UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission file number: 000-52946
VIRGINIA SAVINGS BANCORP, INC.
(Exact name of registrant as specified in its charter)
| VIRGINIA | 20-8947933 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I. R. S. Employer Identification No.) |
600 Commerce Avenue, Front Royal, Virginia 22630
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (540) 635-4137
No securities are registered pursuant to Section 12(b) of the Act.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act: ¨ Yes x No
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. x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is 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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
There are no regularly quoted bid and asked prices for the registrant’s common stock. Based on negotiated trading of the stock through June 30, 2008, registrant believes the approximate trading price to be $16.00 per share for an approximate aggregate market value of $30,399,744. As of June 30, 2008, the aggregate market value of the 872,920 shares of common stock held by non-affiliates of the registrant was $13,966,720. As of June 30, 2008 and March 27, 2009, there were issued and outstanding 1,899,984 shares of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2008 are incorporated into Part II. Portions of the registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders are incorporated by reference into Part III.
Index To Annual Report on Form 10-K
| Page | ||||
Item 1 | 3 | |||
Item 1A | 21 | |||
Item 1B | 21 | |||
Item 2 | 21 | |||
Item 3 | 21 | |||
Item 4 | 22 | |||
| Part II | ||||
Item 5 | 22 | |||
Item 6 | 22 | |||
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||
Item 7A | 23 | |||
Item 8 | 23 | |||
Item 9 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 23 | ||
Item 9A | 23 | |||
Item 9B | 25 | |||
Item 10 | 25 | |||
Item 11 | 25 | |||
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 26 | ||
Item 13 | Certain Relationships and Related Transactions, and Director Independence | 26 | ||
Item 14 | 26 | |||
Item 15 | 26 | |||
| 28 | ||||
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| Item 1. | BUSINESS |
General
Virginia Savings Bancorp, Inc. (the “Company”) was incorporated in the Commonwealth of Virginia in 2007 to serve as a unitary savings and loan holding company. Its sole business activity is its investment in, and control of, the Virginia Savings Bank, FSB (“the Bank”).
The Bank began operations as a state chartered, federally insured savings and loan association in September, 1980 under the name Front Royal Savings and Loan Association. In August, 1983, the name of the institution was changed to Virginia Savings Bank. In August, 1993, the Office of Thrift Supervision (“OTS”) approved the Bank’s application to convert from a Virginia chartered stock state savings bank to a federally chartered stock savings bank with a name change to Virginia Savings Bank, F.S.B. The Bank was reorganized into a holding company form of ownership effective November 30, 2007. On that date, the Bank became a subsidiary of the Company, and the holders of the issued and outstanding shares of the Bank’s $1.00 par value common stock became holders of the Company’s $1.00 par value common stock.
The markets served by the Bank expanded in 1984 with the addition of branches in Woodstock, Virginia and Winchester, Virginia. Between 2000 and 2008, the Bank further expanded with the opening of a branch in the Town of Strasburg in February, 2000 and a branch in Stephens City, Virginia in July, 2008.
The Bank is a community-oriented savings bank. Its business consists of attracting and servicing deposit accounts from the general public and small businesses in the form of passbook savings, money market accounts, demand accounts, and certificates of deposits, and originating loans to finance the purchase, construction, or improvement of residential and commercial real estate in Virginia. The Bank offers other financial services such as consumer loans to households and commercial loans to small businesses. The Bank is also engaged in certain investment activities authorized by the OTS and may from time-to-time hold various types of liquid assets including U.S. government and agency securities, federal funds, and certain money market instruments. Its income is derived primarily from interest and fees from loans and its principal expenses are interest on deposits and operating expenses.
The Bank has an investment in a subsidiary corporation. The Bank is permitted by current Federal regulations to invest an amount up to 2% of its assets in stock, paid-in surplus and unsecured loans in service corporations. At December 31, 2008, the Bank owned 100% of the 25 shares outstanding of Virginia Savings Service Corporation. This subsidiary corporation has been inactive since 1997.
Market Area
The Bank’s primary market area for both deposits and loans encompasses Warren, Shenandoah, and Frederick Counties, and the City of Winchester, Virginia. The Bank faces strong competition for deposits and in its lending activities from other financial institutions primarily from commercial banks, other savings and loan associations, and credit unions, some of which have resources substantially greater than the Bank. The Bank faces additional competition from non-bank lenders, such as mortgage banking companies, and from money market funds, government securities and the issuers of corporate debt instruments.
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Regulation and Supervision
The Company is subject to regulation by the OTS and as such is subject to OTS examinations, supervision and reporting requirements. The Company is also subject to the informational reporting requirements of the Securities Exchange Act of 1934, and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission.
The Company may engage in any activity that a bank holding company may engage in as being so closely related to banking or controlling banks as to be a proper incident thereto (unless OTS prohibits the activity), and any activity that a financial holding company may engage in as being financial in nature or incidental to such financial activity or as being complementary to a financial activity and not posing undue risk. The Company may also engage in limited additional activities that support the operations of a thrift or a bank. In the event that the Bank failed to retain its status as a qualified thrift lender, the Company would have to register with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) as a bank holding company and would be subject to all statutes and regulations, including capital requirements and restrictions on permissible activities, as a bank holding company.
As a federally chartered thrift institution, the Bank is subject to extensive regulation by the OTS. The lending, investment, and deposit activities of the Bank must comply with various regulatory requirements. OTS periodically examines the Bank for compliance with these requirements. The Bank files quarterly reports with the OTS detailing its activities and its financial condition. The Bank is also subject to certain reserve requirements established by the Federal Reserve. This supervision and regulation is intended primarily for the protection of depositors.
As a subsidiary of a thrift holding company, the Bank is subject to certain restrictions in its dealings with the Company.
Regulatory Capital Requirements
OTS capital standards require thrift institutions to satisfy three different capital requirements. Under these standards, thrifts must maintain “tangible” capital equal to 1.5% of adjusted total assets, “leverage” capital equal to at least 4% of adjusted total assets, and a combination of leverage and “supplementary” capital, primarily general loss reserves, equal to 8.0% of “risk weighted” assets.
Of these three capital requirements, the risk-based requirement is the most significant for the Bank. The risk-based capital requirement is measured against the amount of risk-weighted assets, which equals the sum of each asset and credit-equivalent off-balance sheet item multiplied by an assigned risk weight.
