
Consolidated Statement of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994.................................. 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.................................................. 27 and 28
Notes to Consolidated Financial Statements.......................................... 29 through 62
</TABLE>
2. Supplementary Data and Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are omitted because
they are not applicable or the required information is included in the
Consolidated Financial Statements or notes thereto.
41
<PAGE>
3. Exhibits required by Item 601 of Regulation S-K.
No. Description
- ---------- ---------------------------------------------------------------
The following such Exhibits are filed as part of this Form 10-K and
attached hereto as Exhibits, and this list includes the Exhibit Index:
13 1996 Annual Report to Stockholders
23 Consent of Edmondson, LedBetter & Ballard, L.L.P. independent
auditor to the Company
27 Financial Data Schedule
The following such Exhibits are filed as part of this Form 10-K and are
incorporated herein by reference:
3.1 Articles of Incorporation of Life Bancorp, Inc. *
3.2 Bylaws of Life Bancorp, Inc. *
10.1 Life Bancorp, Inc. Employee Stock Ownership Plan and Trust 1/ **
10.2 Employment Agreement among the Registrant, Life Savings Bank,
FSB and Edward E. Cunningham 1/ **
10.3 Employment Agreement among the Registrant, Life Savings Bank,
FSB and Tollie W. Rich, Jr. 1/ **
10.4 Severance Agreement among the Registrant, Life Savings Bank,
FSB and Nelson R. Arnold (representative of similar agreements
entered into with T. Frank Clements, Ralph T. Dempsey, Jr.,
Emory J. Dunning, Jr. and Edward M. Locke) 1/ **
10.5 1982 Deferred Compensation Plan, as amended and restated 1/ **
10.6 1991 Deferred Compensation Plan, as amended and restated 1/ **
10.7 Directors' Retirement Plan 1/ *
10.8 Consulting Agreement by and among Life Savings Bank, FSB and
William J. Fanney 1/ **
10.9 Life Bancorp, Inc. 1995 Stock Option Plan, as amended 1/ ***
10.10 Life Bancorp, Inc. Recognition and Retention Plan and Trust
Agreement, as amended 1/ ***
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the required information
- -----------------------------
1/ Management contract or compensatory plan or arrangement.
* Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-80772) filed by the Registrant with the Securities
and Exchange Commission on June 27, 1994, as amended.
** Incorporated by reference from the Form 10-K of the Registrant for the
year ended December 31, 1994, filed with the Commission on March 31,
1995.
*** Incorporated by reference from the Form 8-K of the Registrant, filed with
the Commission on July 26, 1996.
(b) Reports filed on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this Form 10-K.
(c) Exhibits.
See (a)3. above for all Exhibits filed herewith and the Exhibit Index.
(d) Financial Statement Schedules.
All financial statement schedules required by Regulation S-X are
included in the Annual Report to Stockholders.
42
<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.
LIFE BANCORP, INC.
By: /s/ Edward E. Cunningham
-------------------------------------
Edward E. Cunningham
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Edward E. Cunningham March 27, 1997
- ------------------------------------------
Edward E. Cunningham
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
/s/ Emory J. Dunning, Jr. March 27, 1997
- ------------------------------------------
Emory J. Dunning, Jr.
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
/s/ Joseph C. Addington, Jr. March 27, 1997
- ------------------------------------------
Joseph C. Addington, Jr.
Director
/s/ Charles M. Earley, Jr., M.D. March 27, 1997
- ------------------------------------------
Charles M. Earley, Jr., M.D.
Director
43
<PAGE>
/s/ E. Saunders Early, Jr. March 27, 1997
- ------------------------------------------
E. Saunders Early, Jr.
Director
/s/ William J. Fanney March 27, 1997
- ------------------------------------------
William J. Fanney
Director
March 27, 1997
/s/ Donald I. Fentress
- ------------------------------------------
Donald I. Fentress
Director
/s/ William J. Jonak, Jr. March 27, 1997
- ------------------------------------------
William J. Jonak, Jr.
Director
/s/ Frederick V. Martin March 27, 1997
- ------------------------------------------
Frederick V. Martin
Director
/s/ Tollie W. Rich, Jr. March 27, 1997
- ------------------------------------------
Tollie W. Rich, Jr.
Executive Vice President, Chief
Operating Officer and Director
/s/ Braden Vandeventer March 27, 1997
- ------------------------------------------
Braden Vandeventer
Director
44
Exhibit 13
Life Bancorp, Inc.
1996
Annual Report to Stockholders
<PAGE>
Contents
Page
Message to Stockholders.................................................. 2
Selected Financial and Operating Data.................................... 5
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 6
Report of Independent Auditor............................................ 23
Financial Statements:
Consolidated Balance Sheets............................................ 24
Consolidated Statements of Operations.................................. 25
Consolidated Statement of Changes in Stockholders' Equity.............. 26
Consolidated Statements of Cash Flows.................................. 27
Notes to Consolidated Financial Statements............................... 29
Directors and Executive Officers......................................... 63
Stockholder Information.................................................. 64
Banking Locations - Life Savings Bank, FSB............ Inside Back Cover
Corporate Profile
Life Bancorp, Inc. ("Life" or the "Company") is a Virginia-chartered
thrift holding company headquartered in Norfolk, Virginia. Substantially all of
Life's assets and operations are in Life Savings Bank, FSB (the "Savings Bank"
or the "Bank"), a federal stock savings bank.
At December 31, 1996, Life had consolidated assets of $1.4 billion,
deposits of $732.3 million and stockholders' equity of $150.9 million. The Bank
converted from mutual to stock ownership in October 1994, and reorganized into
the holding company form of organization with the Company becoming the holding
company for the Bank.
Life operates twenty retail banking offices in its immediate market area
- - South Hampton Roads, Virginia, which consists of the cities of Chesapeake,
Norfolk, Portsmouth, Suffolk and Virginia Beach. Hampton, Newport News and
Williamsburg, are also a part of Hampton Roads, which, with 1.5 million
residents, is the 4th largest metropolitan statistical area in the Southeast
region of the United States and the 27th largest in the Nation.
Through its retail banking offices, Life delivers a wide range of
banking products and services to meet the needs of individuals, businesses and
organizations. The Bank attracts retail deposits from the general public and the
business community through a variety of deposit products. Deposits are insured
by the Savings Association Insurance Fund, administered by the Federal Deposit
Insurance Corporation, within applicable limits.
The Company's lending activities focus on meeting the needs of
individuals and businesses in its market area by offering permanent and
construction residential loans, second mortgages and equity lines of credit,
consumer loans, commercial real estate and business loans, and lines of credit.
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market(sm) under the symbol "LIFB." The Bank has been in
business since 1935. It is the largest financial institution headquartered in
Hampton Roads and the largest savings bank in Virginia.
1
<PAGE>
To Our Stockholders and Friends
We are again pleased to prepare this message as a preface to our Annual
Report, an important and unique opportunity to speak personally with each of you
as we review the highlights of 1996, reflect on current happenings, and look
toward the future.
Our primary service area, the Hampton Roads Market, is located in the
southeastern corner of Virginia where the Elizabeth, James and York Rivers flow
into the Chesapeake Bay which in turn empties into the Atlantic Ocean. The
coastal and tributary cities of Norfolk, Portsmouth, Virginia Beach, Chesapeake,
Suffolk, Newport News, Hampton and Williamsburg, with a combined population in
excess of 1.5 million, make up our primary trade area. These are cities of
stable growth, a sound employment base, significant economic and cultural
development, and they are blessed to be a part of the eastern seaboard and the
great port of Hampton Roads. As illustrated on the cover and throughout this
Report, you will see that Life Bancorp is a major part of this market. Our
financial growth has paralleled and enhanced the economic activities of the
area, and, as our cities have prospered, so too have we.
The fruits of our 1996 Business Plan increased our ability to capitalize
on our dynamic market, and our financial results are evident of this through
increased revenues, new products and the implementation of long-term,
cost-saving technology. As we discussed last year, our Business Plan must be
goal oriented if we are to increase stockholder value and maximize long-term
investment return, never forgetting that the market value of our stock is the
financial measure of stockholders' confidence in our progress. The significant
changes taking place in the banking industry create significant challenges for
Management as we attempt to maximize the efficient use of our capital while at
the same time offering broader services and market technology. It is the
customer who judges the quality of our service delivery and it is you, the
stockholder, who grades our accomplishments. We feel we have received high marks
from both constituencies as we position ourselves for the future.
Also as a part of our Business Plan, we implemented an arbitrage
investment program as a means of growing the Bank, with minimum overhead costs,
by utilizing wholesale borrowings to fund investments in mortgage-backed
securities. We are very pleased with the results of this goal-oriented
management strategy, because it had a threefold positive effect on the
operations of the Bank in 1996. First, we attained record net interest income
totaling in excess of $34 million. Second, we grew the Bank in total assets to
more than $1.4 billion, and third, our strategy provided an efficient means to
manage interest rate risk. Over time, it is our intention to reduce borrowings
as a percentage of retail deposits, and mortgage-backed securities as a
percentage of originated portfolio loans. We feel our Business Plan is working,
and I am confident that we can carry it even further as we move into 1997.
1996 was a year of Extraordinary Events -- some of which would seem to
be negative since they adversely impacted operations for the year, but, in
reality, were very positive for longer term income enhancement and competitive
strategy. I speak primarily of the one-time, $4.4 million FDIC deposit insurance
assessment on Life Savings Bank. Such special assessment impacted all thrift
institutions and those commercial banks holding
2
<PAGE>
Savings Association Insurance Fund deposits. As a positive event, based on
deposits at December 31, 1996, the reduced deposit insurance premiums, which
were part of the legislative package creating the one-time special assessment,
will add approximately $1.2 million annually to pre-tax income in future years
and more than 7.5 cents in our after-tax earnings per share.
On another positive note, along with our efforts to leverage the capital
of the Bank, we completed two major Stock Repurchase programs in 1996.
Subsequent to our having gone public in October 1994, we have now repurchased
and retired over one million shares. This action has been an ideal means to
increase our per share earnings, which, before the earlier noted insurance fund
special assessment, would have been $1.20 per share in 1996, a 33% increase over
the $0.90 per share for 1995. Though our current return on average equity has
increased from 5.93% in 1995 to 7.60% in 1996 (excluding the special SAIF
assessment and a related charge), the continuing increase of effective return
remains one of our highest priorities. With a 10.63% capital ratio at the end of
1996, we believe we have additional opportunities to leverage against that
capital which will facilitate our efforts to further increase our earnings per
share and our return on capital.
We are again proud to announce that we were classified as a "Well
Capitalized" institution by regulatory authorities in 1996, and, relative to our
performance under the Community Reinvestment Act, we again received their
"Outstanding" designation for our excellent record in meeting the credit needs
of our communities.
The Acquisition and integration of the operations of Seaboard Savings
Bank, in early 1996, was successful and strategically important because it
increased our market share by bringing to us $66.8 million in deposits, three
strategically located branches and a group of experienced and capable people who
have been an excellent complement to our dedicated employee base. Including the
deposits acquired with the Seaboard acquisition, our deposit base grew during
the year to $732 million from $607 million at the end of 1995.
Net Earnings for 1996 were $8.6 million, or $.89 per share, even though
some $4.9 million in before tax expense was incurred because of the noted
special assessment and a related goodwill charge. We were really quite pleased
with our performance especially since our net interest income hit record levels,
our fee income is growing, our operating costs remain firmly under control and
well below peer group averages and, other than goodwill, our recent acquisition
related expenses are behind us. Our stock price at the close of 1996 was $18.00,
up from $15.00 at the end of the previous year, and our year-end book value per
share was $15.33 compared to $14.75 at the end of 1995.
Relative to Production activities in 1996, we experienced a record year
in generating diversified commercial real estate loans as well as consumer
products, especially in automobile finance. Our subsidiary Life Financial
Services Corporation enjoyed a record year in securities, annuities and
insurance sales.
Many events occurred in 1996 which are expected to result in Improved
Operating Fundamentals and Efficiencies. As we move into 1997 and beyond, other
significant and positive activities continue. Toward the end of 1996 we
converted our data processing system to a modern PC-based, network computer
service center that is state-of-the-art and will better position us as we move
toward and into the next millennium. Though there
3
<PAGE>
are a few wrinkles, we are very pleased as we look at the early results of this
conversion. We are also pleased to report two equity investment affiliations
with organizations providing title insurance and trust services.
In the future, certain national issues affecting our industry remain to
be resolved, and our business strategy must continue to address the Changing
Financial Climate. Regulatory relief continues to be a major issue, and we may
see significant changes in financial institution charter requirements. We must
continue to grow, expand our core product lines, expand our geographic markets
and leverage our capital. I truly believe that the primary challenge for
Management will be our ability to manage change while at the same time remaining
focused on core banking efficiency. Success relies on modern technology, cost
containment, prospect development and enhanced sales, yet never losing sight of
credit quality and customer service.
On a more personal note .... we announced in early spring that William
J. Fanney, former Chairman of the Board, had been designated as Chairman
Emeritus. Mr. Fanney's career spans some 48 years with the Bank, and we are
delighted that we will continue to benefit from his wisdom gained over his long
and distinguished career.
Looking into the future, we feel good about ourselves and our prospects.
As Board Chairman, and perhaps more importantly as a stockholder, I am aware of
the challenges and the expectations of our investors. The insurance fund
resolution has been and will continue to be a dynamic event and, even though the
special assessment was a heavy price to pay, that legislative accomplishment
will allow us to more effectively plan for the future without dealing with the
competitive restraints of inequitable deposit insurance premiums.
We are one team with a common vision and an enthusiasm for working
together, and we are prepared to face the challenges of the future.
Sincerely,
/s/ Edward E. Cunningham
Edward E. Cunningham
Chairman of the Board,
President and Chief Executive Officer
---------------------------------------
[PICTURE AND DESCRIPTION DELETED - SEE APPENDIX]
4
<PAGE>
<TABLE>
<CAPTION>
Selected Financial and Operating Data
As of December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $1,419,762 $1,097,000 $ 996,908 $770,443 $691,976
Cash and cash equivalents 11,283 8,845 7,945 9,372 8,523
Mortgage loans held-for-sale -- -- -- 9,346 4,376
Investment securities 30,742 23,040 18,414 11,419 32,575
Mortgage-backed securities:
Held-to-maturity 140,974 168,602 402,244 332,112 172,746
Available-for-sale 565,086 393,587 107,264 -- --
Loans receivable, net 622,405 467,424 421,191 366,510 430,051
Deposit accounts 732,322 607,139 588,262 528,932 521,347
FHLB advances 261,711 148,636 174,977 159,272 52,388
Repurchase agreements and other borrowings 259,000 168,518 73,212 26,499 66,247
Stockholders' equity 150,938 160,941 148,511 48,252 43,652
Years Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $ 95,133 $ 77,025 $ 57,017 $ 52,510 $ 56,296
Interest expense 60,929 48,266 35,419 32,031 34,967
---------- ---------- ---------- -------- --------
Net interest income 34,204 28,759 21,598 20,479 21,329
Provision (credit) for loan losses (265) 454 1,431 715 894
Noninterest income 3,362 2,023 3,295 5,405 3,043
Noninterest expense 23,501 16,054 13,980 18,610 15,398
---------- ---------- ---------- -------- --------
Income before income taxes 14,330 14,274 9,482 6,559 8,080
Income taxes 5,716 5,126 3,007 2,099 3,285
---------- ---------- ---------- -------- --------
Income before cumulative effect of accounting change 8,614 9,148 6,475 4,460 4,795
Cumulative effect of accounting change -- -- -- 133 --
---------- ---------- ---------- -------- --------
Net income $ 8,614 $ 9,148 $ 6,475 $ 4,593 $ 4,795
========== ========== ========== ======== ========
Earnings per share (1) $ 0.89 $ 0.90 $ 0.27 N/A N/A
Selected Ratios (2)
Return on average assets 0.67% 0.87% 0.75% 0.61% 0.71%
Return on average equity 5.66% 5.93% 9.42% 9.90% 11.68%
Average equity to average assets 11.75% 14.61% 7.95% 6.14% 6.09%
Equity to assets at end of period 10.63% 14.67% 14.90% 6.26% 6.31%
Interest-rate spread (3) 2.20% 2.15% 2.45% 2.83% 3.39%
Net interest margin (3) 2.73% 2.84% 2.67% 2.94% 3.46%
Noninterest expense, exclusive of amortization
of goodwill, to average assets 1.75% 1.51% 1.59% 2.40% 2.21%
Efficiency ratio (4) 60.16% 51.84% 55.07% 70.13% 61.04%
Non-performing assets to total assets (5) 0.26% 0.21% 0.25% 1.41% 2.70%
Allowance for loan losses to non-accruing loans 378.67% 255.79% 275.93% 216.53% 74.97%
Allowance for loan losses to total loans 1.55% 0.95% 1.06% 0.89% 0.64%
Full service customer facilities 20 17 17 17 19
Number shares outstanding, including ESOP 9,846,840 10,910,625 10,910,625 -- --
Book value per outstanding share $ 15.33 $ 14.75 $ 13.61 -- --
-------------------------
<FN>
(1) 1994 earnings per share have been stated only for a partial period because
of the Company's conversion to stock form of ownership on October 11, 1994.
See Note 23 to the Consolidated Financial Statements.
(2) With the exception of end of period ratios, all ratios are based on average
daily balances for 1996 and 1995, average monthly balances prior to 1995
and are annualized where appropriate.
(3) Interest-rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) The efficiency ratio represents noninterest expense, exclusive of
amortization of goodwill, as a percentage of the sum of net interest income
and noninterest income.
(5) Non-performing assets consist of non-accrual loans and real estate acquired
through foreclosure, by deed-in-lieu thereof or deemed in-substance
foreclosed.
</FN>
</TABLE>
5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Life Bancorp, Inc. ("Life" or the "Company") is a Virginia corporation
organized in May 1994. On October 11, 1994, the Company acquired all the capital
stock of Life Savings Bank, FSB ("Life Savings" or the "Bank") in the conversion
of the Bank from a federal mutual savings bank to a federal stock savings bank.
The Company is a unitary thrift holding company and its only significant assets
are the capital stock of the Bank, the Company's loan to an Employee Stock
Ownership Plan ("ESOP"), and the net conversion proceeds retained by the
Company. To date, the business of the Company has consisted of the business of
the Bank.
The Company is subject to examination and regulation by the Office of
Thrift Supervision ("OTS") and is subject to various reporting and other
requirements of the Securities and Exchange Commission ("SEC"). The Bank is
subject to examination and comprehensive regulation by the OTS, which is the
Bank's chartering authority and primary regulator. The Bank is also regulated by
the Federal Deposit Insurance Corporation ("FDIC"), the administrator of the
Savings Association Insurance Fund ("SAIF"). The Bank is subject to certain
reserve requirements established by the Board of Governors of the Federal
Reserve System ("FRB") and is a member of the Federal Home Loan Bank ("FHLB") of
Atlanta, which is one of the 12 regional banks comprising the FHLB System.
The following discussion and analysis is intended to assist readers in
understanding the financial condition and results of operations of the Company
and its subsidiaries for the years ended December 31, 1994 through 1996. This
review should be read in conjunction with Life's audited consolidated financial
statements, accompanying footnotes and supplemental financial data included
herein.
Acquisition of Seaboard Bancorp, Inc. On January 31, 1996, the Company
completed its acquisition of Seaboard Bancorp, Inc. ("Seaboard"), the holding
company for Seaboard Savings Bank, F.S.B., ("Seaboard Savings"). Seaboard
Savings, headquartered in Virginia Beach, operated three offices, one each in
the Virginia cities of Chesapeake, Virginia Beach and Portsmouth. The operations
of Seaboard Savings were merged into the Bank effective February 1, 1996,
representing a natural extension of the Bank's existing operations and
strengthening its presence in the Hampton Roads market. Results of operations of
Seaboard, beginning February 1, 1996, are included in the results of the
Company. For additional information regarding the Seaboard acquisition, see Note
2 to the Consolidated Financial Statements.
---------------------------------------
[PICTURE AND DESCRIPTION DELETED - SEE APPENDIX]
6
<PAGE>
Financial Condition
Assets
General. Total assets of the Company increased by $322.8 million, or
29.4%, from $1.1 billion at December 31, 1995, to $1.4 billion at December 31,
1996. This increase was due primarily to a $155.0 million increase in net loans
receivable and a $143.9 million increase in the Company's mortgage-backed
securities ("MBS"). The increased asset base was the result of both internal
growth and the merger of Seaboard Savings into the Bank, which initially added
$79.0 million to the Company's total assets. The following graph depicts the
Company's asset composition at December 31, 1996, and December 31, 1995. The
discussion which follows focuses on the major changes in the asset mix during
1996.
[GRAPHIC DELETED]
- --------------------------------------------------------------------------------
In the original document, there follows a pie chart depicting the
Company's asset composition at December 31, 1996 and December 31, 1995. The
following table indicates the data points for the chart.
December 31, 1996 December 31, 1995
Dollars in % of Total Dollars in % of Total
Millions Assets Millions Assets
Fixed-rate Loans 271.1 19.1% 193.2 17.6%
Adjustable-rate Loans 351.3 24.7% 274.2 25.0%
Fixed-rate MBS 305.0 21.5% 307.2 28.0%
Adjustable-rate MBS 401.1 28.2% 255.0 23.2%
Other Assets 48.1 3.4% 34.9 3.2%
Cash & Investments 42.0 3.0% 31.9 2.9%
REO 1.2 0.1% 0.6 0.1%
- --------------------------------------------------------------------------------
Cash and Cash Equivalents. Cash and cash equivalents, which consist of
interest-bearing and noninterest-bearing deposits, increased by $2.4 million, or
27.6%, to $11.3 million at December 31, 1996, compared to $8.8 million at
December 31, 1995.
Investment Securities. Investment securities increased by $7.7 million,
or 33.4%, to $30.7 million at December 31, 1996, compared to $23.0 million at
December 31, 1995, reflecting Life's asset/liability management strategy to
increase investment securities during the generally higher interest rate
environment of 1996. In order to provide more flexibility to Life in the
management of its investments and in order to maintain an investment portfolio
more responsive to market conditions, at December 31, 1996, all of the Company's
investment securities were classified as available-for-sale. At December 31,
1996, the Company's investment securities available-for-sale had an unrealized
loss of $354,000, net of
7
<PAGE>
taxes, which was netted against stockholders' equity at such date. Notes 3 and 4
to the Consolidated Financial Statements provide further information on Life's
investment securities.
Mortgage-Backed Securities. Total mortgage-backed securities (both
held-to-maturity and available-for-sale) increased by an aggregate of $143.9
million, or 25.6%, to $706.1 million at December 31, 1996, compared to $562.2
million at December 31, 1995. At December 31, 1996, $401.1 million, or 56.8% of
the $706.1 million in total mortgage-backed securities had adjustable interest
rates. The increase in mortgage-backed securities reflects both the Company's
continuing emphasis on such investments as part of its asset/liability
management strategy as well as an additional arbitrage program instituted by the
Bank in June 1996. Under the arbitrage program, consistent with its Business
Plan, the Bank increased its investment in government agency mortgage-backed
securities and funded such investments with additional borrowed funds. The
arbitrage program was intended to partially leverage the Company's excess
capital, increase its return on equity and improve earnings per share until such
time as more appropriate alternative opportunities for utilization of capital
exist.
The held-to-maturity mortgage-backed securities totaled $141.0 million
($10.2 million adjustable-rate and $130.8 million fixed-rate) at December 31,
1996, and the available-for-sale totaled $565.1 million ($390.9 million
adjustable-rate and $174.2 million fixed-rate). At December 31, 1995, the
held-to-maturity mortgage-backed securities totaled $168.6 million ($12.2
million adjustable-rate and $156.4 million fixed-rate), while the
available-for-sale totaled $393.6 million ($242.9 million adjustable-rate and
$150.7 million fixed-rate). The Bank classified all mortgage-backed securities
purchased during 1996 as available-for-sale, providing the Bank with increased
asset and liability management flexibility to react to yield curve and interest
rate changes. At December 31, 1996, the Company's mortgage-backed securities
available-for-sale had an unrealized gain of $2.3 million, net of taxes, which
was added to stockholders' equity at such date. Higher interest rates will cause
the carrying value of the available-for-sale portfolio to be reduced, resulting
in an adjustment to stockholders' equity.
In addition to mortgage-backed securities issued by the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") or the Government National Mortgage Association ("GNMA"), commonly
called agency securities, the Bank invests in highly rated, investment grade,
private label mortgage-backed securities structured in the form of a Real Estate
Mortgage Investment Conduit ("REMIC"). At December 31, 1996, included in the
Company's aggregate total of $706.1 million mortgage-backed securities were
$168.5 million ($139.6 million fixed-rate and $28.9 million adjustable-rate) in
REMICs. Of this amount $147.4 million were rated AAA by at least two nationally
recognized rating agencies. The remaining $21.1 million were rated AA.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees that often support
them, are more liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of the Company. Additional
information on Life's mortgage-backed securities portfolio may be found in Notes
3, 4 and 22 to the Consolidated Financial Statements.
Loans Receivable, Net. Loans receivable, net, which constitute the
Company's held-for-investment loan portfolio, increased by $155.0 million, or
33.2%, to $622.4 million at December 31, 1996, compared to $467.4 million at
December 31, 1995. The merger of Seaboard Savings into the Bank initially
increased net loans receivable by $69.2 million. During 1996, the Bank
originated an aggregate of $125.4 million of mortgage loans of which $93.2
million were adjustable-rate mortgage loans ("ARMs") and $32.2 million were
fixed-rate, mortgage loans ($880,000 of which subsequently were sold in the
secondary market). During 1995, the Company originated $109.2 million of
mortgage loans. For additional information, see Note 5 to the Consolidated
Financial Statements.
Real Estate Owned. Under Generally Accepted Accounting Principles ("GAAP"),
real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as real estate
8
<PAGE>
owned ("REO"). At December 31 1996, REO was $1.2 million compared to $622,000 at
December 31, 1995. The REO at December 31, 1996 consisted of 18 properties. For
additional information relating to REO, see Note 7 to the Consolidated Financial
Statements.
Excess of Cost Over Net Assets Acquired. The excess of cost over net
assets acquired (goodwill) relates to the Savings Bank's acquisitions of insured
savings institutions and is being amortized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions." Goodwill increased by $4.3
million from $459,000 at December 31, 1995, to $4.8 million at December 31,
1996. This increase resulted from the purchase of Seaboard and is net of
amortizations of $449,000 during the year and a $451,000 adjustment in the
valuation of acquired goodwill due to the SAIF special assessment. This
valuation adjustment reduces the amount of goodwill to be amortized in future
periods as noninterest expense. For additional information, see Notes 1 and 2 to
the Consolidated Financial Statements.
Liabilities and Stockholders' Equity
General. The Company's primary funding sources include deposits, notes
payable and other borrowings and stockholders' equity. The following graph shows
the composition of the Company's liabilities and stockholders' equity at
December 31, 1996, and December 31, 1995. The discussion which follows focuses
on the major changes in the mix during 1996.
[GRAPHIC DELETED]
- --------------------------------------------------------------------------------
In the original document, there follows a pie chart depicting the
Company's Liabilities and Equity composition at December 31, 1996 and December
31, 1995. The following table indicates the data points for the chart.
December 31, 1996 December 31, 1995
Dollars in % of Total Dollars in % of Total
Millions Assets Millions Assets
Deposits 732.3 51.6% 607.1 55.3%
Repurchase Agreements 259.0 18.2% 162.0 14.8%
FHLB Advances 261.7 18.4% 148.6 13.5%
Other Borrowings 5.2 0.4% 6.5 0.6%
Other Liabilities 10.6 0.8% 11.9 1.1%
Stockholders' Equity 150.9 10.6% 160.9 14.7%
- --------------------------------------------------------------------------------
9
<PAGE>
Deposits. Deposits increased by $125.2 million, or 20.6%, from $607.1
million at December 31, 1995, to $732.3 million at December 31, 1996. The merger
of Seaboard Savings into the Bank initially increased deposits by $66.8 million.
Additional information regarding deposits is provided in Note 10 to the
Consolidated Financial Statements.
Borrowings. The Company's borrowings are comprised of: (i) advances from
the FHLB of Atlanta, which increased by $113.1 million, or 76.1%, from $148.6
million at December 31, 1995, to $261.7 million at December 31, 1996; (ii)
Securities sold under agreements to repurchase ("Repos"), which increased by
$97.0 million, or 59.9%, from $162.0 million at December 31, 1995, to $259.0
million at December 31, 1996; and (iii) other borrowings which decreased by $1.3
million, or 19.8%, from $6.5 million at December 31, 1995, to $5.2 million at
December 31, 1996. The Company's borrowings are generally used to fund lending,
investments and other ordinary course of business activities. Initially, the
mortgage-backed securities purchased as part of the Bank's arbitrage program
mostly were funded with short-term repos. The Company continuously reviews
alternative sources of borrowings and in this regard has more recently increased
its use of advances from the FHLB of Atlanta relative to Repos due to the FHLB
of Atlanta's lower costing advances. For additional information, including
maturities of the Company's borrowings, see "Asset and Liability Management" and
Notes 11, 12 and 13 to the Consolidated Financial Statements.
Stockholders' Equity. Stockholders' equity provides a source of
permanent funding, allows for future growth and provides the Company with a
cushion to withstand unforeseen, adverse developments. During 1996, primarily as
a result of the Company's share repurchase program discussed below,
stockholders' equity decreased by $10.0 million from $160.9 million at December
31, 1995 to $150.9 at December 31, 1996. Stockholders' equity at December 31,
1996, contained an increase of $2.0 million required to adjust the carrying
value of assets classified as available-for-sale to their current market prices
as required by SFAS No. 115. This compares to an increase in stockholders'
equity at December 31, 1995, of $1.8 million for such carrying value adjustment.
See Note 4 to the Consolidated Financial Statements.
The $150.9 million of stockholders' equity at December 31, 1996
represented a book value of $15.33 per share and was 10.6% of total assets at
the end of the year.
[GRAPHIC DELETED] [GRAPHIC DELETED]
- --------------------------------------------------------------------------------
In the original document, there follows a bar chart depicting the
Company's Equity to Assets ratio at December 31 for each year from 1992 through
1996. The following table indicates the data points for the chart.
Equity to Assets
at Year End
Dec. 31, 1992 6.31%
Dec. 31, 1993 6.26%
Dec. 31, 1994 14.90%
Dec. 31, 1995 14.67%
Dec. 31, 1996 10.63%
- --------------------------------------------------------------------------------
In the original document, there follows a bar chart depicting the
regulatory capital at December 31, 1996, compared to the regulatory requirements
then in effect. The following table indicates the data points for the chart.
OTS Required The Bank's
Capital Ratios Capital Ratio
Tangible 1.5% 8.6%
Core 3.0% 8.6%
Risk-Based 8.0% 21.4%
- --------------------------------------------------------------------------------
10
<PAGE>
Federal regulations impose minimum regulatory capital requirements on
all FDIC insured institutions. At December 31, 1996, the Savings Bank
significantly exceeded all required regulatory capital ratio requirements with a
tangible and core ratio of 8.6% and a risk-based ratio of 21.4%. These compared
to regulatory requirements of 1.5%, 3.0% and 8.0%, respectively. For additional
discussion of the Bank's regulatory capital requirements, see Note 14 to the
Consolidated Financial Statements.
During 1996, to reduce excess stockholders' equity, the Company
repurchased and retired 1,063,785 shares, or 9.75% of its outstanding shares on
December 31, 1995, at a total acquisition price of approximately $15.2 million.
The Company has received approval from the OTS to repurchase up to an additional
10% during the 12 month period ending October 11, 1997. Future decisions by the
Company to repurchase shares will be based on, among other things, the then
current market value of the stock, alternative opportunities for utilization of
capital and the anticipated positive effect of the repurchase program on the
Company's long-term shareholder value.
Results of Operations
General. For the year ended December 31, 1996, the Company reported that
net earnings before a one-time statutorily mandated SAIF assessment and a
related charge were $11.6 million, or $1.20 per share, a 26.4% increase over
earnings for 1995. Consistent with enacted Federal legislation, the Bank was
assessed, during the third quarter of 1996, a pre-tax charge of $4.4 million by
the FDIC as its pro rata share to recapitalize the insurance fund. This special
assessment impacted all thrift institutions and those commercial banks holding
SAIF insured deposits. After the one-time assessment and related charge, net
earnings were $8.6 million, or $0.89 per share, for the year ended December 31,
1996. For the year ended December 31, 1995, the Company reported net earnings of
$9.1 million, or $0.90 per share; and for 1994, net earnings were $6.5 million.
The change in net income in 1996, compared to 1995, was due primarily to an
increase in net interest income of $5.4 million, a net loan loss credit of
$265,000 and an increase in noninterest income of $1.3 million; partially offset
by an increase in noninterest expense of $7.4 million and
[GRAPHIC DELETED]
- --------------------------------------------------------------------------------
The original document contains a bar chart depicting the
Company's net income for each of the years ended December 31, 1992
through 1996. The following table indicates the data points for the
chart.
Net Income
(Dollars in Millions)
1992 $4.8
1993 4.6
1994 6.5
1995 9.1
1996 - Net Income 8.6
After tax effect of special SAIF
assessment and a related charge 3.0
1996 Adjusted total 11.6
- --------------------------------------------------------------------------------
an increase in the income tax provision of $590,000. The $2.7 million, or 41.3%,
increase in net income during 1995, compared to 1994, was due primarily to an
increase in net interest income of $7.2 million and a decrease in the provision
for loan losses of $1.0 million, partially offset by a decrease in noninterest
income of $1.3 million, an increase in noninterest expense of $2.1 million, and
an increased income tax provision of $2.1 million.
Net Interest Income. Net interest income is the difference between
interest income on interest-earning assets and interest expense on
interest-bearing liabilities. Net interest margin, is the result of
interest-rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and net interest-earning assets (the amount of interest-earning assets relative
to interest-bearing liabilities). The Company's interest-rate spread was 2.32%
at
11
<PAGE>
December 31, 1996, and the average interest-rate spread was 2.20%, 2.15% and
2.45% during the years ended December 31, 1996, 1995 and 1994, respectively. The
Company's net interest margin was 2.73%, 2.84% and 2.67% during the years ended
December 31, 1996, 1995 and 1994, respectively. The decrease in 1996 was the
combined result of an increase in net interest-rate spread from 2.15% in 1995 to
2.20% in 1996 which was more than offset by a decrease in net interest-earning
assets of $5.8 million, from $128.5 million in 1995 to $122.7 million in 1996.
This decrease in net interest-earnings assets was mostly due to fundings for the
Seaboard acquisition and stock repurchases. The improvement in net interest
margin during
[GRAPHIC DELETED]
- --------------------------------------------------------------------------------
The original document contains a bar chart depicting the
Company's net interest margin for each of the years ended December 31,
1992 through 1996. The following table indicates the data points for the
chart.
Net Interest
Margin
1992 3.46%
1993 2.94%
1994 2.67%
1995 2.84%
1996 2.73%
- --------------------------------------------------------------------------------
1995 resulted from the increased level of net interest-earning assets generated
by the investment and leveraging, for the entire year of 1995, of the proceeds
from the conversion of the Bank, together with an increase in the average yield
on total interest-earning assets from 7.04% in 1994 to 7.60% in 1995. The
conversion of the Bank is discussed in Note 23 to the Consolidated Financial
Statements.
Net interest income increased by $5.4 million, or 18.9%, in 1996 to
$34.2 million compared to $28.8 million in 1995. The reason for such increase
was a $18.1 million increase in interest income, partially offset by a $12.7
million increase in interest expense. Net interest income increased by $7.2
million, or 33.2%, in 1995 to $28.8 million compared to $21.6 million in 1994.
The reason for such increase was a $20.0 million increase in interest income,
partially offset by a $12.8 million increase in interest expense.
Interest Income. Interest income totaled $95.1 million for the year
ended December 31, 1996, an increase of $18.1 million over the total of $77.0
million for the year ended December 31, 1995. This improvement was primarily the
result of an increase in the Company's average interest-earning assets of $236.7
million, or 23.3%, to $1.3 billion for the year ended December 31, 1996. The
additional interest-earning assets resulted from the Company's acquisition of
Seaboard, as well as increases in mortgage-backed and investment securities and
internal growth in the Bank's loan portfolio. The increased volume of
interest-earning assets produced additional interest income of $18.5 million.
The average yield on interest-earning assets remained relatively flat at 7.60%
during 1995 and 1996, resulting in a decrease
---------------------------------------
[PICTURE AND DESCRIPTION DELETED - SEE APPENDIX]
12
<PAGE>
in interest income of only $253,000, due to a slight difference in yield.
Interest earned on mortgage-backed securities increased by $6.3 million, or
17.0%, in 1996, due to an $82.7 million, or 15.2%, increase in the average
balance of mortgage-backed securities and an 11 basis point increase in the
yield. Interest on loans increased by $10.2 million, or 26.4%, as a result of an
increase of $130.0 million, or 29.0%, in the average balance of the loan
portfolio partially offset by a decrease of 17 basis points in the average yield
earned thereon.
Interest income totaled $77.0 million for the year ended December 31,
1995, an increase of $20.0 million over the total of $57.0 million for the year
ended December 31, 1994. This improvement was primarily the result of an
increase in the Company's average interest-earning assets of $203.9 million, or
25.2%, to $1.0 billion for the year ended December 31, 1995. This increase in
average interest-earning assets resulted from the Bank continuing the process of
leveraging the capital raised during the stock conversion consummated in October
1994. The increased volume of interest-earning assets produced additional
interest income of $13.9 million. The average yield on interest-earning assets
increased from 7.04% during 1994 to 7.60% during 1995, resulting in an increase
in interest income of $4.8 million. Interest earned on mortgage-backed
securities increased by $13.8 million, or 59.3%, in 1995, due to a $148.6
million, or 37.4%, increase in the average balance of mortgage-backed securities
and a 94 basis point increase in the yield. Interest on loans increased by $6.6
million, or 20.6%, as a result of an increase of $70.9 million, or 18.7%, in the
average balance of the loan portfolio together with an increase of 14 basis
points in the average yield earned thereon.