Under the OTS risk-weighting system, cash reserves at the Federal Reserve and U.S. Government securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight. Mortgage backed securities issued by, or fully guaranteed as to principal and interest, by the Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”), deposits at federally insured financial institutions, cash accounts at the Federal Home Loan Bank of Atlanta (“FHLB”), FHLB stock and federal agency securities are assigned a 20% risk weight. Qualifying residential mortgage loans (first mortgage loans not more than 90 days past due with loan-to-value ratios not over 90%) are assigned a risk weight of 50%. All other assets are assigned a 100% risk weight.
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While the Bank complies with all of the current capital requirements and expects to continue to do so, any failure to meet the capital requirements in the future would result in severe penalties under these regulations. Institutions not in full compliance with the capital standards then applicable will be subject to a capital directive which may include such restrictions as reducing the bank’s assets, restrictions on the rate of growth of liabilities, and limitations on the payment of dividends as may be deemed appropriate by the Director of the OTS. The Director of the OTS is mandated to treat as an unsafe and unsound practice any material failure by a savings institution to comply with a capital plan or capital directive. The sanctions and penalties that could be imposed range from restrictions on the activities of the institution, termination of insurance of accounts following appropriate proceedings, and to the appointment of a conservator or receiver.
The Federal Deposit Insurance Corporation Act of 1991 (“FDICIA”) established a framework of supervisory actions for insured institutions that are not adequately capitalized. The FDICIA defines the capital measures and levels that are used to determine supervisory actions. There are five capital categories defined in the OTS regulations which implement FDICIA. These range from well capitalized to critically under capitalized. The capital measures include a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a leverage ratio. A thrift institution is considered to be well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and is not subject to a capital directive issued by the OTS. A thrift institution is considered to be adequately capitalized if it has a total risk-based capital ratio between 8.00% and 9.99%, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and is not subject to a capital directive issued by the OTS.
Capital Distribution Regulations
OTS regulations govern the payment of dividends by savings institutions. The rules set forth by the OTS, apply equally to all distributions of capital including cash dividends, stock repurchases and cash-out mergers. These rules utilize a tiered approach which permits various levels of capital distributions based primarily upon a savings institution’s capital level. In addition to these capital requirements, a financial institution that has an examination rating of a “1” or a “2” under the joint examination standards for the financial institution regulatory bodies has fewer restrictions on the payment of dividends.
A well capitalized institution with a “1” or a “2” examination rating is not required to make application for permission to pay a dividend or file notice of its intent to make a capital distribution.
An adequately capitalized institution is not required to make application for permission to pay a dividend but must file notice of its intent to make a capital distribution. The thrift institution must receive OTS’s approval before declaring or paying a cash dividend.
If a proposed capital distribution would result in the institution’s capital falling below the adequately capitalized level, it must make application for OTS approval to pay the dividend prior to taking any action.
Under the holding company form of organization, the Company’s ability to pay dividends to its common stock shareholders is dependent upon the Bank’s profitability and its ongoing ability to upstream earnings in the form of dividends to the Company. OTS regulations require the Bank to provide either a notice of, or make application for approval of, all dividend payments to the Company. If
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the amount of the proposed dividend does not exceed a safe harbor amount as defined by OTS, and the Bank would be well capitalized both before and after the dividend payment, only a notice is required. The safe harbor amount is defined as net income for the current and two previous years less all dividends paid during the same periods. If the amount of the proposed dividend payment exceeds the safe harbor amount, the Bank is required to submit an application for approval of the dividend payment. Based upon the Bank’s operating results for the year ended December 31, 2008 and the outlook for the forthcoming year, it is unlikely that the Bank will be able to pay any dividends to the Company in 2008. The Company’s ability to pay dividends to its shareholders will therefore be severely limited.
Loans-To-One Borrower Limitations
Current regulations provide that the loans-to-one borrower limits applicable to national banks will apply to thrift institutions in the same manner and to the same extent. Under these limits, unsecured loans and extensions of credit outstanding at one time to a borrower may not exceed 15% of the unimpaired capital and surplus of the institution. Loans and extensions of credit fully secured by certain readily marketable collateral may represent an additional 10% of unimpaired capital and surplus. At December 31, 2008, the largest amount the Bank could lend to one borrower on either a secured or unsecured basis was $1,831,000. At such date, the Bank’s largest amount loaned to one borrower was approximately $2,030,000. The Bank’s loan to one borrower limit was higher at the time that the loans were made to this borrower.
Liquidity Requirements
In July, 2001, the OTS revised its liquidity regulations that affect savings banks by eliminating all specific liquidity requirements. The revised regulations retain a general safety and soundness requirement which require savings banks to hold liquid assets appropriate to the size and nature of their operations. The OTS may determine the adequacy of an institution’s liquidity based on safety and soundness considerations.
The average daily liquidity ratio of the Bank for the month of December, 2008 was 17.7% and the average ratio for the year ended December 31, 2008 was 20.9%.
Federal Home Loan Bank System
The Bank is a member of the FHLB system, which consists of twelve regional banks that are subject to the supervision and regulation of the Federal Housing Finance Board (“FHFB”). The Federal Home Loan Banks provide a central credit facility primarily for their member savings and loan associations. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in the FHLB. Member institutions are required to maintain both B1 and B2 capital stock. The B1 stock requirement is equal to 0.18% of the member’s total assets as of the preceding year end. The B2 stock requirement is equal to 4.50% of the member’s outstanding borrowings. The Bank was in compliance with the required investment in FHLB stock as of December 31, 2008.
The FHLB serves as a central bank for its member institutions. It is funded primarily from proceeds from the sale of the consolidated obligations of the FHLB system. The FHLB makes advances to its members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB. Advances to Qualified Thrift Lenders, such as the Bank, may be obtained for
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most business purposes, but the total amount of advances outstanding may not exceed the amount of the Bank’s residential housing finance assets. The Bank had $11,800,000 of FHLB advances outstanding at December 31, 2007 which it repaid in 2008.
Qualified Thrift Lender Test
The Bank must maintain an appropriate level of qualified thrift investments and otherwise meet the standards for a qualified thrift lender in order to have full borrowing privileges from the FHLB of Atlanta.