Interest Expense. Interest expense increased by $12.7 million, or 26.2%,
in 1996 compared to 1995. Interest on deposits increased by $5.4 million, or
18.0%, while interest on borrowings increased $7.2 million, or 40.0%. The
increase in interest expense on total deposits was due to a $105.4 million, or
17.6%, increase in the average balance of deposits, while the average rate paid
thereon remained relatively flat, increasing from 5.05% in 1995 to 5.07% in
1996, or only 2 basis points. The increase in interest expense on borrowings was
due to a $137.1 million, or 47.7%, increase in the average balance of borrowings
partially offset by a 32 basis point decrease in the cost of borrowings.
Interest expense increased by $12.8 million, or 36.3%, in 1995 compared
to 1994. Interest on deposits increased by $5.7 million, or 23.1%, while
interest on borrowings increased $7.2 million, or 65.9%. The increase in
interest expense on total deposits was due to a $28.2 million, or 4.9%, increase
in the average balance of deposits, together with an increase in the average
rate paid thereon from 4.31% in 1994 to 5.05% in 1995, a 74 basis point
increase. The increased cost of deposits resulted from maturing certificates
rolling over to higher rates. The increase in interest expense on borrowings was
due to a $85.1 million, or 42.0%, increase in the average balance of borrowings
and a 90 basis point increase in the cost of borrowings.
---------------------------------------
[PICTURE AND DESCRIPTION DELETED - SEE APPENDIX]
13
<PAGE>
Yields Earned and Rates Paid. The following table sets forth, for the
years indicated, information regarding (i) the total dollar amount of interest
income of the Company from interest-earning assets and the resultant average
yields; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net interest income; (iv)
interest-rate spread; and (v) net interest margin. Average balances for 1996 and
1995 are determined on a daily basis while average balances for 1994 are
determined on a monthly basis. Management does not believe that the use of
average monthly balances instead of average daily balances results in material
differences in the information presented.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ----------------------------- -----------------------------
Yield/Cost Average Average Average
at December Average Yield/ Average Yield/ Average Yield/
31, 1996 Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- ------------ ------- ------- ------------ ------- ------- ------------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans 8.08% $ 510,189 $42,312 8.29% $ 398,622 $33,667 8.45% $332,827 $27,658 8.31%
Consumer loans 10.37% 68,973 6,544 9.49% 50,504 4,982 9.86% 45,409 4,394 9.68%
---------- ------- ---------- ------- -------- -------
Total loans 8.36% 579,162 48,856 8.44% 449,126 38,649 8.61% 378,236 32,052 8.47%
Mortgage-backed securities 7.10% 628,645 43,494 6.92% 545,921 37,162 6.81% 397,277 23,328 5.87%
Investment securities 6.82% 35,740 2,411 6.75% 12,642 857 6.78% 20,205 926 4.58%
Other earning assets 6.70% 7,302 372 5.09% 6,454 357 5.53% 14,537 711 4.89%
---------- ------- ---------- ------- -------- -------
Total interest-earning assets 7.67% 1,250,849 95,133 7.60% 1,014,143 77,025 7.60% 810,255 57,017 7.04%
------- ------- -------
Noninterest-earning assets 44,306 40,809 54,345
---------- ---------- --------
Total assets $1,295,155 $1,054,952 $864,600
========== ========== ========
Interest-bearing liabilities:
Deposits:
Demand deposits 2.06% $ 41,194 $ 851 2.07% $ 26,521 565 2.13% $ 23,845 496 2.08%
Passbook savings 3.30% 58,125 1,925 3.31% 60,320 2,023 3.35% 69,853 2,308 3.30%
Certificates 5.51% 604,122 32,886 5.44% 511,215 27,634 5.41% 476,165 21,741 4.57%
---------- ------- ---------- ------- -------- -------
Total deposits 5.11% 703,441 35,662 5.07% 598,056 30,222 5.05% 569,863 24,545 4.31%
Borrowings 5.69% 424,720 25,267 5.95% 287,590 18,044 6.27% 202,518 10,874 5.37%
---------- ------- ---------- ------- -------- -------
Total interest-bearing
liabilities 5.35% 1,128,161 60,929 5.40% 885,646 48,266 5.45% 772,381 35,419 4.59%
------- ------- -------
Noninterest-bearing liabilities 14,825 15,175 23,451
---------- ---------- --------
Total liabilities 1,142,986 900,821 795,832
Stockholders' equity 152,169 154,131 68,768
---------- ---------- --------
Total liabilities and
stockholders' equity $1,295,155 $1,054,952 $864,600
========== ========== ========
Net interest-earning assets $ 122,688 $ 128,497 $ 37,874
========== ========== ========
Net interest income and
interest-rate spread 2.32% $34,204 2.20% $28,759 2.15% $21,598 2.45%
======= ======= =======
Net interest margin 2.73% 2.84% 2.67%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.11x 1.15x 1.05x
</TABLE>
---------------------------------------
[PICTURE AND DESCRIPTION DELETED - SEE APPENDIX]
14
<PAGE>
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 in interest income attributable to changes in rate
(changes in rate multiplied by prior volume); (ii) changes in interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
<TABLE>
<CAPTION>
Interest Income and Expense Interest Income and Expense Interest Income and Expense
1996 compared to 1995 1995 compared to 1994 1994 compared to 1993
------------------------------- -------------------------------- --------------------------------
Increase Increase Increase
(decrease) due to (decrease) due to (decrease) due to
-------------------- ---------------------- ---------------------
Total Net Total Net Total Net
Rate/ Increase Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
---- ------ ------ --------- ---- ------- ------ --------- ---- ------ ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $(637) $ 9,427 $(145) $ 8,645 $ 452 $ 5,468 $ 89 $ 6,009 $(2,134) $(2,044) $ 138 $(4,040)
Consumer loans (187) 1,821 (72) 1,562 85 493 10 588 (215) (627) 26 (816)
----- ------- ----- ------- ------- ------- ------ ------- ----- ------- ----- -------
Total loans receivable (824) 11,248 (217) 10,207 537 5,961 99 6,597 (2,349) (2,671) 164 (4,856)
Mortgage-backed securities 603 5,635 95 6,332 3,716 8,728 1,390 13,834 1,274 7,135 636 9,045
Investment securities (4) 1,566 (8) 1,554 444 (347) (166) (69) (167) 32 (5) (140)
Other earning assets (28) 47 (4) 15 93 (395) (52) (354) 29 385 44 458
----- ------- ----- ------- ------- ------- ------ ------- ------- ------- ----- -------
Total net change in income on
interest-earning assets (253) 18,496 (134) 18,108 4,790 13,947 1,271 20,008 (1,213) 4,881 839 4,507
----- ------- ----- ------- ------- ------- ------ ------- ------- ------- ----- -------
Interest-bearing liabilities:
Deposits:
Demand deposits (15) 313 (12) 286 12 56 1 69 (2) 35 -- 33
Passbook savings deposits (24) (74) -- (98) 35 (315) (5) (285) 85 42 2 129
Certificates of deposit 153 5,026 73 5,252 3,998 1,600 295 5,893 (1,266) 2,425 (148) 1,011
----- ------- ----- ------- ------- ------- ------ ------- ------- ------- ----- -------
Total deposits 114 5,265 61 5,440 4,045 1,341 291 5,677 (1,183) 2,502 (146) 1,173
Borrowings (921) 8,598 (454) 7,223 1,832 4,568 770 7,170 225 1,940 50 2,215
----- ------- ----- ------- ------- ------- ------ ------- ------- ------- ----- -------
Total net change in expense on
interest-bearing liabilities (807) 13,863 (393) 12,663 5,877 5,909 1,061 12,847 (958) 4,442 (96) 3,388
----- ------- ----- ------- ------- ------- ------ ------- ------- ------- ----- -------
Net change in net interest income $554 $ 4,633 $ 259 $ 5,445 $(1,087) $ 8,038 $ 210 $ 7,161 $ (255) $ 439 $ 935 $ 1,119
===== ======= ===== ======= ======= ======= ====== ======= ======= ======= ===== =======
</TABLE>
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Company, the amount of the Company's classified assets,
the status of past due principal and interest payments, general economic
conditions, particularly as they relate to the Company's market area, and other
factors related to the collectibility of the Company's loan portfolio.
Management reviews the allowance for loan losses on a monthly basis and makes
provisions for loan losses as deemed appropriate in order to maintain the
adequacy of the allowance.
---------------------------------------
[PICTURE AND DESCRIPTION DELETED - SEE APPENDIX]
15
<PAGE>
In July 1996, the Bank acquired by deed in lieu of foreclosure certain
properties located in Williamsburg, Virginia in settlement of a previously
charged-off deficiency relating to three Williamsburg hotels sold in October
1994. The acquired property was subsequently sold for $3.3 million and settled
on September 30, 1996. After satisfying superior liens on the property and other
costs associated with the acquisition and sale, the Bank netted a loan loss
recovery of $1.4 million and a gain on sale of REO of $206,000. This sizable
recovery during 1996 more than offset normally determined adjustments to the
Bank's loan loss allowance and resulted in a net loan loss credit for 1996 of
$265,000.
[GRAPHIC DELETED]
- --------------------------------------------------------------------------------
The original document contains a bar chart depicting the
Company's loan loss allowance, compared to non-accruing loans at each of
the years ended December 31, 1992 through 1996. The following table
indicates, in million of dollars, the
data points for the chart.
Non-Accruing Loan Loss
Loans Allowance
1992 3.7 2.8
1993 1.5 3.3
1994 1.6 4.5
1995 1.7 4.4
1996 2.6 9.7
- --------------------------------------------------------------------------------
The Bank made a provision for loan losses of $454,000 in 1995 and $1.4
million in 1994. The provision in 1994 was primarily due to increased
allocations of $1.0 million effected in the second quarter as a result of the
Bank's reconsideration of, and a modification to, its policy on allowance for
loan losses after review of the Interagency Policy Statement on Allowance for
Loan and Lease Losses issued by the federal regulatory agencies as guidelines
for all regulated financial institutions.
Based on facts and circumstances currently available to the Company,
management believes that the allowance for loan losses was adequate at December
31, 1996; however, there can be no assurances that additions to such allowance
will not be necessary in future periods, which would adversely affect the
Company's results of operations.
Noninterest Income. During 1996, the Company's noninterest income was
$3.4 million compared to $2.0 million during 1995. The increased noninterest
income during 1996 resulted from an increase in the net gain on sales of REO of
$204,000, an increase in deposit related income of $185,000 and an increase of
$114,000 in commission income from a Bank subsidiary. In addition, during the
fourth quarter of 1995, after the realignment of the Bank's securities portfolio
in accordance with the implementation guide for SFAS No. 115, the Company sold
$52.0 million of underperforming available-for-sale mortgage-backed securities
at a net loss of $883,000, which was recognized in the fourth quarter of 1995 as
a reduction in noninterest income.
In 1995, the Company reported noninterest income of $2.0 million
compared to $3.3 million for 1994. The primary reason for the decrease in
noninterest income during 1995 was a decrease of $1.3 million in noninterest
income from the operations of three foreclosed hotels which the Bank operated
until it sold them in the fourth quarter of 1994.
Additional information regarding the composition of noninterest income
is included in Note 17 to the Consolidated Financial Statements.
Noninterest expense. Noninterest expense includes compensation and
employee benefits, office and occupancy expense, FDIC premiums, provisions for
losses on REO, amortization of goodwill and other items. Noninterest expense
amounted to $23.5 million, $16.1 million and $14.0 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Excluding the one-time SAIF
special assessment and related charge and REO provisions, noninterest expense
totaled $18.6 million, $16.0
16
<PAGE>
million and $13.2 million, respectively, during such periods. The increase in
1996 mostly related to the costs associated with the acquisition and integration
of Seaboard into the Bank. The increase in 1995 resulted from a $2.4 million
increase in compensation and employee benefits due mainly to a $2.0 million
expense associated with the Company's ESOP, a $596,800 expense relating to the
Company's Recognition and Retention Plan ("RRP"), and the additional costs
associated with operating as a public company.
Generally, a bank's ability to cover its recurring noninterest expenses
with net interest income (expense coverage) reflects its ability to maintain
core
[GRAPHIC DELETED]
- --------------------------------------------------------------------------------
The original document contains a bar chart depicting the
Company's Expense Coverage for each of the years ended December 31, 1992
through 1996. The following table indicates, in millions of dollars, the
data points for the graph.
Non-interest Expense excluding
REO provision, special SAIF Net Interest
assessment and a related charge Income
1992 $12.2 $21.3
1993 12.3 20.5
1994 13.2 21.6
1995 16.0 28.8
1996 18.6 34.2
- --------------------------------------------------------------------------------
profitability. Note 17 to the Consolidated Financial Statements details
additional information regarding other noninterest expenses. Income Taxes. For
the years ended December 31, 1996, 1995 and 1994 the Company recorded income tax
expense of $5.7 million, $5.1 million and $3.0 million, respectively. The
Company's effective tax rates were to 39.9%, 35.9% and 31.7% during 1996, 1995
and 1994, respectively. The increase in the effective tax rate in 1996 primarily
resulted from differences in nondeductible items during 1996, compared to 1995.
In 1994, the Company's effective tax rate was reduced by a tax credit related to
the rehabilitation of the Company's headquarters which is an historic landmark.
For all periods presented, the difference between the effective tax rate and the
statutory tax rate primarily related to variances in the items that are either
nontaxable or nondeductible and the method of calculation used for the tax bad
debt deduction. See Note 16 to the Consolidated Financial Statements.
Asset and Liability Management
The objective of Life's Asset/Liability Management Committee ("ALCO") is
to provide direction in the acquisition and deployment of funds in order to
optimize the Company's net interest income over time within the constraints of
interest-rate sensitivity, liquidity and capital adequacy consistent with Board
approved guidelines. The ALCO meets monthly to monitor, among other things, the
Company's exposure to interest-rate risk. The Committee generally reviews the
Bank's liquidity, cash flow needs, maturities of investments, deposits and
borrowings, current market conditions and interest rates. The ALCO develops
strategies to attain profitability and performance goals under various interest
rate scenarios. A pricing subcommittee meets at least weekly to make pricing and
funding decisions with respect to the Bank's earning assets and paying
liabilities. Results of the ALCO are reported to the Board of Directors on a
quarterly basis.
The ALCO typically has adapted the Company's asset/liability management
strategy to current market conditions. During the declining and relatively low
interest rate environment which prevailed throughout 1992 and 1993, the
Company's ability to originate ARM loans was adversely affected. In addition,
since the longer term (15 years or more) fixed-rate mortgage loans being
originated typically had interest rates perceived to increase the interest-rate
risk exposure of maintaining such loans in portfolio, the Company sold into the
secondary market a substantial amount of the residential mortgage loans which it
originated in 1992 and 1993. During such period, and continuing into 1994, the
Company
17
<PAGE>
substantially increased its investment in mortgage-backed securities,
particularly those having an interest rate adjustment feature or with relatively
short (less than five years) estimated average lives. As a result of the
significant increases in market rates of interest during 1994, mortgage loan
production for sale into the secondary market was significantly reduced, and the
Company was able to increase its originations of ARMs for retention in its
portfolio. Proceeds from the stock conversion, as well as most borrowed money
and deposit growth recorded during the fourth quarter of 1994, were invested
primarily in U.S. Treasury indexed, one-year adjustable-rate mortgage-backed
securities in an effort to maintain a defensive interest-rate risk posture in
the rapidly rising short-term interest rate environment during the period. At
December 31, 1994, $244.2 million, or 58.0%, of the Company's total loan
portfolio had adjustable interest rates or had provisions which allow the Bank
to call the loan at certain specified dates during the term of the loan,
typically every one, three or five years. In addition, at such date the
Company's mortgage-backed securities portfolio had $199.0 million, or 39.1%, of
the portfolio invested in adjustable-rate securities.
In 1995 the interest rate environment changed as long-term interest
rates declined, resulting in a flatter yield curve. Average loan balances
increased $70.9 million, as borrowers preferred fixed-rate loans, rather than
ARM loan products. Most of the lower rate fixed-rate loans were originated for
sale into the secondary market. The Company purchased mortgage-backed securities
for the majority of its growth in earning assets; the average portfolio grew by
$148.6 million during the year, and added $13.8 million in additional pre-tax
income.
The Company's traditional source of funds, savings deposits, were not
sufficient to fund the growth in assets in 1995. The savings customer did not
have the economic incentive to invest in moderate or longer term certificates of
deposits, and average savings gains were only $28.2 million. Increasingly, the
Company turned to wholesale borrowings for its funding requirements. The average
balance of borrowings grew by $85.1 million, mostly in Repos. To take advantage
of medium-term inversions in the yield curve, $133.0 million in Repos were
borrowed for terms of from one to three years. The result was a decrease in
rates and a dramatic increase in the weighted average term of Repos, as well as
reduced overall interest-rate risk of the Company. The effect was a $7.2 million
increase in the net interest margin in 1995 compared to 1994.
In 1996 the interest rate yield curve steepened slightly to the level
that many potential borrowers preferred ARM loans once again. The Bank
originated $145.1 million in loans during the year, of which $93.2 million were
adjustable-rate mortgage loans. In an effort to leverage the Company, all except
$880,000 of the loans were retained in its portfolio. The result was that
average loans increased $130.0 million during the year, including the $69.2
million in loans from the Seaboard acquisition, and interest income increased
$10.2 million.
Further leveraging was accomplished in mid-year with the purchase of an
additional $132.4 million of one-year Treasury based adjustable-rate agency
mortgage-backed securities. The result was a $82.7 million increase in the
average balance of mortgage-backed securities and a $6.3 million increase in
interest income.
Partial funding for the growth of earning assets was provided by a
$105.4 million increase in average deposits, including the $66.8 million in
deposits from Seaboard. Additional funding was provided by a $137.1 million
increase in average borrowings during the year. The average cost of borrowings
was reduced by 32 basis points by relying relatively less on short-term Repos
and more on convertible FHLB Advances that offer interest rates that were
approximately 50 basis points less than 30-day Repos. Even though there is a
risk that interest rates will decline below convertible advance rates,
management feels that the risk is minimal, given the present low short-term
interest rate levels. At December 31, 1996, the Company had $102.7 million in
convertible FHLB Advances, $159.0 million in other FHLB Advances and $259.0
million in Repos.
18
<PAGE>
Interest-rate sensitivity is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities and the time and extent to
which interest-earning assets and interest-bearing liabilities mature or are
subject to changes in interest rates. To the extent that liabilities reprice
more quickly than assets within a given time period, an institution is said to
be "negatively gapped". Conversely, a "positive gap" indicates a situation where
assets reprice more quickly than liabilities. At December 31, 1996, the
Company's interest-earning assets which were estimated to mature or reprice
within one year exceeded the Company's interest-bearing liabilities with the
same characteristics, resulting in a positive gap of $21.2 million, or 1.49%, of
the Company's total assets. During a period of rising interest rates, a negative
gap would tend to decrease net interest income, while a positive gap would tend
to result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to decrease net interest
income.
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1996. The estimates were produced using the Bank's internal model.