In order to meet these standards, the Bank must maintain at least 65% of its “portfolio assets” (defined as total assets minus intangible assets, property used in the conduct of the Bank’s business, and the first twenty percent of the Bank’s liquid assets) in qualified thrift investments, which consist primarily of residential mortgages and related investments. Failure to maintain qualified thrift lender status would require the Bank to either convert to a commercial bank charter or comply with the restrictions imposed for non-compliance. If the Bank does not convert to a commercial bank charter, it must comply with the following additional restrictions on the operations of the institution: (i) it may not engage in any new activity or make any new investment, directly or indirectly, unless such activity is permissible for a national bank; (ii) its branching powers will be restricted to those of a national bank; (iii) it will not be eligible to obtain advances from the FHLB; and (iv) its ability to pay dividends will be subject to the rules regarding the payment of dividends by a national bank.
At December 31, 2008, Virginia Savings Bank met the Qualified Thrift investment requirements as currently defined. Its qualified thrift investments were approximately 87.0% of portfolio assets. The Bank expects to continue to qualify as a Qualified Thrift Lender, although there can be no assurance that it will do so.
Insurance of Deposits
The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable maximum limits. On October 3, 2008, the FDIC’s deposit insurance temporarily increased from $100,000 to $250,000 per depositor. Checking, savings, certificates of deposit, money market accounts, and other interest-bearing deposit accounts, when combined, are now FDIC insured up to $250,000 per depositor through December 31, 2009. Joint accounts may be insured up to $250,000 per owner in addition to the $250,000 of insurance available on those same owner’s individual accounts. On January 1, 2010, the standard coverage limit is scheduled to return to $100,000 for all deposit categories except IRAs and certain retirement accounts mentioned above, which will continue to be insured up to $250,000 per owner.
The FDIC maintains a risk based assessment system for determining deposit insurance premiums. Four risk categories, each subject to different premium rates, are established, based upon an institution’s status as well capitalized, adequately capitalized or undercapitalized, and the institution’s supervisory rating. Commencing in early 2009, the premium rates increased by 7 basis points in each category for the first quarter of 2009. For the second quarter of 2009 and beyond, the FDIC has issued a final rule providing for further changes in rates, which introduces three adjustments that could be made to an institution’s initial base assessment rate: (1) a potential decrease for long-term unsecured debt, including senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) a potential
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increase for secured liabilities above a threshold amount; and (3) for non-risk category I institutions, a potential increase for brokered deposits above a threshold amount, other than those received through a deposit placement network on a reciprocal basis. These increases in insurance premiums are not expected to increase the Company’s pretax noninterest expense by an material amount in 2009.
Further, in late February 2009, the FDIC adopted an interim rule imposing an emergency special assessment on all banks, potentially up to 20 basis points, on June 30, 2009. The assessment is to be collected on September 30, 2009. The interim rule would also permit the FDIC to impose an emergency special assessment after June 30, 2009, of up to 10 basis points, if necessary to maintain public confidence in federal deposit insurance. As a result of competitive pressures for deposits, the Company may not be able to adjust deposit rates to offset the cost of increased deposit insurance premiums. In any event, the Company will have to absorb the cost of the increased premiums until such time as it is able to reprice its time deposits.
USA Patriot Act of 2001
In October, 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Northern Virginia which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcements’ and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The continuing and potential impact of the Patriot Act and related regulations and policies on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws, and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Federal Reserve System
Pursuant to regulations of the Federal Reserve, savings and loan associations are required to maintain average daily reserves at mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits. Because reserves must be maintained in the form of vault cash or in a non-interest bearing account at the Federal Reserve Bank of Richmond, the effect of the reserve requirement is to reduce the amount of the Bank’s interest earning assets. As of December 31, 2008, the Bank met its reserve requirements.
Emergency Economic Stabilization Act of 2008
In accordance with its stated purpose of restoring liquidity and stability to the financial system of the United States, the Emergency Economic Stabilization Act of 2008 established the Troubled Asset Relief Program (“TARP”), under which the U.S. Department of the Treasury (“Treasury”) is authorized to purchase preferred stock from qualified financial institutions. The Company meets the requirements to be considered a qualified financial institution.
Under TARP, for organizations like the Company, the federal government’s purchase limitation is generally defined as 3% of risk-weighted assets. The terms of the preferred stock generally provide that: (i) cumulative dividends will be paid at a rate of 5% for the first five years and 9% thereafter; (ii) any increase in the dividend rate paid on common stock during the first three years will require the consent of
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the Treasury; (iii) any repurchase of common stock will require the consent of the Treasury; (iv) conditions and limitations will be placed on executive compensation; and (v) the Treasury will receive warrants, with a term of 10 years, to purchase a number of shares of common stock having an aggregate market price equal to 15% of the preferred stock amount on the day of investment. The Company applied to the Treasury’s capital purchase program but is still awaiting a response from Treasury.
Temporary Liquidity Guarantee Program
On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (“TLGP”) to strengthen confidence and increase liquidity in the nation’s banking system. The program guarantees, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions and provides full FDIC deposit insurance coverage for certain noninterest-bearing transaction deposit accounts through December 31, 2009. Coverage under the TLGP was available for the first 30 days without charge. The transaction account program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. The Bank elected only to participate in the full FDIC deposit insurance coverage program.
Sarbanes-Oxley Act Of 2002
The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the filing of annual, quarterly, and other reports with the Securities and Exchange Commission (the “SEC”). As an Exchange Act reporting company, the Company is directly affected by the Sarbanes-Oxley Act of 2002 (the “SOX”), which is aimed at improving corporate governance, internal controls and reporting procedures. The Company is complying with applicable SEC and other rules and regulations implemented pursuant to the SOX and intends to comply with any applicable rules and regulations implemented in the future.
Other Laws
The Bank’s relationship with its depositors and borrowers is also regulated to a great extent by both federal and Commonwealth of Virginia laws especially in such matters as the ownership of deposit accounts, interest rates on mortgages and the form and content of contractual documents affecting these relationships.
Lending Activities
General
The Bank’s lending activities have changed significantly in recent years as it has increasingly shifted away from residential real estate lending in favor of consumer and commercial lending. The primary factors influencing this change are the intense competition from mortgage banking companies for fixed rate conventional loans, opportunities for commercial lending created by the acquisition of regional banks and a favorable economic climate for consumer lending. In 2008, lending opportunities were limited in comparison to recent years because of the turmoil in national and local markets caused by the collapse of values for real estate properties.