<TABLE>
<CAPTION>
Over One Over Two
One Year Year Thru Years Thru Over Five
or Less Two Years Five Years Years Total
------------- ------------- ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $215,630 $ 50,162 $194,021 $ 97,690 $ 557,503
Mortgage-backed securities 438,647 88,170 106,739 63,546 697,102
Consumer loans 22,756 13,144 29,311 13,431 78,642
Investment securities 9,242 500 700 30,000 40,442
-------- -------- -------- -------- ----------
Total $686,275 $151,976 $330,771 $204,667 $1,373,689
======== ======== ======== ======== ==========
Interest-bearing liabilities:
Certificates of deposit $400,340 $ 93,255 $ 76,676 $ 8,601 $ 578,872
Demand deposit accounts 25,264 25,264 49,656 -- 100,184
Savings accounts 10,652 10,654 31,960 -- 53,266
Other borrowings 1,742 1,742 1,743 -- 5,227
FHLB advances 32,377 30,724 191,587 7,023 261,711
Repos 182,000 66,000 11,000 -- 259,000
-------- -------- -------- -------- ----------
Total $652,375 $227,639 $362,622 $ 15,624 $1,258,260
======== ======== ======== ======== ==========
Total off-balance sheet position $(12,689) $ 5,141 $ 7,548 $ --
======== ======== ======== ========
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities and off-balance sheet
position $ 21,211 $(70,522) $(24,303) $189,043
======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
and off-balance sheet position $ 21,211 $(49,311) $(73,614) $115,429
======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities and
off-balance sheet position as a
percent of total assets 1.49% (3.47)% (5.18)% 8.13%
======== ========= ========= ========
</TABLE>
19
<PAGE>
Liquidity and Capital Resources
The Company's liquidity, represented by cash and cash equivalents, 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, sales of loans,
maturities of investment securities and other short-term investments and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities and
short-term investments 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 and other short-term interest-earning assets which
provide operational liquidity. The Company has been able to generate sufficient
cash through its deposits as well as borrowings (primarily consisting of
advances from the FHLB of Atlanta and Repos). At December 31, 1996, the Company
had $261.7 million of outstanding advances from the FHLB of Atlanta, $259.0
million in Repos and $5.2 million in other borrowings.
Liquidity provides Life funding sources for loan growth as well as
unforeseen transactional requirements affecting the asset and liability
structure of the balance sheet. Liquidity management is both a daily and
long-term function of business management. OTS regulations require savings
associations to maintain an average daily balance of liquid assets 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. This regulatory
liquidity requirement may be varied by the OTS from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the required liquidity ratio is 5%.
Additionally, current regulations require that short-term liquid assets must
constitute at least 1% of the average daily balance of net withdrawable accounts
and current borrowings. The Bank, as a component of its overall asset and
liability management strategy, maintains qualifying liquid assets at levels
which exceed regulatory requirements and at December 31, 1996, had a total
regulatory liquidity of 9.2% and a short-term regulatory liquidity of 1.1%.
Excess liquidity is generally invested in short-term investments such as
overnight deposits. On a longer-term basis, the Company maintains a strategy of
investing in various loan products. The Company uses its sources of funds
primarily to meet its ongoing operations, to fund maturing savings certificates
and savings withdrawals and to fund loan commitments and its portfolio of
mortgage-backed and investment securities. At December 31, 1996, the total
approved loan commitments outstanding amounted to $47.7 million. At the same
date, commitments under unused lines of credit amounted to $9.0 million.
Certificates of deposit scheduled to mature in one year or less at December 31,
1996, totaled $400.3 million. Management believes that a significant portion of
maturing deposits will remain with the Company. The Company anticipates that,
even with interest rates at lower levels than have been experienced in recent
years, it will continue to have sufficient funds to meet its operational needs.
Stockholders' equity amounted to $150.9 million at December 31, 1996.
This level of equity represents 10.6% of total assets at the end of the year. At
December 31, 1996, the Bank's regulatory capital was well in excess of
applicable regulatory requirements.
20
<PAGE>
Impact of New Accounting Standards
SFAS No. 125 and SFAS No. 127. The Financial Accounting Standards Board
("FASB") has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", and SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
which do not permit adoption prior to January 1, 1997. SFAS No. 125, as issued,
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. SFAS No. 127 defers certain
provisions of SFAS No. 125 until after December 31, 1997. SFAS No. 125 and SFAS
No. 127 will be adopted by the Bank when required. For additional information on
these and other FASB statements, see Note 21 to the Consolidated Financial
Statements.
Impact of Recent Legislation
SAIF Recapitalization
On September 30, 1996, the President signed into law the Omnibus
Consolidated Appropriations Act. Part of this act, the Deposit Insurance Funds
Act of 1996 ("BIF/SAIF Legislation"), provides for, among other things, the
resolution of the FDIC premium disparity between Bank Insurance Fund ("BIF") and
SAIF insured financial institutions.
The BIF/SAIF Legislation required a one-time special assessment to
recapitalize the SAIF. The assessments, based on the amount of SAIF-assessable
deposits held by an institution as of March 31, 1995, was effective on September
30, 1996, and, in accordance with final rules adopted by the FDIC, was paid in
November 1996. The FDIC determined that, in order to fully capitalize the SAIF
to statutorily mandated levels, all SAIF insured depository institutions (except
certain "weak institutions") were assessed 65.7 basis points on SAIF-assessable
deposits as of March 31, 1995. If an institution merged with or acquired another
institution since March 31, 1995, it was required to add to its special
assessment base the March 31, 1995 assessable deposits of the institution that
was acquired.
Consistent with the BIF/SAIF Legislation, the Bank's pro-rata one-time
special assessment to recapitalize the SAIF was $4.4 million. In conformity with
the applicable FASB guidelines, the Bank accrued this liability on September 30,
1996, resulting in the additional one-time increase in FDIC premiums, and paid
the assessment in November 1996.
Effective January 1, 1997, the BIF/SAIF Legislation requires that SAIF
members have the same risk-based assessment schedule as BIF members.
Additionally, the legislation provides for a sharing formula to meet the
Financing Corporation bond obligation ("FICO Bonds")1 between members of the
SAIF and the BIF. The BIF/SAIF Legislation also provides for the conditional
merger of the BIF and the SAIF no earlier than January 1, 1999. When the funds
are merged, the FICO Bond premium will be equal for all members of the new fund.
As a "well capitalized institution", the Bank previously paid the lowest
SAIF insurance premium rate of 23 basis points on insured deposits for the
fourth quarter of 1996. Beginning January 1, 1997,
- --------
1 FICO Bonds were issued in an attempt undertaken between 1987 and 1989 to
provide funds for the ailing Federal Savings and Loan Insurance Corporation
("FSLIC") without a direct taxpayer expense. Since the establishment of the SAIF
in 1989, a portion of the SAIF premiums has been earmarked to satisfy the $780
million in annual interest obligations on FICO Bonds, interest that continues
until 2019.
21
<PAGE>
unless the base rate for "well capitalized institutions" is modified, the Bank's
FDIC premium should be 6.4 basis points (the FICO Bond obligation). Based on
deposit levels at December 31, 1996, this will reduce the Bank's annual premium
assessment by approximately $1.2 million.
Bad Debt Reserve Recapture
On August 20, 1996, as part of the Small Business Job Protection Act of
1996, Congress enacted legislation that makes it substantially easier for
savings institutions to convert to a commercial bank charter, diversify their
assets, or merge into a commercial bank. The legislation effectively changes the
methods savings institutions use to compute bad debt deductions for tax purposes
and requires savings institutions with assets greater than $500 million to
recapture their post-1987 tax reserves. The Bank has determined that
approximately $1.4 million of post-1987 tax reserves are subject to recapture
over a six-year period. The Bank previously recorded a deferred tax liability
related to its post-1987 tax reserves and has determined that the effects of the
recapture are not material to the Bank's financial condition or results of
operations.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Company and related notes
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 changes in the relative purchasing power of money
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution such as the Company are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services, since such prices may be
affected by inflation to a larger extent than interest rates. As market interest
rates rise or fall in relation to the rates earned on the Company's loans and
investments, the value of these assets decreases or increases, respectively.
---------------------------------------
[PICTURES AND DESCRIPTIONS DELETED - SEE APPENDIX]
22
<PAGE>
Report of Independent Auditor
The Board of Directors and Stockholders of
Life Bancorp, Inc.
Norfolk, Virginia
We have audited the accompanying consolidated balance sheets of Life Bancorp,
Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, 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 audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Life Bancorp, Inc. and
subsidiary as of December 31, 1996 and 1995, 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.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities as of January 1, 1994.
/s/ Edmondson, LedBetter & Ballard, L.L.P.
Norfolk, Virginia
January 27, 1997
23
<PAGE>
<TABLE>
<CAPTION>
Life Bancorp, Inc.
Consolidated Balance Sheets
(In thousands, except stock data)
December 31,
---------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Assets
Cash and cash equivalents:
Interest-bearing deposits....................................................$ 3,494 $ 1,668
Noninterest-bearing deposits................................................. 7,789 7,177
Securities held-to-maturity (Note 3):
Mortgage-backed securities (market value of $141,269 and $169,195,
respectively).............................................................. 140,974 168,602
Securities available-for-sale (at market value) (Note 4):
Investments ................................................................. 30,742 23,040
Mortgage-backed securities................................................... 565,086 393,587
Loans receivable, net (Note 5).................................................. 622,405 467,424
Accrued interest and dividends receivable (Note 6).............................. 10,824 9,443
Real estate owned, net (Note 7)................................................. 1,202 622
FHLB stock, at cost (Note 8).................................................... 13,086 8,310
Premises and equipment, net (Note 9)............................................ 17,468 13,975
Excess of cost over net assets acquired (Notes 1 and 2)......................... 4,792 459
Other assets, including net deferred tax asset of $64 and $36,
respectively (Note 16)....................................................... 1,900 2,693
---------- ----------
Total assets.............................................................$1,419,762 $1,097,000
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (Note 10)...........................................................$ 732,322 $ 607,139
Notes payable and other borrowings:
Advances from Federal Home Loan Bank of Atlanta (Note 12).................. 261,711 148,636
Securities sold under agreements to repurchase (Note 11)................... 259,000 162,000
Secured note due to Thrift Financing Corporation (Note 13)................. 5,227 6,518
Advances from borrowers for taxes and insurance.............................. 1,795 2,981
Accrued interest payable, accrued expenses and other liabilities............. 8,769 8,785
---------- ----------
Total liabilities........................................................ 1,268,824 936,059
---------- ----------
Commitments and contingencies (Note 20)
Stockholders' Equity:
Preferred stock of $0.01 par value, authorized 5,000,000 shares,
none issued or outstanding................................................. -- --
Common stock of $0.01 par value, authorized 30,000,000 shares,
issued and outstanding 9,846,840 shares and 10,910,625, respectively....... 98 109
Additional paid-in capital................................................... 92,122 106,659
Retained earnings, substantially restricted (Note 23)........................ 63,871 59,447
Unearned common stock held by Employees' Stock Ownership
Plan ("ESOP") (Note 15).................................................... (5,732) (7,073)
Unearned common stock held by Recognition and Retention Plan
("RRP") (Note 15).......................................................... (1,389) --
Unrealized gain on securities available-for-sale, net of tax (Note 4)........ 1,968 1,799
---------- ----------
Total stockholders' equity............................................... 150,938 160,941
---------- ----------
Total liabilities and stockholders' equity...............................$1,419,762 $1,097,000
========== ==========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Life Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
For the Years Ended
December 31,
----------------------------------------
1996 1995 1994
--------- ----------- ---------
<S> <C> <C> <C>
Interest income:
Interest on cash deposits............................................... $ 372 $ 357 $ 711
Interest on investment securities....................................... 2,411 857 926
Interest on mortgage-backed securities.................................. 43,494 37,162 23,328
Interest on loans....................................................... 48,856 38,649 32,052
------- ------- -------
Total interest income................................................. 95,133 77,025 57,017
------- ------- -------
Interest expense:
Interest on deposits.................................................... 35,662 30,222 24,545
Interest on notes payable and other borrowings.......................... 25,267 18,044 10,874
------- ------- -------
Total interest expense................................................ 60,929 48,266 35,419
------- ------- -------
Net interest income................................................... 34,204 28,759 21,598
Provision (credit) for loan losses (Note 5)................................ (265) 454 1,431
------- -------- -------
Net interest income after provision for loan losses................... 34,469 28,305 20,167
------- ------- -------
Noninterest income:
Deposit account fees and related income................................. 629 444 352
Loan servicing fees..................................................... 577 636 674
Net gain on sales of mortgage loans held-for-sale....................... 12 142 95
Net gain on sales of real estate owned.................................. 300 96 229
Net gain on sales of assets............................................. 5 62 7
Net gain (loss) on sales of investments and mortgage-backed
securities............................................................ 89 (883) (691)
Unrealized loss on mortgage loans held-for-sale......................... -- -- (68)
Other (Note 17)......................................................... 1,750 1,526 2,697
------- ------- -------
Total noninterest income.............................................. 3,362 2,023 3,295
------- ------- -------
Noninterest expense:
Compensation and employee benefits...................................... 10,795 9,834 7,411
Occupancy and office operations......................................... 3,063 2,481 2,392
FDIC premium ........................................................... 1,568 1,365 1,256
Special SAIF assessment (Note 18)....................................... 4,380 N/A N/A
Advertising and promotion............................................... 593 639 610
Provision for losses on real estate owned............................... 61 41 746
Amortization of excess of cost over net assets acquired................. 900 96 271
Other (Note 17)......................................................... 2,141 1,598 1,294
------- ------- -------
Total noninterest expense............................................. 23,501 16,054 13,980
------- ------- -------
Income before income taxes................................................. 14,330 14,274 9,482
Income tax provision (Note 16)............................................. 5,716 5,126 3,007
------- ------- -------
Net income................................................................. $ 8,614 $ 9,148 $ 6,475
======= ======= =======
Net income per common and common equivalent share (4th quarter only for 1994):
Primary............................................................... $ .89 $ .90 $ .27
======= ======= =======
Fully diluted......................................................... $ .88 $ .89 $ .27
======= ======= =======
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Life Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
(In thousands)
Unrealized
Retained Unearned Unearned Gain (Loss)
Earnings, Common Common on Securities
Additional Substan- Stock Stock Available-
Common Paid-in tially Held Held for-Sale,
Stock Capital Restricted by ESOP by RRP Net of Tax Total
------ -------- ---------- --------- --------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.......... $ -- $ -- $48,252 $ -- $ -- $ -- $ 48,252
Net income............................ -- -- 6,475 -- -- -- 6,475
Net proceeds from issuance
of common stock.................... 109 106,181 -- (8,728) -- -- 97,562
Common stock released by
ESOP trust......................... -- (45) -- 263 -- -- 218
Unrealized loss on securities
available-for-sale, net of tax..... -- -- -- -- -- (3,996) (3,996)
---- -------- ------- ------- ------- ------- --------
Balance at December 31, 1994.......... 109 106,136 54,727 (8,465) -- (3,996) 148,511
---- -------- ------- ------- ------- ------- --------
Net Income............................ -- -- 9,148 -- -- -- 9,148
Cash dividends paid................... -- -- (4,428) -- -- -- (4,428)
Net conversion expenses and
refunds applied to additional
paid-in capital.................... -- (16) -- -- -- -- (16)
Common stock released by
ESOP trust......................... -- 539 -- 1,392 -- -- 1,931
Unrealized gain on securities
available-for-sale, net of tax..... -- -- -- -- -- 5,795 5,795
---- -------- ------- ------- ------- ------- --------
Balance at December 31, 1995 ......... 109 106,659 59,447 (7,073) -- 1,799 160,941
---- -------- ------- -------- ------- ------- --------
Net Income............................ -- -- 8,614 -- -- -- 8,614
Cash dividends paid................... -- -- (4,190) -- -- -- (4,190)
Repurchase of common stock............ (11) (15,151) -- -- -- -- (15,162)
Common stock released by
ESOP trust......................... -- 709 -- 1,341 -- -- 2,050
Acquisition of common stock
by RRP............................. -- (95) -- -- (2,901) -- (2,996)
Common stock released by
RRP trust.......................... -- -- -- -- 895 -- 895
Amortization of award of RRP.......... -- -- -- -- 617 -- 617
Unrealized gain on securities
available-for-sale, net of tax..... -- -- -- -- -- 169 169
---- -------- ------- ------- ------- ------- --------
Balance at December 31, 1996 ......... $ 98 $ 92,122 $63,871 $(5,732) $(1,389) $ 1,968 $150,938
==== ======== ======= ======= ======= ======= ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Life Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income................................................................... $ 8,614 $ 9,148 $ 6,475
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for losses on loans and real estate owned........................ (204) 495 2,177
Depreciation and amortization.............................................. 651 530 509
Net amortization of premiums and discounts on investments and
mortgage-backed securities.............................................. 1,676 (67) 3,806
Amortization of excess of cost over net assets acquired.................... 900 96 271
Hotel income in excess of renovation costs................................. -- -- (249)
Charitable contribution of premises and real estate owned.................. 153 -- --
Net gain on sales of real estate owned..................................... (300) (96) (229)
Net gain on sales of mortgage loans........................................ (12) (142) (95)
Unrealized loss on mortgage loans held-for-sale............................ -- -- 68
Net gain on sales of assets................................................ (5) (62) (7)
Net (gain) loss on sales of investments and mortgage-backed securities..... (89) 883 691
Loans originated for resale.................................................. (880) (10,451) (5,881)
Proceeds from loans sold to others........................................... 892 10,593 13,562
Noncash ESOP expense......................................................... 1,105 1,046 --
Noncash RRP expense.......................................................... 915 597 --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accrued interest receivable............................................... (828) (480) (1,819)
Deferred loan fees........................................................ (94) 138 (427)
Deferred income taxes..................................................... 28 (3,181) 1,701
Deferred gain on sale of hotels........................................... -- -- (1,080)
Other assets.............................................................. 1,025 1,285 60
Increase (decrease) in liabilities:
Accrued expenses and other liabilities.................................... 82 1,263 601
------- ------- -------
Net cash provided by (used in) operating activities....................... $13,629 $11,595 $20,134
------- ------- -------
<FN>
(Continued on Next Page)
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Life Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from sales and maturities of investments and mortgage-backed
securities................................................................. $ 39,959 $ 67,040 $ 95,106
Purchases of investment securities........................................... (19,943) (19,956) (13,137)
Principal collected on loans................................................. 54,779 51,728 68,267
Loans originated for investment.............................................. (144,212) (98,773) (114,227)
Proceeds from sale of premises and equipment................................. 5 146 7
Purchases of premises and equipment.......................................... (3,055) (263) (1,211)
Purchases of mortgage-backed securities...................................... (299,164) (188,529) (355,338)
Purchases of hotel renovations............................................... -- -- (459)
Principal collected on mortgage-backed securities............................ 133,335 92,708 78,040
Proceeds from sale of real estate owned...................................... 834 513 1,736
Purchase of FHLB stock....................................................... (4,346) (518) (1,726)
Proceeds from redemption of FHLB stock....................................... 350 957 1,141
Principal collected on ESOP loan............................................. 1,257 1,257 218
Payments for purchase of Seaboard Bancorp, Inc., net of cash acquired........ (6,074) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities........................ (246,275) (93,690) (241,583)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in checking deposits, savings
deposits, and certificates of deposit...................................... 58,394 18,877 59,330
Proceeds from notes payable and other borrowings............................. 309,553 188,819 220,616
Repayment of notes payable and other borrowings.............................. (108,869) (119,854) (158,198)
Net increase (decrease) in advances from borrowers for taxes and insurance... (1,335) (31) 712
Dividends paid............................................................... (4,501) (4,800) --
Repurchase of common stock................................................... (15,162) -- --
Purchase of common stock held for RRP........................................ (2,996) -- --
Net proceeds (refunds) from issuance of common stock......................... -- (16) 97,562
--------- --------- ---------
Net cash provided by (used in) financing activities........................ 235,084 82,995 220,022
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....................... 2,438 900 (1,427)
Cash and cash equivalents, beginning of year.................................... 8,845 7,945 9,372
--------- --------- ---------
Cash and cash equivalents, end of year.......................................... $ 11,283 $ 8,845 $ 7,945
========= ========= =========
Supplemental disclosures of cash flow information: Cash paid (received) during
the year for:
Interest................................................................... $ 35,195 $ 28,685 $ 20,670
========= ========= =========
Income tax payments........................................................ $ 4,518 $ 8,182 $ 1,545
========= ========= =========
Income tax refunds......................................................... $ (878) $ (1,953) $ --
========= ========= =========
Supplemental disclosures of noncash transactions:
Net foreclosed assets transferred from loans receivable to real estate owned. $ 1,149 $ 542 $ 935
========= ========= =========
Loans originated to finance sales of real estate owned....................... $ -- $ 322 $ 9,392
========= ========= =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
28
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Operations
Life Bancorp, Inc. (the "Holding Company" or the "Company") is a Virginia
corporation organized in May, 1994, for the purpose of becoming the
unitary savings and loan holding company for Life Savings Bank, FSB (the
"Bank"). Through its network of 20 full service offices in Norfolk,
Chesapeake, Portsmouth, Suffolk and Virginia Beach, Virginia, the Bank
offers permanent and construction residential loans, second mortgages and
equity lines of credit, consumer loans, commercial real estate and
business loans and lines of credit to individuals and businesses. Through
these offices, the Bank delivers a wide range of deposit products and
services to meet the needs of individuals, businesses and organizations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary Life Savings Bank, FSB, and the Bank's
wholly-owned subsidiaries. The accounts of the Company are included as of
October 11, 1994, the effective date of the conversion (Note 23). All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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 Equivalents
Cash and cash equivalents consist of interest-bearing and
noninterest-bearing deposits. For purposes of the Consolidated Statements
of Cash Flows, the Company considers all highly liquid debt instruments
with original maturities when purchased of three months or less to be cash
equivalents. From time to time, the Bank may have deposits at other
institutions in excess of insurance coverage.
Investment and Mortgage-Backed Securities
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 115 under which securities are
classified as held-to-maturity, available-for-sale or trading. Securities
classified as held-to-maturity are carried at amortized cost as the Bank
has the positive intent and ability to hold these securities to maturity.
Securities classified as available-for-sale are carried at fair value with
the amount of unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. The Bank had no securities
classified as trading in the years ended 1996, 1995 or 1994.
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for premium amortization and discount
accretion using the interest method over the estimated period to
maturity. Gains or losses are recognized based on the specific-
identification method.
The Bank had no outstanding commitments to sell securities at December 31,
1996.
Prior to the adoption of SFAS No. 115, all securities were stated at
amortized cost.
29
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Loans Receivable
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees or costs.
The allowance for loan losses is increased by provisions charged to income
and reduced by charge-offs, net of recoveries. Management's monthly
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's monthly
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest
and principal payments is no longer in doubt, in which case the loan is
returned to accrual status.
Loan Origination Fees
Origination fees, net of certain direct costs, have been deferred in
accordance with SFAS No. 91. Such net fees are recognized as an adjustment
to the interest-rate yield on each loan and are included in income over
the loan's contractual life, adjusted for prepayments. In the event that a
loan giving rise to net deferred fees is repaid prior to maturity or
renegotiation, the remaining balance of any related deferred fees is
recognized as income at that time.
Loan Servicing Fees
The Bank earns fees for servicing mortgage loans for others, but receives
no excess fees required to be capitalized. Therefore, all such fees are
taken into income in the period earned. However, see Note 21 regarding
SFAS No. 122, which was adopted by the Bank of January 1, 1996, and SFAS
No. 125, effective January 1, 1997. The amount of loans being serviced for
others is disclosed in Note 5.
Mortgage Loans Held-for-Sale
The Bank periodically generates additional funds for lending by selling,
without recourse, whole fixed-rate loans with maturities of 15 years or
greater. Mortgage loans held-for-sale are carried at the lower of cost or
market. Gains or losses on such sales are recognized at the time of sale
and are determined by the difference between the net sales proceeds and
the carrying value of the loans sold adjusted for any remaining net
deferred fees as previously discussed. Management intends, and has the
ability, to hold all other loans to maturity and management is not aware
of any conditions, such as liquidity or regulatory requirements, which
would impair its ability to do so.
Real Estate Owned
Real estate acquired in settlement of loans ("Real Estate Owned" or "REO")
is initially recorded at the lower of cost (loan value of real estate
acquired in settlement of loans plus incidental expenses) or estimated
fair value. Costs relating to the development and improvement of the
property are capitalized, while holding costs of the property are charged
to expense in the period incurred. Carrying values of REO are reduced when
they exceed fair value minus the estimated costs to sell. Fair values and
net realizable values are determined by reference to appraisals, written
market analyses from real estate brokers, tax assessments, internally
generated property evaluations, and other relevant data.
30
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Premises and Equipment
Premises and equipment are recorded at cost and depreciation is calculated
using the straight-line method, based on the following useful lives:
Asset Category Useful Life
Buildings 20 - 50 years
Furniture, fixtures and equipment 3 - 10 years
Automobiles 4 years
Excess of Cost Over Net Assets Acquired
The cost in excess of fair value of net assets acquired relates to
acquisitions in 1983 and 1996 and is being amortized in accordance with
SFAS No. 72. The Bank periodically assesses the remaining unamortized
amounts of such intangible assets to determine if impairment of value has
occurred. See Note 2 for a discussion of the Company's 1996 acquisition of
Seaboard Bancorp, Inc.
Securities Sold Under Agreements to Repurchase
The Bank routinely enters into sales of securities under agreements to
repurchase (reverse repurchase agreements). Reverse repurchase agreements
are accounted for as financings and the obligations to repurchase
securities sold are reflected as a liability in the Consolidated Balance
Sheets. The securities underlying the agreements remain in the asset
accounts.
Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
such as commitments to extend credit, lines of credit and letters of
credit. Management assesses the risk for potential losses related to these
instruments on an on-going basis.
Pension Plans
The Bank maintains a non-contributory defined benefit pension plan for all
qualifying full-time employees hired prior to their 65th birthday. The
benefit formula is based upon final average earnings and years of credited
service. The Bank's policy is to fund actuarially determined costs as they
accrue.
The Bank also maintains a non-contributory defined benefit pension plan
for all qualifying directors. The plan benefit is based upon 120
formula-determined level payments beginning the month following the later
of retirement or attainment of age 70. While the related expense and
liability for the plan are recognized annually, the Bank's policy is to
fund the plan as benefits become payable to the retirees. Funding needs
for the plan are expected to be substantially offset by insurance proceeds
as explained in Note 15.
Deferred Compensation Plans
The Bank also maintains two deferred compensation plans, one for
qualifying directors and employees and the other for qualifying
executives. Benefits under both plans are based on the amount and timing
of both elective participant deferrals and discretionary employer
contributions. Contributions are funded when the related expense is
recognized.
31
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Income Taxes
The Company and its subsidiary file a consolidated income tax return. The
provision for income taxes is computed according to the terms of SFAS No.
109, "Accounting for Income Taxes". Under this method, deferred taxes are
provided on a liability method whereby deferred tax assets are recognized
for deductible temporary differences and operating loss and tax credit
carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Fair Value of Financial Instruments
The estimated fair values required under SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," have been determined by the Bank
using appropriate valuation methodologies and available market information
as of December 31, 1996 and 1995. However, considerable judgment is
required to develop the estimates of fair value. Accordingly, the
estimates presented in Note 22 for the fair value of the Bank's financial
instruments are not necessarily indicative of the amounts the Bank could
realize in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
Reclassification
Certain items in the 1995 and 1994 consolidated financial statements have
been reclassified in order to conform with the 1996 consolidated financial
statements presentation. These reclassifications had no effect on 1996,
1995 or 1994 net income or retained earnings.
2. Mergers and Acquisitions
On January 31, 1996, the Company completed its acquisition of Seaboard
Bancorp, Inc. ("Seaboard"), the holding company for Seaboard Savings Bank,
F.S.B., ("Seaboard Savings"). Seaboard Savings, headquartered in Virginia
Beach, operated three offices, one each in the Virginia cities of
Chesapeake, Virginia Beach and Portsmouth. The operations of Seaboard
Savings were merged into the Bank effective February 1, 1996.
The purchase of Seaboard was accounted for under the purchase method of
accounting, whereby the purchase price is allocated to the underlying
assets acquired and liabilities assumed based on their respective fair
values at the date of acquisition. The total cost of $8.8 million exceeded
the fair value of the net assets by approximately $5.2 million which will
be accounted for as goodwill and amortized, in accordance with SFAS No.
72, over approximately 15 years. Additionally, a $451,000 adjustment in
the valuation of goodwill was made due to the SAIF special assessment
(Note 18). The results of operations of Seaboard, beginning February 1,
1996, are included in the Company's results of operations in the 1996
financial statements.
At December 31, 1995, Seaboard's assets totaled approximately $82.0
million and its deposits totaled approximately $66.5 million. The
financial results of the Company for 1995 do not include the results of
the acquisition of Seaboard.
32
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
3. Securities Held-to-Maturity:
The amortized cost and estimated market value of securities
held-to-maturity at December 31, 1996 and 1995, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------------------------------- --------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities
FHLMC/FNMA/
GNMA
30-year $ 31,161 $ 524 $ -- $ 31,685 $ 38,237 $ 586 $ -- $ 38,823
15-year 17,347 414 -- 17,761 23,196 490 -- 23,686
7-year 67,082 -- (839) 66,243 78,377 2 (601) 77,778
5-year 5,136 17 (9) 5,144 6,599 42 (7) 6,634
Adjustable 10,223 292 -- 10,515 12,165 102 -- 12,267
REMICs
Fixed-rate 10,025 -- (104) 9,921 10,028 -- (21) 10,007
-------- ------ ----- -------- -------- ------ ----- --------
Total $140,974 $1,247 $(952) $141,269 $168,602 $1,222 $(629) $169,195
======== ====== ===== ======== ======== ====== ===== ========
</TABLE>
The amortized cost and estimated market value of securities
held-to-maturity by final maturity date at December 31, 1996 and 1995, are
shown below (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,136 $ 5,144 $ -- $ --
Due after one year through five years 67,092 66,254 84,976 84,413
Due after five years through ten years 19,855 20,039 12,615 12,890
Due after ten years 48,891 49,832 71,011 71,892
-------- -------- -------- --------
$140,974 $141,269 $168,602 $169,195
======== ======== ======== ========
</TABLE>
33
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
4. Securities Available-for-Sale:
The amortized cost and estimated market value of securities
available-for-sale at December 31, 1996 and 1995, are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and federal agency
obligations $ 31,316 $ 12 $ (586) $ 30,742 $ 17,957 $ 68 $ -- $ 18,025
Mutual funds -- -- -- -- 5,000 15 -- 5,015
-------- ------ ------- -------- -------- ------ ----- --------
31,316 12 (586) 30,742 22,957 83 -- 23,040
-------- ------ ------- -------- -------- ------ ----- --------
Mortgage-backed
securities
FHLMC/FNMA/
GNMA
30-year 27,450 450 (153) 27,747 32,949 387 (39) 33,297
7-year 17,055 17 (161) 16,911 40,217 17 (176) 40,058
Adjustable 356,559 5,542 (129) 361,972 192,340 2,700 (226) 194,814
REMICs
Fixed-rate 131,337 114 (1,917) 129,534 77,274 260 (178) 77,356
Adjustable-rate 28,922 33 (33) 28,922 47,945 252 (135) 48,062
-------- ------ ------- -------- -------- ------ ----- --------
561,323 6,156 (2,393) 565,086 390,725 3,616 (754) 393,587
-------- ------ ------- -------- -------- ------ ----- --------
Total $592,639 $6,168 $(2,979) $595,828 $413,682 $3,699 $(754) $416,627
======== ====== ======= ======== ======== ====== ===== ========
</TABLE>
The application of SFAS No. 115 resulted in a credit to stockholders'
equity of $1,968,000 ($3,189,000 net of income tax of $1,221,000) at
December 31, 1996, compared to a credit of $1,799,000 ($2,945,000 net of
income tax of $1,146,000) at December 31, 1995.
The amortized cost and estimated market value of securities
available-for-sale by final maturity date at December 31, 1996 and 1995,
are shown below (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 301 $ 301 $ 5,000 $ 5,015
Due after one year through five years 18,250 18,106 30,788 30,771
Due after five years through ten years 33,321 32,846 27,386 27,312
Due after ten years 540,767 544,575 350,508 353,529
-------- -------- -------- --------
$592,639 $595,828 $413,682 $416,627
======== ======== ======== ========
</TABLE>
At December 31, 1996, the second and third categories above include three
securities callable within one year. The amortized cost of these
securities is $29,920,000 and at December 31, 1996, the estimated market
value associated with these callable securities is $29,346,000.
34
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Results from sales of securities are as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Gross proceeds from sales $29,999 $51,765 $89,106
======= ======= =======
Gross realized gains $ 146 $ -- $ 646
Gross realized losses (57) (883) (1,337)
------- ------- -------
Net realized gains (losses) $ 89 $ (883) $ (691)
======= ======= =======
</TABLE>
5. Loans Receivable:
Loans receivable at December 31, 1996 and 1995, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
First mortgage loans Principal balances:
Secured by one-to-four family residences $393,538 $329,793
Secured by other properties 133,677 76,165
Construction loans 58,228 25,351
Residential lots 3,691 4,986
-------- --------
589,134 436,295
-------- --------
Consumer and other loans Principal balances:
Home equity and second mortgage 34,425 27,826
Automobile 31,072 15,970
Lines of credit 5,608 5,803
Other 7,537 5,456
-------- --------
78,642 55,055
-------- --------
Less:
Loans-in-process 31,631 16,062
Allowance for loan losses 9,656 4,438
Net deferred loan origination fees 2,142 2,068
Purchase accounting discount 757 481
Unearned discount 1,134 595
Discount on loans purchased 51 282
-------- --------
45,371 23,926
$622,405 $467,424
======== ========
</TABLE>
35
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
The following is an analysis of the allowance for loan losses (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 4,438 $4,459 $ 3,274
Allowance acquired from Seaboard 5,185 N/A N/A
Provisions (credited) charged to operations (265) 454 1,431
Loans charged-off (1,429) (788) (1,068)
Recoveries 1,727 313 822
------- ------ -------
Balance, end of year $ 9,656 $4,438 $ 4,459
======= ====== =======
</TABLE>
The principal balance of nonaccrual loans, and renegotiated loans for
which the interest rate has been reduced from that stipulated in the
original loan agreement, totaled approximately $6,286,000 and $6,947,000
at December 31, 1996 and 1995, respectively. The differences between
interest income that would have been recorded under the original terms of
such loans and the interest income actually recognized are summarized
below (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Interest income that would have
been recorded $435 $639 $734
Less interest income recognized 206 462 540
---- ---- ----
Interest income foregone $229 $177 $194
==== ==== ====
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans
have been modified.
Results from sales of loans are as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
------ ------- --------
<S> <C> <C> <C>
Gross proceeds from sales $892 $10,544 $13,562
==== ======= =======
Gross realized gains $ 12 $ 150 $ 118
Gross realized losses -- (8) (23)
---- ------- -------
Net realized gain $ 12 $ 142 $ 95
==== ======= =======
</TABLE>
Unrealized losses on mortgage loans held-for-sale for the years ended
December 31, 1996, 1995 and 1994 were $0, $0 and $68,000, respectively.
The unrealized loss recognized in 1994 resulted from the transfer of
certain loans held-for-sale into the held-to-maturity category.
36
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Mortgage loans serviced for others are not included in the accompanying
Consolidated Balance Sheets. The unpaid principal balances of these loans
at December 31, 1996 and 1995, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
-------- ---------
<S> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC $131,514 $147,871
GNMA 17,646 19,352
VHDA 7,640 7,838
Other Investors 166 291
-------- --------
$156,966 $175,352
======== ========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing portfolios were approximately $644,000 and $640,000 at December
31, 1996 and 1995, respectively. Balances at December 31, 1996 were
maintained in noninterest checking accounts as required under servicing
agreements.
The following table sets forth information relating to the Bank's impaired
loans for the years ended December 31, 1996 and 1995, (in thousands), as
required by SFAS No. 114 (Note 21). The total of the recorded investment
in these loans and the related allowance for credit losses is included in
loans receivable.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1996 1995
------- -------
<S> <C> <C>
Impaired loans for which there is a related
allowance for credit losses $9,022 $4,223
Impaired loans for which there is no related
allowance for credit losses -- --
------ ------
Total impaired loans $9,022 $4,223
====== ======
Allowance for credit losses:
Balance, beginning of year $ 768 $ 756
Restructured loans not previously impaired 178 --
Allowance acquired from Seaboard 2,415 N/A
Provisions charged to operations 177 12
Loans charged-off (38) --
------ ----
Balance, end of year $3,500 $ 768
====== ======
Average impaired loans during the period $9,089 $4,234
====== ======
Interest income recognized on impaired loans
during the time within the period that
the loans were impaired $ 131 $ 98
====== ======
Interest income recognized on impaired loans using a cash-basis method
of accounting during the time within the period that
the loans were impaired. $ 131 $ 98
====== ======
</TABLE>
37
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
6. Accrued Interest and Dividends Receivable:
Accrued interest and dividends receivable at December 31, 1996 and 1995,
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Loans receivable $ 4,258 $4,730
Mortgage-backed securities 5,684 4,380
Investment securities and other 882 333
------- ------
$10,824 $9,443
======= ======
</TABLE>
7. Real Estate Owned:
Real estate owned at December 31, 1996 and 1995, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
------- -------
<S> <C> <C>
Real estate owned $1,232 $655
Allowance for losses on real estate owned (30) (33)
------ ----
$1,202 $622
====== ====
</TABLE>
The following is an analysis of activity in the allowance for losses on
real estate owned (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Balance, beginning of year $ 33 $ -- $ 5,060
Allowance acquired from Seaboard 8 N/A N/A
Provisions charged to operations 61 41 746
Losses charged-off (72) (11) (5,808)
Recoveries -- 3 2
---- ---- -------
Balance, end of year $ 30 $ 33 $ --
==== ==== =======
</TABLE>
38
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Results from sales of real estate owned are as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Gross proceeds from sales $834 $835 $10,236
==== ==== =======
Gross realized gains $290 $ 89 $ 1,320
Gross realized losses -- (3) (10)
---- ---- -------
Net realized gains 290 86 1,310
Deferred realized gains -- -- (1,117)
Deferred gains recognized 10 10 36
---- ---- -------
Net recognized gain $300 $ 96 $ 229
==== ==== =======
</TABLE>
On October 31, 1994, the Bank sold three foreclosed hotel properties
representing more than 90% of its total REO balance at that date. The
properties were sold at a gain of $1,117,000 which is being recognized on
the installment method, with $10,000, $10,000 and $36,000 of gain being
recognized for the years ended December 31, 1996, 1995 and 1994,
respectively. The Bank financed $8,500,000 of the sales price.