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The primary real estate lending activity of the Bank has been the granting of conventional first trust loans to enable borrowers to purchase or construct single family homes. The Bank offers both fixed and adjustable rate mortgages (“ARM’s”) on residential properties. The interest rates on ARM’s are subject to periodic adjustment and are indexed to the one year, three year or five year Treasury rate published by the Federal Reserve.
The following table sets forth the Bank’s loans, net of loan fees and costs, undisbursed loan funds, and the allowances for losses.
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| Dollars in Thousands | At December 31, | |||||||||||||
| 2008 | 2007 | |||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||
Residential Real Estate | ||||||||||||||
Adjustable Rate | $ | 6,336 | 6.1 | % | $ | 8,322 | 7.4 | % | ||||||
Fixed Rate | 3,215 | 3.1 | % | 3,310 | 3.0 | % | ||||||||
Home Equity Lines of Cr. (1) | 13,189 | 12.7 | % | 12,173 | 10.9 | % | ||||||||
Balloon Loans | 34,515 | 33.1 | % | 26,981 | 24.1 | % | ||||||||
Residential Construction (2) | 6,686 | 6.4 | % | 14,016 | 12.5 | % | ||||||||
Apartment | 3,715 | 3.6 | % | 3,412 | 3.0 | % | ||||||||
Total Residential Loans | 67,656 | 65.0 | % | 68,214 | 60.9 | % | ||||||||
Other Real Estate | ||||||||||||||
Non-residential Mortgages | 19,102 | 18.3 | % | 22,180 | 19.8 | % | ||||||||
Lines of Credit (3) | 733 | 0.7 | % | 919 | 0.8 | % | ||||||||
Land Loans | 4,421 | 4.2 | % | 5,900 | 5.3 | % | ||||||||
Total Other Real Estate | 24,256 | 23.2 | % | 28,999 | 25.9 | % | ||||||||
Total Real Estate Loans | 91,912 | 88.2 | % | 97,213 | 86.8 | % | ||||||||
Commercial Loans | ||||||||||||||
Secured | 2,479 | 2.4 | % | 2,683 | 2.4 | % | ||||||||
Unsecured | 1,490 | 1.4 | % | 1,960 | 1.7 | % | ||||||||
Total Commercial Loans | 3,969 | 3.8 | % | 4,643 | 4.1 | % | ||||||||
Consumer Loans | ||||||||||||||
Secured | 7,713 | 7.4 | % | 9,380 | 8.3 | % | ||||||||
Unsecured | 625 | 0.6 | % | 916 | 0.8 | % | ||||||||
Total Consumer Loans | 8,338 | 8.0 | % | 10,296 | 9.1 | % | ||||||||
Gross Loans | 104,219 | 100.0 | % | 112,152 | 100.0 | % | ||||||||
Less: | ||||||||||||||
Deferred Fees | 15 | 31 | ||||||||||||
Allowance for loan losses | (1,376 | ) | (702 | ) | ||||||||||
Net Loans | $ | 102,858 | $ | 111,481 | ||||||||||
| (1) | Lines of credit are secured primarily by second deeds of trust and are shown net of undisbursed loan funds. |
| (2) | Construction loans are shown net of undisbursed loan funds. |
| (3) | Non-residential lines of credit are secured by non-residential real estate and are shown net of undisbursed loan funds. |
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Loan Maturity Schedule
The following table sets forth certain information at December 31, 2008 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity. Deferred fees and costs have not been deducted from or added to the amounts of maturing loans:
Loan Maturity Schedule
| Dollars in Thousands | Residential | Non-Residential Real Estate | Commercial | Consumer Loans | Total | |||||||||||
1 Year or less | $ | 22,605 | $ | 10,261 | $ | 2,501 | $ | 2,784 | $ | 38,151 | ||||||
After 1 Year: | ||||||||||||||||
Year 2 | 11,332 | 4,169 | 596 | 1,802 | 17,899 | |||||||||||
Years 3 - 5 | 22,924 | 8,219 | 693 | 2,914 | 34,750 | |||||||||||
Years 6 to 10 | 4,672 | 1,273 | 179 | 838 | 6,962 | |||||||||||
Years 11 to 15 | 1,712 | 187 | — | 1,899 | ||||||||||||
Years 16 & over | 4,411 | 147 | — | — | 4,558 | |||||||||||
Total amounts due | $ | 67,656 | $ | 24,256 | $ | 3,969 | $ | 8,338 | 104,219 | |||||||
Less: | ||||||||||||||||
Deferred loan fees | 15 | |||||||||||||||
Allowance for loan losses | (1,376 | ) | ||||||||||||||
Total Net Loans | $ | 102,858 | ||||||||||||||
The following table sets forth the dollar amount of loans with maturity dates after December 31, 2009 which have predetermined interest rates and which have floating or adjustable interest rates:
| Dollars in Thousands | Predetermined Rates | Floating or Adjustable Rates | Totals | ||||||
Residential Real Estate | $ | 11,949 | $ | 33,102 | $ | 45,051 | |||
Non-residential Real Estate | 10,877 | 3,118 | 13,995 | ||||||
Commercial | 1,434 | 34 | 1,468 | ||||||
Consumer | 5,554 | — | 5,554 | ||||||
Totals | $ | 29,814 | $ | 36,254 | $ | 66,068 | |||
At December 31, 2008, 65.0% of the Bank’s loan portfolio consisted of loans secured by first mortgages on residential real estate properties. A conventional mortgage loan is one that is neither insured by the Federal Housing Authority nor guaranteed by the Veterans Administration or any other governmental agency. The vast majority of the Bank’s first mortgage loans are secured by properties located in Virginia.
The original contractual loan payment period for single family residential mortgage loans originated by the Bank normally ranges from 15 to 30 years. Historically, however, industry experience and the Bank’s own experience have indicated that the average life of such loans is significantly less than the contractual period, generally five to eight years.
Substantially all of the Bank’s residential mortgages have due-on-sale clauses, that are provisions giving the Bank the right to declare a loan immediately due and payable in the event that the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid.
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The Bank exercises the due on sale clause as a means of obtaining repayment on low rate mortgages and thereby generates higher yields on its funds. Alternatively, the Bank may increase the rate of interest to the market rate upon assumption of a loan by a new purchaser.
The Bank’s underwriting standards limit loans to creditworthy borrowers, and all of the Bank’s residential mortgage lending is subject to written, non-discriminatory underwriting guidelines approved by the Bank’s board of directors. Detailed loan applications are designed to determine the borrower’s ability to repay and certain items on these applications are verified through the use of credit reports, financial statements and other procedures.
Appraised values are determined by on-site inspections performed by qualified appraisers approved by the Board of Directors. All appraisals on single family residences securing long-term mortgage loans meet FHLMC or FNMA guidelines and OTS regulations. Such appraisal amounts are subject to change depending on market conditions, and decreases in property values may affect the ultimate collectability of loans. Single family mortgage and constructions loans up to $500,000 may be approved by senior management. Loans above this amount require the approval of the Loan Committee or the Board of Directors, depending on the amount involved.
It is the Bank’s policy to obtain title insurance policies certifying that the Bank has a valid first lien on the mortgaged real estate. Borrowers also must obtain hazard insurance prior to closing and, when considered necessary, flood insurance policies. Borrowers are generally required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes, hazard insurance premiums and private mortgage insurance premiums as they become due.
The types, amounts, terms of, and security for loans originated by the Bank are governed by regulation. Under OTS regulations, a real estate loan may not exceed the appraised value of the security property at the time of origination.
The Bank lending policy for home loans generally allows for principal amounts up to 90% of the appraised value of the security property without a requirement for private mortgage insurance for qualified borrowers.
The Bank’s policy is to make short term construction loans secured by a first lien up to a maximum of 85% of the appraised value of real estate as improved. Residential construction loans to individual home owners are generally for a term of nine months with a fixed interest rate plus additional fees. The vast majority of these construction loans are rolled-over into permanent mortgage loans. This allows the Bank to provide a complete financing package. The Bank also makes construction loans to builders at prime based rates for terms up to nine months.
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Non-Residential Real Estate Loans
Non-residential real estate loans are secured by properties such as land and small office buildings in amounts between 65% and 85% of the appraised value for a maximum term of 30 years. Non-residential real estate lending poses additional risks as compared to residential real estate loans. Typically, these loans involve larger loans to single borrowers or groups of borrowers. The repayment of such loans may be dependent on the successful operation of the business and property values are subject to change depending on the market for commercial real estate buildings. Non-residential real estate loans were 23% of total loans at December 31, 2008.
Consumer Loans
The Bank makes a large variety of secured and unsecured consumer loans for terms up to ten years. These loans are for such purposes as home equity loans, automobile purchases, short term interest only notes, and executive lines of credit secured by various forms of collateral. Increasingly in recent years many of these loans have been secured by second trust positions on the borrowers’ residence. The Bank sold its credit card portfolio late in 2007 to eliminate the potential for fraud losses that were disproportionate to the size of the portfolio. Consumer loans were 8% of total loans at December 31, 2008.
Commercial Loans
Since it started a commercial lending program in 1997, the Bank has focused increased attention on the financial service needs of small businesses in its market area. It believes that community banks, such as Virginia Savings Bank, can compete effectively against large regional or national banks in this area by providing prompt and personal attention to credit requests from small businesses. Commercial loans offered by the Bank include both secured and unsecured loans. Such loans may be either open ended lines of credit or closed end amortizing loans. Although commercial loans are granted for multi-year terms, most borrowers are subject to annual credit reviews. Loans may be called in full if the credit worthiness of borrowers no longer meet the standards reflected in the Bank’s policy guidelines. Commercial loans were 4% of the Bank’s loan portfolio at December 31, 2008.
Non-Performing Loans and Classified Assets
The Bank’s collection policy emphasizes early and frequent personal contact with delinquent borrowers. Every effort is made to resolve delinquencies within sixty days of the due date of the first delinquent payment. Should these efforts fail, foreclosure proceedings or other action to regain possession of the collateral will be initiated by the 90th day of delinquency. In limited instances, the Bank will recast the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs. Any real estate property acquired as a result of foreclosure, or by deed in lieu of foreclosure, is classified as “real estate owned” until such time as it is sold or otherwise disposed of by the Bank to recover its investments.
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No interest is accrued on loans delinquent 90 or more days. The accrual status of delinquent loans at December 31, 2008 and 2007 is reflected in the following table:
| December 31 | ||||||
| 2008 | 2007 | |||||
Non-accrual loans | $ | 1,974,755 | $ | 5,130,556 | ||
Accrual loans past due 90 or more days | — | — | ||||
Total Non-Performing Loans | $ | 1,974,755 | $ | 5,130,556 | ||
Gross interest not recorded on non-accrual loans | $ | 383,003 | $ | 122,303 | ||
All but $301,000 of the loans noted in the above table as non-accrual loans at December 31, 2008 were evaluated for impairment. Specific loan loss allowances totaling approximately $280,000 were provided on these loans as a result of these impairment evaluations. Loans totaling $5.4 million were classified as sub-standard, including the $2.0 million identified above as non-accrual loans, at December 31, 2008. Certain of the classified loans which are in an accrual status have the potential to become further troubled if the borrowers financial condition worsens which could result in their being placed in a non-accrual status.
Certain performing loans may have the potential for future repayment problems. Management closely monitors the Bank’s loan portfolio for indications of potential problems when there are signs of credit problems affecting individual loans or trends in local economic conditions that may affect groups of loans or customer groups. Larger individual loans are placed on a special watch list if there are circumstances which lead management to have doubts as to the ability of such borrowers to meet their current loan repayment terms. Delinquency statistics on smaller balance loans, typically consumer loans, are closely monitored for sign of deterioration when management becomes aware of events affecting our local economy, such as plant closing or rising unemployment, which may affect groups of customers’ short term ability to meet their current loan repayment terms. These loans are subject to regular management attention, and their status is reviewed on a monthly basis.