8. FHLB Stock:
The Bank, as a member of the FHLB system, is required to maintain an
investment in capital stock of the FHLB in an amount equal to the greater
of 1% of its outstanding home loans or 5% of advances from the FHLB.
At December 31, 1996 and 1995, the Bank's investment in FHLB stock was
$13,086,000 and $8,310,000, at cost, respectively.
9. Premises and Equipment:
Premises and equipment at December 31, 1996 and 1995, are summarized by
major classifications as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Land and buildings $18,656 $15,319
Furniture, fixtures and equipment 5,307 3,509
------- -------
23,963 18,828
Less accumulated depreciation (6,524) (4,886)
------- -------
17,439 13,942
Improvements to leased property, net of amortization 29 33
------- -------
$17,468 $13,975
======= =======
</TABLE>
39
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
10. Deposits:
Deposits at December 31, 1996 and 1995, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- -------------------------------------------
Percent Weighted Percent Weighted
of Average of Average
Amount Total Rates Amount Total Rates
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 52,521 7.17% 3.32% $ 58,208 9.59% 3.34%
Negotiable order of with-
drawal ("NOW") accounts 29,496 4.03 2.19% 26,294 4.33 2.41%
Noninterest checking
accounts 2,557 0.35 -- 1,403 0.23 --
Money market deposit
accounts ("MMDA") 68,704 9.38 4.04% 34,025 5.60 3.09%
-------- ------ -------- ------
153,278 20.93 119,930 19.75
-------- ------ -------- ------
Certificates of deposit:
Less than 4.00% 68 0.01 1,370 0.22
4.00% - 4.99% 32,834 4.49 49,946 8.23
5.00% - 6.99% 521,509 71.21 401,781 66.18
7.00% - 8.99% 21,703 2.96 29,747 4.90
9.00% - 10.99% 2,763 0.38 4,365 0.72
-------- ------ -------- ------
578,877 79.05 5.65% 487,209 80.25 5.77%
-------- ------ -------- ------
Purchase Accounting -
Seaboard 167 .02 N/A N/A
-------- ------ -------- ------
$732,322 100.00% 5.17% $607,139 100.00% 5.21%
======== ====== ======== ======
</TABLE>
The aggregate amount of short-term (one year or less) certificates of
deposit with a minimum denomination of $100,000 was $35,009,000 and
$36,337,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, scheduled maturities of all certificates of deposit
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter
----------- ----------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than 4.00% $ 5 $ 62 $ -- $ 1 $ -- $ --
4.00% - 4.99% 31,539 1,140 155 -- -- --
5.00% - 6.99% 360,599 89,319 42,255 10,062 13,034 6,240
7.00% - 8.99% 7,560 1,286 5,005 4,509 982 2,361
9.00% - 10.99% 637 1,448 678 -- -- --
-------- ------- ------- ------- ------- ------
$400,340 $93,255 $48,093 $14,572 $14,016 $8,601
======== ======= ======= ======= ======= ======
</TABLE>
40
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
At December 31, 1995, scheduled maturities of all certificates of deposit were
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 Thereafter
----------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Less than 4.00% $ 1,370 $ -- $ -- $ -- $ -- $ --
4.00% - 4.99% 43,044 5,469 1,294 139 -- --
5.00% - 6.99% 257,499 85,673 25,149 20,047 7,187 6,226
7.00% - 8.99% 8,188 7,361 1,260 5,179 4,435 3,324
9.00% - 10.99% 2,076 245 1,376 668 -- --
-------- ------- ------- ------- ------- ------
$312,177 $98,748 $29,079 $26,033 $11,622 $9,550
======== ======= ======= ======= ======= ======
</TABLE>
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Passbook accounts $ 2,657 $ 1,196 $ 1,359
NOW accounts and MMDAs 3,324 2,473 2,570
Certificates of deposit 29,681 26,553 20,616
------- ------- -------
$35,662 $30,222 $24,545
======= ======= =======
</TABLE>
11. Securities Sold Under Agreements to Repurchase:
Securities sold under agreements to repurchase at December 31, 1996 and
1995, are as follows (in thousands):
Maturing
Year Ending Interest
December 31, Rate 1996 1995
--------------- --------------- ----------- -----------
1996 5.80% - 5.88% $ -- $ 45,000
1997 5.38% - 6.19% 182,000 80,000
1998 5.01% - 5.91% 66,000 37,000
1999 5.10% 11,000 --
-------- --------
$259,000 $162,000
======== ========
41
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Additional information concerning borrowings under reverse repurchase
agreements is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Average balance during the year $258,417 $114,058
Average interest rate during the year 5.67% 6.17%
Maximum month-end balance during the year $361,145 $195,000
Mortgage-backed securities underlying the agreements at year-end:
Carrying value, including accrued interest $288,209 $164,723
Estimated market value $292,206 $166,054
</TABLE>
The Bank routinely enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are accounted for as financings
and the obligations to repurchase securities sold are reported as a
liability in the accompanying Consolidated Balance Sheets. The dollar
amount of securities underlying the agreements remains in the asset
accounts.
Mortgage-backed securities sold under reverse repurchase and dollar
reverse repurchase agreements are delivered to the broker-dealers who
arrange the transactions. Under reverse repurchase agreements, the Bank
retains legal control of the securities underlying the agreements.
Broker-dealers may sell, lend, or otherwise dispose of securities sold
under dollar reverse repurchase agreements to other parties in the normal
course of their operation, and agree to resell to the Bank substantially
identical securities at the maturities of the agreements.
Interest expense on securities sold under agreements to repurchase is
summarized as follows (in thousands):
For the Years Ended
December 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
$14,665 $7,041 $739
======= ====== ====
42
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
12. Advances From Federal Home Loan Bank of Atlanta:
Advances from the FHLB at December 31, 1996 and 1995, consisted of the
following (in thousands):
Maturing December 31,
Year Ending Interest --------------------------------
December 31, Rate 1996 1995
--------------- --------------- ---------------- -------------
1996 4.87% - 6.94% $ -- $ 54,478
1997 5.72% - 6.99% 32,377 27,078
1998 4.81% - 7.15% 30,724 17,937
1999 4.84% - 6.97% 68,902 9,440
2000 5.41% - 6.97% 26,715 26,715
After 2000 4.72% - 7.03% 102,993 12,988
-------- ---------
$261,711 $148,636
======== ========
At December 31, 1996, convertible advances which can be called monthly by
the FHLB of Atlanta totaled $25,000,000 at a 4.84% interest rate scheduled
to mature in 1999 and $77,700,000 at interest rates ranging from 4.72% to
4.77% scheduled to mature after the year 2000.
Pursuant to collateral agreements with the FHLB, advances routinely are
collateralized by the Bank's stock in the FHLB and qualifying first
mortgage loans, and sometimes by qualifying mortgage-backed securities.
Total collateral was $362,034,000 and $229,852,000 at December 31, 1996
and 1995, respectively.
Interest expense on advances is summarized as follows (in thousands):
For the Years Ended
December 31,
------------------------------------------
1996 1995 1994
------- ------- ------
$9,934 $10,195 $9,104
====== ======= ======
13. Long-Term Debt, Thrift Financing Corporation:
During 1985, through its wholly-owned, single-purpose finance subsidiary,
Life Capital Corporation ("Life Capital"), the Bank participated in a
mortgage collateralized borrowing program (NMAC) through Thrift Financing
Corporation. Through this program, Life Capital borrowed $32,115,572 on
its note collateralized by mortgage-backed securities obtained in its
initial capitalization from the Bank. This debt bears interest at a rate
which is 0.2% above the weighted average rate of a group of bonds which it
and several similar notes collateralize under the NMAC program. The
effective rates for the years ended December 31, 1996, 1995 and 1994 were
11.61%, 11.63% and 11.61%, respectively. The debt is to be repaid from the
payment proceeds, including prepayments, if any, of the underlying
collateral. The debt was originally due in four segments with final
maturity dates ranging from July 1, 1999 to January 1, 2016. At December
31, 1996, the first three segments had been paid and a balance of
$5,375,000 of the fourth segment remains with a final
43
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
maturity date of January 1, 2016. Absent significant additional
prepayments, the approximate anticipated principal repayments under the
NMAC program during the next five years ending December 31 are as shown
below.
1997 1998 1999 2000 2001
----------- ----------- ----------- ---------- -----------
$618,506 $83,675 $93,353 $104,151 $116,198
The outstanding balance of long-term debt at December 31, 1996 and 1995,
is as follows (in thousands):
December 31,
------------------------------
1996 1995
------------ ------------
$5,227 $6,518
====== ======
Interest expense on long-term debt is summarized as follows(in thousands):
For the Years Ended
December 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
$669 $808 $1,031
==== ==== ======
14. Capital Requirements and Other Regulatory Matters:
The Bank is a federally chartered savings association subject to the Home
Owners' Loan Act and the regulations of the Office of Thrift Supervision
("OTS") promulgated thereunder. The OTS is responsible for the supervision
and regulation of savings institutions. The Federal Deposit Insurance
Corporation ("FDIC") administers the federal deposit insurance program.
Regulations promulgated by the OTS establish certain minimum levels of
regulatory capital for savings institutions subject to its supervision.
The Bank must follow specific capital guidelines stipulated by the OTS
which involve quantitative measures of the Bank's assets, liabilities and
certain off-balance sheet items. An institution that fails to comply with
its regulatory capital requirements must obtain OTS approval of a capital
plan and can be subject to a capital directive and certain restrictions on
its operations. At December 31, 1996, the minimum regulatory capital
requirements were:
o Tangible and core capital of 1.5% and 3%, respectively, consisting
principally of stockholders' equity, but excluding most intangible
assets such as goodwill and any net unrealized holding gains or losses
on debt securities available-for-sale. Core (or Tier 1) capital must
also equal or exceed 4% of the value of the risk-weighted assets.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8% of the
value of risk-weighted assets.
At December 31, 1996, the Bank was "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of
44
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
1991 ("FDICIA"). To be categorized as "well capitalized," the Bank must
maintain the following minimum ratios:
o Core capital of 5%
o Tier 1 risk-based capital of 6%
o Risk-based capital of 10%
The Bank's capital amounts and classification are subject to review by
federal regulators regarding components, risk-weightings and other
factors. There are no conditions or events since December 31, 1996, that
management believes have changed the institution's category.
A reconciliation of the Bank's capital as calculated in accordance with
GAAP to the four components of regulatory capital calculated at December
31, 1996 (in thousands, except ratios) is shown below:
<TABLE>
<CAPTION>
Tier 1
Equity Tangible Core Risk-Based Risk-Based
Capital Capital Capital Capital Capital
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Stockholders' equity, substantially
restricted $ 127,844 $ 127,844 $ 127,844 $127,844 $127,844
Unrealized gain on securities
available-for-sale, net of tax (1,968) (1,968) (1,968) (1,968) (1,968)
---------- ---------- ---------- -------- --------
Adjusted GAAP capital $ 125,876 125,876 125,876 125,876 125,876
==========
Unallowable land loans -- -- -- (787)
Intangible assets (4,821) (4,821) (4,821) (4,821)
General valuation allowances -- -- -- 5,973
---------- ---------- -------- --------
Regulatory capital measure 121,055 121,055 121,055 126,241
Minimum capital required 21,195 42,390 23,570 47,139
---------- ---------- -------- --------
Excess $ 99,860 $ 78,665 $ 97,485 $ 79,102
========== ========== ======== ========
Total assets per Thrift Report $1,418,659
Total risk-weighted assets ========== $589,241 $589,241
======== ========
Total tangible assets $1,412,973 $1,412,973
========== ==========
Capital ratio 8.9% 8.6% 8.6% 20.5% 21.4%
==========
Regulatory capital category:
Well capitalized, equal
to or greater than N/A% 5.0% 6.0% 10.0%
---------- ---------- -------- --------
Excess N/A% 3.6% 14.5% 11.4%
========== ========== ======== ========
</TABLE>
45
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
A reconciliation of the Bank's capital as calculated in accordance with
GAAP to the four components of regulatory capital calculated at December
31, 1995 (in thousands, except ratios) is shown below:
<TABLE>
<CAPTION>
Tier 1
Equity Tangible Core Risk-Based Risk-Based
Capital Capital Capital Capital Capital
---------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Stockholders' equity, substantially
restricted $ 118,039 $ 118,039 $ 118,039 $118,039 $118,039
Unrealized gain on securities
available-for-sale, net of tax (1,799) (1,799) (1,799) (1,799) (1,799)
--------- ---------- ---------- -------- --------
Adjusted GAAP capital $ 116,240 116,240 116,240 116,240 116,240
=========
Unallowable land loans (72)
Intangible assets (511) (511) (511) (511)
General valuation allowances -- -- -- 3,274
---------- ---------- -------- --------
Regulatory capital measure 115,729 115,729 115,729 118,931
Minimum capital required 16,442 32,883 17,097 34,195
---------- ---------- -------- --------
Excess $ 99,287 $ 82,846 $ 98,632 $ 84,736
========== ========== ======== ========
Total assets per Thrift Report $1,098,412
Total risk-weighted assets ========== $427,432 $427,432
======== ========
Total tangible assets $1,096,100 $1,096,100
========== ==========
Capital ratio 10.6% 10.6% 10.6% 27.1% 27.8%
==========
Regulatory capital category:
Well capitalized, equal
to or greater than N/A% 5.0% 6.0% 10.0%
---------- ---------- -------- --------
Excess N/A% 5.6% 21.1% 17.8%
========== ========== ======== ========
</TABLE>
Life Savings Bank, FSB's capital exceeds all of the fully phased-in
capital requirements imposed by the OTS. OTS regulations provide that an
institution that exceeds all fully phased-in capital requirements before
and after a proposed capital distribution can, after prior notice but
without the approval of the OTS, pay dividends or make other capital
distributions during the calendar year up to amounts determined by a
formula set forth in the regulations. Dividends or other capital
distributions in excess of such amounts require prior regulatory approval.
Life Bancorp, Inc. is subject to the restrictions of Virginia law, which
generally provide that a Virginia corporation may make distributions to
its shareholders unless, after giving effect to the distribution, (i) the
corporation would not be able to pay its debts as they become due in the
usual course of business or (ii) the corporation's total assets would be
less than the sum of its total liabilities plus (unless the articles of
incorporation permit otherwise, which in the case of the Company they do
not) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of stockholders whose preferential rights are
superior to those receiving the distribution.
46
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
15. Benefit Plans:
Retirement Plans
Total pension plan and retirement expense for the years ended December 31,
1996, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------------
1996 1995 1994
------ ------ ------------
<S> <C> <C> <C>
Net periodic pension cost:
Employees' plan $(259) $114 $ 43
Directors' plan 90 164 52
401(k) 133 91 118
Actuarial fees and other plan expense 27 72 74
----- ---- ----
Total $ (9) $441 $287
===== ==== ====
</TABLE>
Prior to July 1, 1995, the periodic cost recognized with respect to the
employees' plan was computed in accordance with the requirements of SFAS
No. 87 for single-employer pension plans. Effective July 1, 1995, all
assets and liabilities of this plan were transferred to the Financial
Institutions Retirement Fund ("FIRF"). The FIRF is a multi-employer
pension plan under which plan assets are not segregated by employer, nor
are separate actuarial valuations made with respect to each employer.
However, the full-funding limitation is applied on an employer-by-employer
basis, with any overfunded balance available to offset future contribution
requirements. The Bank's overfunded balance was approximately $1,055,000,
as of July 1, 1996, and approximately $1,260,000 as of July 1, 1995
(previously estimated by FIRF to be $692,000). Since pension cost with
respect to multi-employer plans is recognized in the amount of
contributions made, and since the Bank was not required to make any
contributions in 1996 or 1995, no expense was recognized for the FIRF
either year. Also, due to the extent of the plan's current overfunding,
pension liabilities previously accrued under SFAS No. 87 have been
reversed through 1996 operations.
The periodic cost recognized with respect to the directors' plan was
computed on the basis of individual retirement agreements which represent
unfunded obligations of the Bank. However, the Bank is the beneficiary of
life insurance policies on the lives of certain directors, the proceeds of
which will be available to offset retirement benefit costs or for other
corporate uses.
Effective January 1, 1994, the Bank adopted an employee savings plan
(401(k)) for the benefit of all employees having completed one year of
service and having attained age 21. The Bank matches 50% of an employee's
monthly contributions up to 3% of an employee's qualifying monthly
compensation. The Bank's contributions vest to the participants who have
completed five or more years of service. The Bank's matching contribution
for 1996 was approximately $133,000.
Deferred Compensation Plan
The total expense recognized with respect to the deferred compensation
plans for the years ended December 31, 1996, 1995 and 1994 was
approximately $52,000, $51,000 and $183,000, respectively. Effective with
the Bank's conversion to stock form, the then projected benefit obligation
of $354,000 was invested on participants' behalf in savings accounts of
the Bank, which accounts earn interest at the Bank's one-year Money Market
Certificate rate. Of those funds, $352,000 was subsequently invested in
Life Bancorp
47
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
stock on behalf of plan participants. Additional accumulations may, at the
election of individual participants, also be invested in Life Bancorp
stock.
Employee Stock Ownership Plan
On June 1, 1994, in conjunction with the Bank's anticipated conversion
from mutual to stock form, the Company established an Employee Stock
Ownership Plan ("ESOP") to provide additional retirement benefits to all
full-time employees of the Company and the Bank who have been credited
with at least 1,000 hours of service during a twelve-month period and who
have attained age 21. The Bank's annual contributions to the ESOP are
discretionary, and may be made in the form of Company stock, cash or in
such property as is acceptable to the Trustee.
Initially, the ESOP acquired 872,850 shares of the Company's stock,
financed by an $8,728,500 loan from the Company. The shares purchased by
the ESOP are reported in the stockholders' equity section of the
accompanying balance sheet, together with an offsetting charge to Unearned
common stock held by ESOP, a contra-equity account.
Allocations of contributions are made to each participant's account in the
same proportion that each such participant's qualifying gross compensation
for the year bears to the total qualifying gross compensation of all
participants for that year. As of December 31, 1996, 299,692 shares have
been so allocated, based on principal and interest payments made by the
ESOP on the loan, and no shares were committed-to-be-released. At December
31, 1996, the fair market value of the 573,158 unearned shares was
approximately $10,317,000.
ESOP shares allocated to participants in 1996, 1995 and 1994, were
included in earnings per share calculations for the number of days they
were outstanding during each year.
Total contributions to the ESOP, including dividends, which were used to
fund principal and interest payments amounted to $1,815,700 for 1996. The
Bank recognizes compensation expense when shares are released for
allocation to participants. Dividends on all shares held by the ESOP were
used by the ESOP to make additional payments on the ESOP loan, thus
releasing additional shares for allocation to participants. The total of
such dividends in 1996 was $384,000.