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At December 31, 2008, the Bank had an allowance for loan losses of $1,375,900 in recognition of the risks involved in its lending program. Management and the Board of Directors make a quarterly review of the adequacy of the loan loss reserve based on such factors as the composition of the loan portfolio and the amount and number of problem loans and other classified assets, if any. Additions to the allowance for possible losses are made by charges against income. The following table sets forth information regarding the Bank’s allowances for losses at the dates indicated, and related charge-off and recovery activities:
| Balance of loan loss allowance, | 2008 | 2007 | ||||||
January 1 | $ | 702,200 | $ | 477,000 | ||||
Charge-Offs: | ||||||||
Mortgage | (1,021,285 | ) | (100,807 | ) | ||||
Consumer | (128,177 | ) | (94,119 | ) | ||||
Commercial | — | (1,125 | ) | |||||
Recoveries | ||||||||
Mortgage | — | — | ||||||
Consumer | 51,720 | 12,983 | ||||||
Commercial | — | — | ||||||
Net Charge-offs | (1,097,742 | ) | (183,068 | ) | ||||
Additions charged to operations | 1,771,442 | 408,268 | ||||||
Balance of loan loss allowance, | ||||||||
December 31 | $ | 1,375,900 | $ | 702,200 | ||||
Ratio of net charges-offs to average outstanding loans | 1.01 | % | 0.15 | % | ||||
The following table sets forth the approximate allocation of loan loss allowances to the various loan categories. While management of the Bank considers the various types of loans in the portfolio with regard to the degree of risk they present to the Bank, and uses other judgmental factors, the general loss reserves below may be used to absorb any loan losses which may occur and the allocations are not restrictive.
Allocation of the allowance for possible loan allowances:
| December 31, 2008 | December 31, 2007 | |||||||||||
| Amount | % of Loans Each Category to Total Loans | Amount | % of Loans Each Category to Total Loans | |||||||||
Residential real estate | $ | 864,300 | 65.0 | % | $ | 312,900 | 60.9 | % | ||||
Other real estate | 313,300 | 23.2 | % | 290,300 | 25.9 | % | ||||||
Unallocated - real estate | 106,600 | 0.0 | % | — | 0.0 | % | ||||||
Commercial | 47,900 | 3.8 | % | 39,400 | 4.1 | % | ||||||
Consumer | 43,800 | 8.0 | % | 60,100 | 9.1 | % | ||||||
Total | $ | 1,375,900 | 100.0 | % | $ | 702,700 | 100.0 | % | ||||
The increase in allowances for losses on residential real estate at December 31, 2008 over prior year is the result of two factors. Specific loan loss allowances totaling approximately $280,000 were provided on loans individually evaluated for impairment. Secondly, management increased the percentage general loan loss allowances on the various loan classifications because of heightened concern over the continued decrease in home prices and worsening general economic conditions that may affect borrowers’ ability to repay their obligations.
Federal regulations provide for three adverse asset classification categories: (i) substandard, (ii) doubtful, and (iii) loss. The regulations also include a special mention category reserved for assets
16
which do not currently expose the Bank to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weakness deserving management’s close attention. Assets classified as substandard or doubtful generally require the institution to establish specific allowances for loan losses. If an asset, or portion thereof, is classified loss, the institution must either establish specific allowances for loan losses in the amount equal to 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, while specific valuation allowances for loan losses do not qualify as regulatory capital. OTS examiners may disagree with the Bank’s classifications and amount reserved.
The Bank’s classification of assets policy provides for monthly review of all assets by senior management with a report and recommendations to the full Board of Directors. Factors included in the classification policy review are the economic environment, industry characteristics, historical trends, market position, cost controls, asset values, financial position, and cash flows. The components of risk considered within the scope of the review are the value of the collateral, timely liquidation, and internal controls.
At December 31, 2008, the Bank had $9.6 million of classified assets as compared to $7.8 million at December 31, 2007. The 2008 classified assets includes $5.9 million of loans and $3.7 million of foreclosed real estate as compared to $7.2 million of loans and $700,000 of foreclosed loans in 2007 The percentage of classified assets to total assets increased from 4.98% at December 31, 2007 to 7.05% at December 31, 2008.
The following table sets forth certain information concerning the classified assets of the Bank and the ratios of the classified assets to total assets.
Classified Assets: | December 31, | |||||||
| 2008 | 2007 | |||||||
Loss | $ | 23,937 | $ | — | ||||
Doubtful loans | 521,100 | — | ||||||
Sub-standard loans | 5,365,579 | 7,165,412 | ||||||
Total Classified Loans | 5,910,616 | 7,165,412 | ||||||
Foreclosed real estate | 3,656,322 | 653,941 | ||||||
Repossessed vehicle | 1,250 | — | ||||||
Totals | $ | 9,568,188 | $ | 7,819,353 | ||||
Percentage of Total Assets | 7.05 | % | 4.98 | % | ||||
Foreclosed real estate assets are comprised of any collateral properties acquired through a foreclosure proceeding under Virginia real estate law. As of December 31, 2008, foreclosed real estate consisted of residential buildings, commercial buildings and land obtained in partial or total satisfaction of loan obligations. When we acquire title to a collateral property, it is transferred on the Company’s books from loans receivable to foreclosed real estate. Collateral properties obtained in satisfaction of loans are recorded at the estimated fair value less anticipated selling costs. We estimate fair values primarily based on appraisals when available, or through discounted cash flow analysis when appraisals are not available. When the fair value, less costs to dispose, associated with a loan at the time of foreclosure is less than its net carrying value, a charge off is recognized against the allowance for loan losses. If the initial fair value amount, less cost to dispose, exceeds the net carrying value, it is recognized in income.
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Subsequently, foreclosed assets are valued at the lower of the amount recorded at the acquisition date or the current fair value less estimated disposition costs. Valuation adjustments on these assets and gains or losses realized upon the sale of the assets are recorded as non-interest income or non-interest expense.