Stock Option Plan and Recognition and Retention Plan
Under the Company's 1995 Stock Option Plan ("Stock Option Plan"), options
to purchase common stock are granted to non-employee directors and certain
officers of the Bank at not less than the estimated fair market value at
the date of grant. The terms of the options generally provide that they
will be vested and exercisable 20% per year over a five year period
commencing on the date of grant. A total of 1,091,062 shares of common
stock may be issued pursuant to this plan. Under the Stock Option Plan,
stock appreciation rights may be granted such that the grantee may
surrender an exercisable stock option in return for payment by the
Company. No stock appreciation rights were granted during 1996 and 1995.
48
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
A summary of the status of the Company's Stock Option Plan as of December
31, 1996 and 1995 and changes during those years is presented as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- -----------------------------
Exercise Exercise
Shares Price Shares Price
--------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 817,202 $13.88 -- --
Options granted 21,000 14.50 817,202 $13.88
Options exercised -- -- -- --
Options forfeited -- -- -- --
------- ------ ------- -----
Options outstanding at end of year 838,202 $13.90 817,202 $13.88
======= ====== ======= ======
Options exercisable at year-end 163,440 $13.88 --
======= ====== =======
</TABLE>
The remaining contractual lives of the options granted in 1996 and 1995
are 9.3 and 8.3 years, respectively at December 31, 1996. The weighted
average remaining contractual life of total options is 8.3 years.
The Company's Recognition and Retention Plan ("RRP") was designed to
retain personnel of experience and ability in key positions by providing
employees and non-employee directors of the Bank with a proprietary
interest in the Company as an incentive to contribute to its success. A
total of 436,425 shares of common stock may be issued pursuant to this
plan. Unless the plan administration committee specifies otherwise, shares
of common stock granted pursuant to the RRP generally will be in the form
of restricted stock payable over a five year period at the rate of 20% per
year, such payments commencing on the first anniversary of the date of
grant of the award. A recipient will be entitled to all voting and other
shareholder rights of vested shares. Nonvested shares, while restricted,
may not be sold, pledged or otherwise disposed of and are required to be
held in the RRP Trust, and are voted by the trustees. The Company granted
10,500 shares at $14.50 per share and 322,623 shares at $13.88 per share
in 1996 and 1995, respectively. Of the shares granted in 1995, a total of
64,518 shares vested and were distributed to participants in 1996. The
Bank recognized expense related to the RRP of $915,487 and $596,800 during
the years ended December 31, 1996 and 1995, respectively.
During 1996, the Company purchased in the open market 209,127 shares for
distribution under the RRP program.
49
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
The Company applies Accounting Principles Board Opinion ("APB") 25 and
related interpretations in accounting for its Stock Option Plan and the
RRP. Accordingly, no compensation cost has been recognized for the Stock
Option Plan. Had compensation cost been determined based on the fair value
at the grant dates consistent with the methods of FASB Statement 123, the
Company's net income and net income per share would have been reduced to
the pro forma amounts indicated below (in thousands, except per share
data):
For the Years Ended
December 31,
-------------------------------
1996 1995
---------- ----------
Net income:
As reported $8,614 $9,148
Pro forma 8,003 8,747
Net income per share:
Primary:
As reported $ 0.89 $ 0.90
Pro forma 0.83 0.86
Fully diluted:
As reported $ 0.88 $ 0.89
Pro forma 0.81 0.85
For purposes of computing the pro forma amounts indicated above, the fair
value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model with the following assumptions for the
grants in 1996 and 1995, respectively: dividend yields of 3.0% for 1996
and 1995; expected volatility of 21% and 25%; risk-free interest rates of
6.4% and 6.9%; and an expected option life of seven years for 1996 and
1995. The fair value at the date of grant of each option granted in 1996
and 1995 was $3.72 and $4.09, respectively.
16. Income Tax Matters:
Retained earnings at December 31, 1996 and 1995, included additions to bad
debt reserves for income tax purposes of $14.3 million and $14.6 million,
respectively. If the amounts which qualified as bad debt deductions are
used for purposes other than to absorb bad debt losses or adjustments
arising from the carry back of net operating losses, income taxes may be
imposed at the then existing rates. Because the Bank does not intend to
use the reserves for purposes other than to absorb losses, deferred income
taxes have not been provided for these amounts, except for increases in
the reserves, if any, since 1987 as required by SFAS No. 109.
Prior to 1996, under the Internal Revenue Code and the Tax Code of
Virginia, the Bank was allowed a special deduction related to additions to
tax bad debt reserves established for the purpose of absorbing losses. The
provisions of the Internal Revenue Code permitted the Bank to deduct from
taxable income an allowance for bad debts based upon either a percentage
of taxable income (8%) before such deduction or actual loss experience;
the Tax Code of Virginia permitted a deduction of 40% of Virginia taxable
income before such deduction or actual loss experience. The Small Business
Job Protection Act of 1996 ("SBJPA"), enacted by Congress on August 20,
1996, eliminated the reserve method of calculating tax bad debt
deductions, effective January 1, 1996, for all savings institutions, like
the Bank, with assets over $500 million. Those institutions
50
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
are now required to use the direct charge-off method. Virginia's
conformity rules will require use of the same method in calculating
Virginia taxable income.
The SBJPA also requires that reserves accumulated after 1987 be restored
to taxable income ratably over a six-year period starting after December
31, 1995, unless the institution meets a residential loan requirement, in
which case the recapture may be suspended on a per annum basis for up to
two years. A savings institution with more than $500 million in assets,
such as the Bank, is generally required to recapture its entire post-1987
additions to its bad debt reserve. The Bank has determined that
approximately $1.4 million of post-1987 tax reserves are subject to
recapture. Since the Bank previously established a deferred tax liability
corresponding to its post-1987 tax reserves, the effects of the recapture
are not material to the Bank's financial condition or results of
operations.
Additionally, the SBJPA repeals certain other provisions in present tax
law applicable only to savings institutions, including special rules
applicable to foreclosures; a reduction in the dividends received
deduction; the ability of a savings institution to use net operating
losses to offset its income from a residual interest in a Real Estate
Mortgage Investment Conduit ("REMIC"); and the denial of a portion of
certain tax credits to a savings institution. The Bank has not determined
what effect, if any, these changes may have on its financial condition or
results of operations.
The provision for income taxes varies from the amount that would be
obtained by applying statutory income tax rates to income before income
taxes. The difference is explained as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax $4,915 $4,896 $3,224
Increases (decreases) in taxes resulting from:
Nondeductible expenses 541 77 25
Nontaxable income (39) (36) (96)
Tax credit and refunds -- -- (409)
State income tax, net of federal tax benefit 303 194 281
Other (4) (5) (18)
------ ------ ------
Provision for income taxes $5,716 $5,126 $3,007
====== ====== ======
Effective income tax rate 39.9% 35.9% 31.7%
====== ====== ======
</TABLE>
Income tax expense is summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal:
Current $5,283 $4,458 $ (895)
Deferred (91) 369 3,474
------ ------ ------
$5,192 $4,827 $2,579
====== ====== ======
State:
Current $ 405 $ 259 $ (244)
Deferred 119 40 672
------ ------ ------
$ 524 $ 299 $ 428
====== ====== ======
</TABLE>
51
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
The net deferred tax asset in the accompanying Consolidated Balance Sheet
at December 31, 1996 and 1995, includes the following amounts of deferred
tax assets and liabilities (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
--------- --------
<S> <C> <C>
Deferred tax asset $ 4,098 $ 4,481
Valuation allowance for deferred tax asset -- (284)
Deferred tax liability (4,034) (4,161)
------- -------
Net deferred tax asset $ 64 $ 36
======= =======
</TABLE>
The tax effects of principal temporary differences at December 31, 1996
and 1995, are shown in the following table (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
--------- --------
<S> <C> <C>
Deferred Tax Assets:
Amortization of goodwill $ 203 $ --
Accrued pension expense -- 103
Deferred loan fees -- 45
Book provision for losses on loans and real estate owned 1,745 1,675
Deferred compensation 649 611
ESOP and RRP 232 474
Unrealized gain recognized under SFAS No. 115 1,240 1,146
Deferred gain on sale of hotels -- 416
Other 29 11
------- ------
Total gross assets 4,098 4,481
Less valuation allowance -- (284)
4,098 4,197
------- ------
Deferred Tax Liabilities:
Deferred loan fees 110 --
Depreciable property basis differences 2,395 2,377
FHLB stock dividends 881 920
Accrued interest on pre-September 26, 1985 loans 190 233
Tax bad debt reserves 453 625
Other 5 6
------- ------
4,034 4,161
------- ------
Net deferred tax asset $ 64 $ 36
======= ======
</TABLE>
52
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
17. Other Noninterest Income and Expense:
Other noninterest income and expense amounts are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Other noninterest income:
Dividends on FHLB stock $ 682 $ 628 $ 566
Net income from hotel operations -- -- 1,314
Commission income 682 568 485
Rental income 241 268 228
Net REO income (expense) (161) (84) (107)
Other 306 146 211
------ ------ ------
$1,750 $1,526 $2,697
====== ====== ======
Other noninterest expense:
Insurance premiums $ 171 $ 204 $ 201
Accounting and legal 471 383 276
Directors' fees 217 185 170
Charitable contributions 247 54 56
Service charges 60 44 43
Other 748 524 356
------ ------ ------
$2,141 $1,598 $1,294
====== ====== ======
</TABLE>
18. Special SAIF Assessment:
On September 30, 1996, the "Deposit Insurance Funds Act of 1996" was
signed into law. The legislation included a special assessment to
recapitalize the SAIF insurance fund up to its statutory goal of 1.25% of
insured deposits. The assessment required the Bank to pay an amount equal
to approximately 65.7 basis points of its SAIF-assessable deposit base as
of March 31, 1995, which resulted in a $4.38 million charge (pre-tax) to
income during the year ended December 31, 1996.
19. Net Income Per Share Information:
For the purpose of calculating net income per common and common equivalent
share for each of the periods presented, the Company used the respective
numbers of weighted-average outstanding shares shown below (in thousands):
<TABLE>
<CAPTION>
1994
1996 1995 (4th Quarter Only)
------ -------- -----------------
<S> <C> <C> <C>
For primary net income per share 9,664 10,203 10,038
For fully diluted net income per share 9,831 10,289 10,038
</TABLE>
53
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Pro forma net income per share for periods prior to the fourth quarter of
1994 is not considered meaningful because the Bank's conversion to the
stock form of ownership did not occur until October 11, 1994.
The dilutive securities included in the calculations above consist
entirely of common equivalent shares in the form of common shares
contingently issuable under the Company's Stock Option Plan and
Recognition and Retention Plan, both of which plans are described in Note
15. No such shares were granted or issuable during 1994.
The calculations of weighted-average common and common equivalent shares
outstanding in 1996 also include the effects of the Company's repurchase
of 1,063,785 shares of its outstanding common stock during the year. Under
authorizations from its Board of Directors, the Company repurchased those
shares between January 26, 1996 and July 23, 1996 at prices ranging from
$14 1/8 to $14 1/2. At December 31, 1996, the Company is authorized to
repurchase up to an additional 10% (or 984,684 shares) of its outstanding
common stock during the 12 month period ending October 11, 1997.
20. Commitments, Contingencies and Related Parties:
Operating Leases
The Bank leases certain branch offices through noncancellable operating
leases with terms that range from 4 to 12 years, with renewal options
thereafter. Occupancy and office operations expense attributable to
operating leases includes $67,700 for 1996, $39,500 for 1995 and $52,440
for the year ended December 31, 1994.
Minimum future annual rent commitments under these agreements as of
December 31, 1996, for the next five years and thereafter are:
1997 1998 1999 2000 2001 Thereafter Total
--------- -------- --------- -------- -------- ---------- ---------
$71,942 $74,689 $76,767 $75,555 $27,502 $112,500 $438,955
Off-Balance-Sheet Risk
In the normal course of business, as necessary to meet the financing needs
of its customers, the Bank is a party to financial instruments with
off-balance-sheet risk. These financial instruments include commitments to
extend credit, lines of credit and letters of credit. They involve, to
varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the Consolidated Balance Sheets. The contract or
notional amounts of those instruments reflect the extent of involvement
the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
54
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
A summary of the contract amount of the Bank's exposure to
off-balance-sheet risk, except for undisbursed loan funds, at December 31,
1996 and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------------------------- ------------------------------------------
Fixed- Variable Fixed- Variable
Rate Rate Total Rate Rate Total
--------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend
credit, mortgage loans $3,361 $44,371 $47,732 $5,573 $19,531 $25,104
Commitments to extend
credit, consumer and
other loans 845 -- 845 366 -- 366
Undisbursed lines of credit -- 8,980 8,980 -- 5,898 5,898
Letters of credit -- 1,420 1,420 -- 1,817 1,817
</TABLE>
Fixed-interest rates range from 7.00% to 9.00% for mortgage loans and
8.00% to 17.50% for consumer and other loans.
Fees received in connection with the letters of credit are recognized
immediately. However, had the Bank deferred the fees and amortized them
into income over the life of the commitments, net income would not be
materially different.
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 some of the commitment
amounts are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of
the customer. Collateral held varies, but may include income-producing
commercial properties and other real estate.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance by a customer to a third party. Those
guarantees were issued primarily to support public and private borrowing
arrangements, including bond financing and similar transactions.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending a loan.
55
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
Loans to Officers and Directors
The Bank has made loans to officers and directors in the normal course of
business. The following is an analysis at December 31, 1996 and 1995, of
the loans to executive officers and directors (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- -------
<S> <C> <C>
Balance, beginning of year $1,066 $1,158
Increase due to change in qualifying officers 206 --
Originations 193 --
Collections (239) (92)
------ ------
Balance, end of year $1,226 $1,066
====== ======
</TABLE>
Employment and Severance Agreements
The Company has entered into employment agreements with its President and
Executive Vice-President. It also has entered into severance agreements
with its five Senior Vice-Presidents. The Bank also is a party to those
same agreements. At December 31, 1996, the total commitment under all
agreements was approximately $1,808,980.
Litigation
In the normal course of business, the Bank is involved in various legal
actions. It is the opinion of management, after consultation with legal
counsel, that the ultimate resolution of any such matters pending at
December 31, 1996, will not have a material effect on the accompanying
consolidated financial statements.
21. FASB Statements and Proposed Laws and Regulations:
FASB has issued SFAS No. 125 and SFAS No. 127 which do not permit adoption
prior to January 1, 1997. SFAS No. 125, as issued, is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. SFAS No. 127 defers certain
provisions of SFAS No. 125 until after December 31, 1997. SFAS No. 125 and
SFAS No. 127 will be adopted by the Bank when required.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," specifies the accounting for
transfers and servicing of financial assets and extinguishment of
liabilities as well as assets that can be contractually prepaid in such a
way that the holder would not recover substantially all of its investment.
Under SFAS No. 125, an entity recognizes only assets it controls and
liabilities it has incurred, derecognizes assets only when control has
been surrendered and derecognizes liabilities only when they have been
extinguished. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with pledge of collateral.
Extinguishments of liabilities are recognized only when the debtor pays
the creditor or is otherwise legally released from the obligation.
This statement addresses when an obligation to service financial assets
should be recognized as an asset or a liability, that the servicing asset
or liability is to be amortized in proportion to the period of net
servicing income or loss and establishes that servicing assets and
liabilities are to be assessed for impairment based on their fair value.
It additionally modifies the accounting for assets such as interest only
strips or retained interests in securitizations that can contractually be
prepaid or settled in such a way that would preclude the
56
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
holder from recovering substantially all of its recorded investment, to
require their classification as available-for-sale or trading securities.
SFAS No. 125 as issued would have been effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," deferred most provisions
related to repurchase agreements, dollar-rolls, securities lending and
similar transactions to be effective after December 31, 1997. It also
deferred the portion of SFAS No. 125 regarding secured borrowings and
collateral until after December 31, 1997. The Bank does not believe that
adoption of the applicable portions of SFAS No. 125 will have a material
effect on operations in 1997.
The FASB has issued SFAS No. 121, SFAS No. 122 and SFAS No. 123 which were
adopted by the Bank as of January 1, 1996. SFAS No. 121, SFAS No. 122, and
SFAS No.123 became effective for fiscal years beginning after December 15,
1995.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and to long-lived
assets and certain identifiable intangibles to be disposed of. This
statement addresses when impairment losses should be recognized, how
impairment losses should be measured and the reporting and disclosure
requirements when long-lived assets have been determined to be impaired.
Ultimately, SFAS No. 121 may shorten the amortization period of the
Company's acquired intangible assets.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," amends certain
provisions of SFAS No. 65, eliminates the accounting distinction between
rights to service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase transactions.
When a mortgage banking enterprise purchases or originates mortgage loans,
the cost of acquiring those loans includes the cost of the related
mortgage servicing rights. If the mortgage banking enterprise sells or
securitizes the loans and retains the mortgage servicing rights, the
enterprise should allocate the total cost of the mortgage loans to the
mortgage servicing rights and the loans based on their relative fair
values. Any costs allocated to mortgage servicing rights should be
recognized as a separate asset, amortized over the period of estimated net
servicing income and evaluated for impairment based on their fair value.
During 1996, the Company sold no loans to which it retained servicing
rights; therefore, SFAS No. 122 has had no impact on these financial
statements.
This SFAS has been superseded by SFAS No. 125 which is discussed above.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes, and
encourages all entities to adopt, new financial accounting and reporting
standards for stock-based employee compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting prescribed by APB No.
25, "Accounting for Stock Issued to Employees". Entities electing to
remain with APB No. 25 accounting must make pro forma disclosures of net
income and earnings per share as if the fair value based method of
accounting defined in SFAS No. 123 had been applied. The affected plans
include all arrangements by which employees receive shares of stock or
other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock. This statement also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from
nonemployees, requiring that such transactions be accounted for based on
the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The
Company continued to account for stock-based compensation in accordance
with APB No. 25 and has presented in Note 15 the disclosures required by
SFAS No. 123.
57
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
The FASB has issued SFAS No. 114, which was adopted by the Bank as of
January 1, 1995. SFAS No. 114, "Accounting by Creditors for Impairment of
Loans," requires that certain impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate. The effective rate of a loan is defined as the
contractual interest rate adjusted for any deferred loan fees or costs,
premiums or discounts existing at the inception or acquisition of the
loan. SFAS No. 118 amended certain provisions of SFAS No. 114 relating to
the recognition of interest income on impaired loans. See Note 5.
22. Disclosures About Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both
assets and liabilities, for which it is practicable to estimate fair
value. The carrying (book) values and fair values of the Company's
financial instruments at December 31, 1996 and 1995, are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------ -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 11,283 $ 11,283 $ 8,845 $ 8,845
Securities held-to-maturity 140,974 141,269 168,602 169,195
Securities available-for-sale 595,828 595,828 416,627 416,627
Loans receivable 622,405 632,187 467,424 468,717
Federal Home Loan Bank stock 13,086 13,086 8,310 8,310
---------- ---------- ---------- -----------
Total financial instrument assets 1,383,576 1,393,653 1,069,808 1,071,694
---------- ---------- ---------- ----------
Deposits with no stated maturities 153,278 153,278 119,930 119,930
Deposits with stated maturities 579,044 583,380 487,209 491,975
Federal Home Loan Bank advances 261,711 256,945 148,636 150,560
Other debt obligations 264,227 263,845 168,518 169,856
---------- ---------- ---------- ----------
Total financial instrument liabilities 1,258,260 1,257,448 924,293 932,321
---------- ---------- ---------- ----------
Net value of financial instruments $ 125,316 $ 136,205 $ 145,515 $ 139,373
========== ========== ========== ==========
</TABLE>
The following methods and assumptions were used to estimate the fair value
of those financial instruments for which it is practicable to estimate
that value:
The fair value of the Company's cash and cash equivalents is estimated
to be equal to their recorded amounts. For securities held-to-maturity
and securities available-for-sale, the fair value is estimated using
quoted market values obtained from independent pricing services.