Investment Activities
Virginia Savings Bank invests in marketable securities for the purpose of maintaining a prudent level of liquidity and to derive interest income. Investment decisions are made by authorized officers of the Bank under the guidelines provided by the Board of Directors. The following table sets forth the carrying value of the Bank’s investment securities and mortgage backed securities at the dates indicated:
Investment Portfolio
| Dollars in Thousands | December 31, | |||||
| 2008 | 2007 | |||||
Investment Securities - Held to Maturity | ||||||
Certificates of Deposit | $ | 3,011 | $ | — | ||
Federal agency securities | — | 33,999 | ||||
Mortgage backed securities | 10 | 11 | ||||
Total | $ | 3,021 | $ | 34,010 | ||
Investment Securities - Available for Sale | ||||||
Municipal Bond | $ | 1,000 | $ | — | ||
Corporate Bonds | 2,816 | — | ||||
Mortgage backed securities | 1,230 | — | ||||
Total | $ | 5,046 | $ | — | ||
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The following table indicates the scheduled maturities, carrying values and weighted average yields for the Bank’s various investments as of December 31, 2008:
| Dollars in Thousands | ||||||
Investment Securities Maturing | Amount | Yield | ||||
Held to Maturity | ||||||
Within one year: | ||||||
Certificates of Deposit | $ | 3,011 | 2.12 | % | ||
After five years: | ||||||
Mortgage backed securities | 10 | 5.06 | % | |||
Total | $ | 3,021 | 2.13 | % | ||
Available for Sale | ||||||
Within one year: | ||||||
Municipal Bond | 1,000 | 5.00 | % | |||
Within two years: | ||||||
Corporate Bonds | 2,816 | 6.59 | % | |||
Mortgage backed securities | 1,230 | 4.87 | % | |||
Totals | $ | 5,046 | 3.50 | % | ||
Sources of Funds
General
Deposit accounts are among the major sources of the Bank’s funds for lending and investment purposes. In addition to deposits, Virginia Savings Bank derives funds from loan repayments, proceeds from sales of loans, and advances from the FHLB of Atlanta. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings are used to compensate for reductions in the availability of other sources of funds. At December 31, 2008, the Bank had a pre-approved credit limit from the FHLB that is 22% of its total assets as reported on its OTS Thrift Regulatory Report as of each quarter end. As of December 31, 2008, the Bank’s credit limit from the FHLB was approximately $30.0 million. The Bank also has a $4.6 million credit facility from the Community Bankers’ Bank of Richmond, Virginia for the purchase of federal funds which may be outstanding for a maximum period of thirty days and which expires on March 31, 2009.
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Deposits
Deposits in the Bank as of December 31, 2008, are represented by various types of household and commercial programs. The Bank offers a number of deposit accounts including passbook, money market, interest-bearing checking accounts, and certificates of deposit with terms from three months to five years. Deposit accounts vary as to terms, with the principal terms being the minimum balance required, the period the funds must remain on deposit and the interest rate offered. The following table sets forth the composition of the Bank’s deposit accounts by dollar amount and average rate paid at the end of the past two years:
| At December 31, | ||||||||||||
| 2008 | 2007 | |||||||||||
| Dollars in Thousands | Amount | Average Rate | Amount | Average Rate | ||||||||
Type of Account | ||||||||||||
Interest Bearing Demand | $ | 21,681 | 0.25 | % | $ | 20,803 | 0.38 | % | ||||
Non-interest Bearing Demand | 5,075 | 0.00 | % | 5,903 | 0.00 | % | ||||||
Money Market | 1,490 | 0.38 | % | 2,025 | 0.76 | % | ||||||
Savings | 18,900 | 0.91 | % | 17,245 | 1.45 | % | ||||||
Certificates of deposit | 76,009 | 3.53 | % | 87,254 | 4.62 | % | ||||||
Total Deposits | $ | 123,155 | 2.37 | % | $ | 133,230 | 3.28 | % | ||||
At December 31, 2008, the Bank had certificates of deposit with balances of $100,000 or more with remaining terms to maturity as follows:
Certificates of Deposit of $100,000 or More
| Dollars in thousands | Balance | Rate | ||||
Three months or less | $ | 3,244 | 3.89 | % | ||
Over 3 through 6 months | 3,079 | 3.07 | % | |||
Over 6 through 9 months | 2,460 | 3.54 | % | |||
Over 9 through 12 months | 1,109 | 3.28 | % | |||
Year ended 12/31/2010 | 3,346 | 3.75 | % | |||
Year ended 12/31/2011 | 630 | 3.76 | % | |||
Year ended 12/31/2012 | 157 | 5.15 | % | |||
Year ended 12/31/2013 | 904 | 4.21 | % | |||
Total | $ | 14,929 | 3.62 | % | ||
Borrowings
The Bank obtains advances from the FHLB upon the security of the FHLB capital stock it owns and other collateral. Such advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities, and the FHLB prescribes acceptable uses to which the advances may be put as well as limitations on the size of such advances. FHLB advances have from time to time been available to meet seasonal and other withdrawals of savings accounts and to expand lending.
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The following table presents the Bank’s short-term borrowing activities for the past two years:
Short-Term Borrowings
| Dollars in Thousands | 2008 | 2007 | ||||||
Balance at December 31 | $ | — | $ | 11,800 | ||||
Weighted average interest rate at year end | — | 5.06 | % | |||||
Maximum amount outstanding at any month end | 13,000 | 23,300 | ||||||
Average outstanding for the year | 2,832 | 18,533 | ||||||
Weighted average rate during the year | 5.08 | % | 5.40 | % | ||||
Employees
The Bank had fifty-six full-time employees, including its executive officers, and two part-time employee at December 31, 2008. The employees are not represented by a collective bargaining agreement, and the Bank has always enjoyed harmonious relations with its personnel.
| Item 1A. | RISK FACTORS |
The information in this item is not required of smaller reporting companies.
| Item IB. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| Item 2. | PROPERTIES |
The Bank’s business is conducted in five offices in Virginia. As of December 31, 2008, the net book value of the premises and furniture and fixtures owned by the Bank was approximately $6,300,000. In addition to its main office at 600 Commerce Avenue, Front Royal, Virginia, the Bank owns full service branch facilities located at 1001 Main Street, Woodstock, Virginia, 234 Weems Lane, Winchester, Virginia, 33230 Old Valley Pike, Strasburg, Virginia, and 100 Elizabeth Street, Stephens City, Virginia . The Bank closed its branch at 202 Boscawen Street in the City of Winchester in May, 2008, which is currently listed for sale.
The headquarters of the Company is located at 600 Commerce Avenue, Front Royal, Virginia.
| Item 3. | LEGAL PROCEEDINGS |
The Company is not a party to nor is its property the subject of any legal proceedings other than routine non-material proceedings incidental to its business. There is no litigation threatened against the Company at this time to the knowledge of management.
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| Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2008.
| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no established market in the Company’s common stock. The common stock is not listed on any organized exchange nor are there any market makers to promote the sale of the shares. There are no regularly quoted bid and asked prices for the common stock. Trading in the common stock has been very thin and occurs privately and in transactions generally involving a small number of shares. The following table presents information concerning sales of the Company’s common stock known to management of the Company. The information set forth below may not be representative of all transactions during the indicated periods or the actual fair market value of the common stock at the time of such transactions due to the infrequency of trades and the limited market for the shares.
| Common Stock Sales | ||||||
| 2008 | 2007 | |||||
Number of Sales | 9 | 17 | ||||
Shares Traded | 5,367 | 27,401 | ||||
Price Range: | ||||||
High | $ | 16.00 | $ | 17.51 | ||
Low | $ | 10.00 | $ | 10.00 | ||
At December 31, 2008, there were approximately 560 holders of the Company’s common stock.