The fair value of loans has been estimated by discounting the projected
cash flows at December 31, 1996 and 1995. These rates have been
adjusted as necessary to conform with the attributes of the specific
loan types in the portfolio. The valuation has also been adjusted for
prepayment risk using nationally published and internally determined
prepayment percentages, which approximate the Bank's estimates of
prepayment activity experienced in the portfolio. Management believes
that the Bank's general valuation allowances at December 31, 1996 and
1995 are an appropriate indication of the applicable credit risk
associated with determining the fair value of its loan portfolio and
such allowances have been deducted from the estimated fair value of
loans.
No ready market exists for the Federal Home Loan Bank stock, and it has
no quoted value. For presentation purposes, such stock is assumed to
have a market value which is equal to cost.
58
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
The fair value of deposits with no stated maturities, including
checking accounts and statement savings accounts, is estimated to be
equal to the amount payable on demand as of December 31, 1996 and 1995.
The fair value of certificates of deposit is based upon the discounted
value of the contractual cash flows. The discount rates used in these
calculations approximate the current rates offered for deposits of
similar remaining maturities.
The fair value of Federal Home Loan Bank advances outstanding at
December 31, 1996 and 1995, is based upon the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for advances of similar remaining maturities.
The fair value of other debt obligations outstanding at December 31,
1996 and 1995, includes both securities sold under agreements to
repurchase and a secured note to Thrift Financing Corporation. The fair
value of securities sold under agreements to repurchase is based upon
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for securities of similar
remaining maturities.
The estimated fair value of commitments to extend credit is determined
using fees currently charged for similar arrangements adjusted for
changes in interest rates and credit risk that have occurred subsequent
to origination. Because the Bank believes that the credit risk
associated with available but undisbursed commitments would essentially
offset fees that could be recognized under similar arrangements, and
because the commitments are either short-term in nature or subject to
immediate repricing, no fair value has been assigned to these
off-balance sheet commitments.
23. Conversion From Mutual to Stock Association
The Company is a Virginia corporation organized in May 1994, for the
purpose of becoming the unitary savings and loan holding company for the
Bank. The Board of Directors of the Bank adopted an Amended and Restated
Plan of Conversion dated May 9, 1994, pursuant to which the Bank
converted, effective October 11, 1994, from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank. The Holding
Company completed its Subscription and Community Offering and, with a
portion of the net proceeds, acquired the capital stock of the Bank.
The total number of the Company's shares offered and issued at the date of
conversion was 10,910,625 at $10 per share. Out of that offering, 872,850
shares were bought by the ESOP. The costs associated with the conversion
were deducted from the proceeds of the shares sold in the conversion.
Total conversion costs approximated $2,816,000, and the net proceeds
received from the conversion approximated $97,562,000.
At the time of the Bank's conversion from the mutual to the stock form of
organization, it established a liquidation account in the amount of
$48,973,000. The liquidation account will be maintained for the benefit of
eligible account holders with qualifying deposits who continue to maintain
their accounts at the Bank after the conversion. Qualifying deposits are
those held in the Bank on February 28, 1993, by Eligible Account Holders
and on June 30, 1994, by Supplemental Eligible Account Holders, both as
defined in the Prospectus dated August 15, 1994. The liquidation account
will be reduced annually to the extent that eligible account holders have
reduced their qualifying deposits. In the event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current
adjusted qualifying balances for accounts then held.
The Bank is restricted from declaring or paying cash dividends or
repurchasing any of its shares of common stock if the effect thereof would
cause equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise violate
regulatory requirements. The Bank continues to be a member of the Federal
Home Loan Bank System and all insured savings deposits continue to be
insured by the FDIC up to the maximum provided by law.
59
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
24. Subsequent Events:
Dividends Declared
On January 21, 1997, the Board of Directors of Life Bancorp, Inc. declared
a cash dividend of $.11 per common share payable on February 28, 1997, to
stockholders of record on February 14, 1997.
25. Condensed Parent Company Only Financial Statements:
Condensed financial statements of Life Bancorp, Inc. (parent company) are
shown below. The parent company has no significant operating activities.
<TABLE>
<CAPTION>
Condensed Balance Sheets
(In thousands)
December 31,
--------------------------------------------
1996 1995
--------------------- ------------------
<S> <C> <C>
Assets
Cash in bank.................................................. $ 100 $ 258
Investment in subsidiaries.................................... 127,844 118,039
Loans receivable from subsidiary.............................. 23,002 43,797
-------- --------
Total assets............................................... $150,946 $162,094
======== ========
Liabilities and Stockholders' Equity
Liabilities................................................... $ 8 $ 1,153
-------- --------
Stockholders' equity:
Common stock............................................... 98 109
Additional paid-in capital................................. 92,122 106,659
Retained earnings.......................................... 63,871 59,447
Unearned common stock held by ESOP......................... (5,732) (7,073)
Unearned common stock held by RRP.......................... (1,389) --
Unrealized gain (loss) on securities held-for-sale by
subsidiary, net of tax.................................. 1,968 1,799
-------- --------
Total stockholders' equity.............................. 150,938 160,941
-------- --------
Total liabilities and stockholders' equity.............. $150,946 $162,094
======== ========
Condensed Statement of Operations
(In thousands)
1996 1995
--------------------- -------------------
Equity in earnings of subsidiary.............................. $ 7,020 $ 6,885
Interest income............................................... 2,519 3,616
Other expense................................................. 159 209
-------- --------
Income before income taxes.................................... 9,380 10,292
Provision for income taxes.................................... 766 1,144
-------- --------
Net income.................................................... $ 8,614 $ 9,148
======== ========
</TABLE>
60
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
(In thousands)
For the Years Ended
December 31,
--------------------------------------------
1996 1995
--------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 8,614 $ 9,148
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiary...................... (7,020) (6,885)
Increase (decrease) in other liabilities................ (1,145) 824
-------- -------
Net cash provided by (used in) operating activities..... 449 3,087
-------- -------
Cash flows from investing activities:
Net decrease in loan to subsidiary......................... 20,796 5,706
Purchase of capital stock of subsidiary.................... (1) (5,000)
Principal collected on ESOP loan........................... 1,257 1,257
-------- -------
Net cash provided by (used in) investing activities..... 22,052 1,963
-------- -------
Cash flows from financing activities:
Dividends paid............................................. (4,501) (4,800)
Net proceeds (refunds) from issuance of common stock....... -- (16)
Repurchase of common stock................................. (15,162) --
Purchase of common stock held for RRP trust................ (2,996) --
-------- -------
Net cash provided by (used in) financing activities..... (22,659) (4,816)
-------- -------
Net increase (decrease) in cash and cash equivalents.... (158) 234
Cash and cash equivalents, beginning of period................ 258 24
-------- -------
Cash and cash equivalents, end of period...................... $ 100 $ 258
======== =======
</TABLE>
61
<PAGE>
Life Bancorp, Inc.
Notes to Consolidated Financial Statements
26. Quarterly Results of Operations (Unaudited)(in thousands, except per share
data):
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total interest income......................... $21,686 $22,785 $24,829 $25,833
Total interest expense........................ 13,449 14,270 16,354 16,856
------- ------- ------- -------
Net interest income........................ 8,237 8,515 8,475 8,977
Provision (credit) for loan losses............ 34 (38) (295) 34
------- ------- ------- -------
Net interest income after provision
for loan losses......................... 8,203 8,553 8,770 8,943
Noninterest income............................ 699 843 940 880
Noninterest expense........................... 4,505 4,950 9,474 4,572
------- ------- ------- -------
Income before income taxes.................... 4,397 4,446 236 5,251
Income tax provision.......................... 1,810 1,755 70 2,081
------- ------- ------- -------
Net income.................................... $ 2,587 $ 2,691 $ 166 $ 3,170
======= ======= ======= =======
Net income per common and
common equivalent share:
Primary................................. $ .25 $ .28 $ .02 $ .34
======= ======= ======= =======
Fully diluted........................... $ .25 $ .28 $ .02 $ .33
======= ======= ======= =======
Dividends paid per common share............... $ .11 $ .11 $ .11 $ .11
======= ======= ======= =======
Year Ended December 31, 1995
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------ ------------ ------------
Total interest income......................... $18,740 $19,025 $19,452 $19,808
Total interest expense........................ 11,253 12,070 12,305 12,638
------- ------- ------- -------
Net interest income........................ 7,487 6,955 7,147 7,170
Provision for loan losses..................... 168 123 75 88
------- ------- ------- -------
Net interest income after provision
for loan losses......................... 7,319 6,832 7,072 7,082
Noninterest income............................ 675 680 800 (132)
Noninterest expense........................... 3,981 4,011 4,075 3,987
------- ------- ------- -------
Income before income taxes.................... 4,013 3,501 3,797 2,963
Income tax provision.......................... 1,513 1,341 1,443 829
------- ------- ------- -------
Net income.................................... $ 2,500 $ 2,160 $ 2,354 $ 2,134
======= ======= ======= =======
Net income per common and
common equivalent share:
Primary................................. $ .25 $ .21 $ .23 $ .21
======= ======= ======= =======
Fully diluted........................... $ .25 $ .21 $ .22 $ .21
======= ======= ======= ========
Dividends paid per common share............... $ .11 $ .11 $ .11 $ .11
======= ======= ======= ========
</TABLE>
62
<PAGE>
Directors and Executive Officers
Board of Directors
Life Bancorp, Inc. and Life Savings Bank, FSB
- -------------------------------------------------------------------------------
Edward E. Cunningham
Chairman of the Board,
President and Chief Executive Officer
William J. Fanney
Chairman Emeritus
Joseph C. Addington, Jr.
Retired as Chairman of the
Board of Addington-Beaman
Lumber Company
Charles M. Earley, Jr., M.D.
Retired general surgeon
E. Saunders Early, Jr.
Chairman of the Board and consultant
of Robbie's Home Center, Inc.
Donald I. Fentress
General insurance agent and President of
Bryant-Fentress Associates, Ltd.
William J. Jonak, Jr.
Real estate appraiser and consultant
and President of Jonak & Company
Frederick V. Martin
Investment counselor and President
of Virginia Investment Counselors, Inc.
Tollie W. Rich, Jr.
Executive Vice President and
Chief Operating Officer
Braden Vandeventer, Esq.
Retired, formerly a Partner, then
Of Counsel with Vandeventer, Black,
Meredith & Martin, L.L.P.
Life Bancorp, Inc. Executive Officers
- --------------------------------------------------------------------------------
Edward E. Cunningham
Chairman of the Board,
President and Chief Executive Officer
Tollie W. Rich, Jr.
Executive Vice President and
Chief Operating Officer
Emory J. Dunning, Jr., CPA
Senior Vice President, Treasurer and
Chief Financial Officer
Life Savings Bank, FSB Executive Officers
- --------------------------------------------------------------------------------
Edward E. Cunningham
Chairman of the Board,
President and Chief Executive Officer
Tollie W. Rich, Jr.
Executive Vice President and
Chief Operating Officer
Nelson R. Arnold
Senior Vice President
Retail Banking Division
T. Frank Clements
Senior Vice President
Lending Division
Ralph T. Dempsey, Jr.
Senior Vice President
Loan Administration Division
Emory J. Dunning, Jr., CPA
Senior Vice President, Treasurer and
Chief Financial Officer
Edward M. Locke
Senior Vice President
Administrative Services Division
63
<PAGE>
Stockholder Information
Life Bancorp, Inc. is a unitary savings and loan holding company conducting
business through its wholly-owned subsidiary, Life Savings Bank, FSB. The Bank
is a federally chartered, SAIF-insured savings institution operating from its
headquarters located in Norfolk, Virginia and 20 full-service banking facilities
located in the cities of Norfolk, Chesapeake, Portsmouth, Suffolk and Virginia
Beach, Virginia. The Company's headquarters is located at the home office of the
Bank at 109 East Main Street, Norfolk, Virginia 23510.
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market(sm) under the symbol "LIFB." On March 6, 1997, the Company
had 1,169 stockholders of record, excluding shares held in brokerage accounts.
The Annual Meeting of Stockholders of Life Bancorp, Inc. will be held at the
Norfolk Waterside Marriott, 235 East Main Street, Norfolk, Virginia on April 24,
1997 at 10:00 a.m.
The table below shows the high, low and last sale prices and the per share
dividends of the Company's common stock for each quarter of 1996 and 1995.
Market Price
Quarter Dividends Month end
Ended High Low Last Declared Book Value
1994
December 31 $10 5/8 $ 8 1/8 $ 9 1/4 $13.61
1995
March 31 12 1/4 8 7/8 12 1/8 $0.11 13.91
June 30 14 15/16 11 3/4 14 0.11 14.23
September 30 16 3/4 13 3/4 16 0.11 14.38
December 31 16 1/8 14 3/8 15 0.11 14.75
1996
March 31 15 14 14 1/2 0.11 14.74
June 30 14 5/8 13 7/8 14 1/8 0.11 14.73
September 30 16 1/4 14 1/8 16 0.11 14.77
December 31 18 3/8 15 7/8 18 0.11 15.33
[GRAPHIC DELETED]
- --------------------------------------------------------------------------------
The original document contains a combination bar and line chart. The bar depicts
the quarterly High and Low Market Prices beginning with the fourth quarter of
1994 through the fourth quarter of 1996. A line depicts the quarterly Month end
Book Value. The table has been modified to include the additional data points
for the chart.
- --------------------------------------------------------------------------------
In January 1997, the Company declared a quarterly dividend of $0.11 per
share on its common stock. Dividends are customarily paid on the last day of
February, May, August and November.
Shareholder Requests
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Investor Relations, Life Bancorp, Inc., 109
East Main Street, Norfolk, Virginia 23510, (757) 858-1136.
Transfer Agent/Registrar
ChaseMellon Shareholder Services
85 Challenger Road, Overpeck Centre
Ridgefield Park, NJ 07660
(800) 851-9677
Independent Auditors
Edmondson, LedBetter & Ballard, L.L.P.
2200 Dominion Tower
Norfolk, Virginia 23510
General Counsel
Vandeventer, Black, Meredith & Martin, L.L.P.
500 World Trade Center
Norfolk, Virginia 23510-1699
Special Counsel
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
64
<PAGE>
Banking Locations - Life Savings Bank, FSB
Corporate Offices
109 East Main Street
Norfolk, Virginia 23510
Operations Center
4530 East Virginia Beach Boulevard
Norfolk, Virginia 23502
Branch Facilities
(757) 858-1000
- --------------------------------------------------------------------------------
109 East Main Street
Norfolk, Virginia 23510
7420 Granby Street
Norfolk, Virginia 23505
728 West 21st Street
Norfolk, Virginia 23517
2336 East Little Creek Road
Norfolk, Virginia 23518
2008 Cromwell Drive
Norfolk, Virginia 23509
Military Circle, East Ring Road
Norfolk, Virginia 23502
4530 East Virginia Beach Boulevard
Norfolk, Virginia 23502
213 Battlefield Boulevard, South
Chesapeake, Virginia 23320
1400 Kempsville Road, Suite 134
Chesapeake, Virginia 23320
3921 Poplar Hill Road
Chesapeake, Virginia 23321
330 West Constance Road
Suffolk, Virginia 23434
3801 Pacific Avenue
Virginia Beach, Virginia 23451
6056 Indian River Road
Virginia Beach, Virginia 23464
601 Lynnhaven Parkway
Virginia Beach, Virginia 23452
1316 North Great Neck Road
Virginia Beach, Virginia 23454
2089 General Booth Boulevard
Virginia Beach, Virginia 23454
944 Independence Boulevard
Virginia Beach, Virginia 23455
501 South Independence Boulevard
Virginia Beach, Virginia 23452
3225 High Street
Portsmouth, Virginia 23707
6201 Portsmouth Boulevard
Portsmouth, Virginia 23701
65
<PAGE>
APPENDIX
The cover of the 1996 Annual Report has eight photographs representative of
Life Savings Bank's real estate lending in 1996. The photographs are duplicated
in the report with an explanatory caption. The following list shows the location
of the pictures and includes the explanatory caption.
Page 4
TWA Reservation Center, Norfolk, Virginia
Life Savings Bank provided construction and permanent financing to develop
40,000 square feet of office space for a reservation center for TWA Airlines.
The facility, part of the Bank's Community Reinvestment program, was developed
in cooperation with the City of Norfolk Development Authority, the State of
Virginia Economic Development Department and private developers. The project
will generate in excess of 500 new jobs
in Hampton Roads.
Page 6
Gatling Pointe South, Smithfield, Virginia
Life Savings Bank provided financing to develop 82 single family lots in the
first phase of this project. The subdivision is a planned community marketed to
individual buyers and custom homebuilders.
Page 12
Courtyard by Marriott, Chesapeake, Virginia
Life Savings Bank provided construction and permanent financing for this 90
room hotel to be operated as a Courtyard by Marriott. The facility, in the
Greenbrier section of Chesapeake, Virginia, will generate approximately 30 new
jobs for the area.
Page 13
Five Columbus Center, Virginia Beach, Virginia
Life Savings Bank provided construction and permanent financing to build
20,000 square feet of office space in the Pembroke Central Business District of
Virginia Beach. The building is leased to 360o Communications, as its regional
headquarters, housing their corporate offices and operations as well as a sales
center for cellular communications.
Page 14
New Kirn Building, Portsmouth, Virginia
Life Savings Bank provided financing to rehabilitate 22,750 square feet of
office space in the Olde Towne Historic District of Portsmouth, Virginia. The
New Kirn Building, originally constructed in the 1920's, houses the headquarters
of the Portsmouth
66
<PAGE>
Redevelopment and Housing Authority. This loan is a part of the Bank's on-going
Community Reinvestment programs.
Page 15
300 Freemason Street, Norfolk, Virginia
Life Savings Bank provided financing to renovate this property, containing
9,200 square feet of office space, in an historic restoration area of Norfolk,
Virginia. The structure was originally built in the 1890's.
Page 22
Wexford Downs, Suffolk, Virginia
Life Savings Bank provided development and construction financing for this
104 unit townhome community in the city of Suffolk, Virginia. The townhomes are
to be targeted to first-time homebuyers and is a part of the Bank's ongoing
Community Reinvestment programs.
Page 22
Leigh Medical Building, Norfolk, Virginia
Life Savings Bank provided financing for this medical office building
containing 25,370 square feet, the facility is adjacent to Sentara Leigh
Hospital in Norfolk, Virginia.
67
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in Registration Statement No. 33-91836 on Form S-8 of our report
dated January 27, 1997, included in this Annual Report on Form 10-K of Life
Bancorp, Inc. for the year ended December 31, 1996.
/s/ Edmondson, LedBetter & Ballard, L.L.P.
Norfolk, Virginia
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1996 10-K and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000926039
<NAME> Life Bancorp, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U. S. DOLLARS
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0
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<INCOME-PRE-EXTRAORDINARY> 14,330
<EXTRAORDINARY> 0
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