Prior to the formation of the Company, the Bank paid annual cash dividends from 1990 through 2007. In 2005, the dividend rate was 37.5¢ per share after adjustment for a two for one stock split declared in May, 2006. Beginning in the second quarter of 2006 and through 2007, the Bank made quarterly dividend payments at the rate of 9.375¢ per share to the holders of common stock. Because of the reduced earnings level of the Company in 2008, it reduced its quarterly dividend rate to 3¢ per share.
The Company’s ability to pay future dividends to its shareholders will depend upon its cash resources, earnings trends and its obligation to support the capital position of the Bank in a prudent manner. In addition, the payment of dividends is subject to the restrictions noted inPart I, Regulations and Supervision, Capital Distribution Regulations.
| Item 6. | SELECTED FINANCIAL DATA |
The information required by this item is contained in the Company’s 2008 Annual Report which is being filed in Exhibit 13.0 to this Report on Form 10-K and is incorporated by reference.
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| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information required by this item is contained in the Company’s 2008 Annual Report to Shareholders, which is being filed as Exhibit 13 to this Report on Form 10-K and is incorporated herein by reference.
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information in this item is not required of smaller reporting companies.
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item is contained in the Company’s 2008 Annual Report to Shareholders, which is being filed as Exhibit 13 to this Report on Form 10-K and is incorporated herein by reference.
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
| Item 9A. | CONTROLS AND PROCEDURES |
Management’s Disclosure Controls
Management of the Company is responsible for the preparation of the accompanying financial statements and for their integrity and objectivity. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Management also prepares the other information in this annual report and is responsible for its accuracy and consistency with the financial statements.
Management has designed what it believes are appropriate disclosure controls and procedures. These controls and procedures are designed to insure that management receives all pertinent information that may be required to be disclosed in its annual report. Such information is not limited to financial data but also includes non-financial information that should be considered for disclosure in the annual report. Because of inadequate staffing in the financial accounting section of the Company for a portion of the year ended December 31, 2008, there was not an appropriate segregation of duties in the recording and review of financial data and in the preparation and review of financial reports.
Management has concluded that as of December 31, 2008, implementation of its structure of disclosure controls and procedures was not effective in meeting their intended purposes. The most recent review of these systems, conducted as of December 31, 2008, revealed material deficiencies, which are detailed below in management’s report on internal control over financial reporting, that could adversely affect the Bank’s ability to properly and accurately record and report financial data.
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Report of Management on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over our financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:
| 1. | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| 2. | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are made only in accordance with authorizations of management and directors of the Company; and |
| 3. | provide reasonable assurance regarding timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
The Company, under the direction of its Chief Executive Officer and its Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. Management’s assessment identified material weaknesses in the Company’s internal control over financial reporting because of ineffective controls related to computations, methodology and presentation of a limited number of non-routine complex transactions which could potentially aggregate to material misstatements in financial reporting. Management’s testing of internal controls also identified instances of significant deficiencies in internal controls pertaining to segregation of duties and independent review that existed at December 31, 2008, which when combined, were considered by management to be a material weakness.
Management assessed the effectiveness of its internal control over financial reporting as of December 31, 2008, based on the criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of the material weaknesses described above, management believes that as of December 31, 2008, the Company did not maintain effective control over financial reporting based on those criteria.
In order to address the material weaknesses described above, the Company will take the following remedial actions:
Management will develop procedures to insure that the complex transactions identified in the evaluation of internal control have a sufficient level of review to ensure that the risk of misstatement is minimized.
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Subsequent to the report date, and prior to the filing date of this report, management added accounting staff to better segregate accounting duties and to provide additional support to the financial accounting review process leading to the preparation of financial statements. Management has also remediated certain of the significant deficiencies identified in its most recent internal control evaluation. Management will develop policies and procedures to insure that the remaining deficiencies are corrected in the near future.
This annual report does not contain an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary relief rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
| Item 9B. | OTHER INFORMATION |
None
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The Company has adopted a code of ethics that applies to its chief executive officer and to its chief financial officer. The Company’s written code of ethics is attached to this report as Exhibit 14.0. The Company will provide without charge a copy of its code of ethics to any person. Copies of the written code of ethics are available by written or telephonic communication to the Company’s chief financial officer.
For other information with respect to the directors and executive officers of the Company and certain committees of the Company, see the information set forth in the Company’s Proxy Statement for the 2009 Annual Meeting of Shareholders, which is incorporated herein by reference.
| Item 11. | EXECUTIVE COMPENSATION |
The information required by this item is contained in the Company’s Proxy Statement issued in connection with the Company’s 2009 Annual Meeting of Shareholders, and is incorporated herein by reference.
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| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is contained in the Company’s Proxy Statement issued in connection with the Company’s 2009 Annual Meeting of Shareholders, and is incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item is contained in the Company’s Proxy Statement issued in connection with the Company’s 2009 Annual Meeting of Shareholders, and is incorporated herein by reference.
| Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item is contained in the Company’s Proxy Statement issued in connection with the Company’s 2009 Annual Meeting of Shareholders, and is incorporated herein by reference.
| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index:
Exhibit | Description of Exhibits | |
2.0 | Agreement and Plan of Reorganization, dated as of April 19, 2007 and amended and restated, by and among Virginia Savings Bank, F.S.B., Virginia Savings Bancorp, Inc. and VSB Interim Federal Savings Bank.* | |
3.1 | Articles of Incorporation of Virginia Savings Bancorp, Inc., as amended.* | |
3.2 | Bylaws of Virginia Savings Bancorp, Inc., as amended.* | |
10.1 | Employment Agreement, dated as of January 1, 2005, by and between Virginia Savings Bank, F.S.B. and W. Michael Funk.* | |
10.2 | Change in Control Employment Agreement, dated as of January 1, 2005, by and between Virginia Savings Bank, F.S.B. and W. Michael Funk.* | |
13.0 | 2008 Annual Report to Shareholders | |
14.0 | Code of Ethics | |
21.0 | Subsidiaries of the Registrant – Reference is made to “Item 1. Description of Business” for the required information. | |
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31.1 | Rule13a-14(a)/15d-14(a) CEO Certification | |
31.2 | Rule 13a-14(a)/15d-14(a) CFO Certification | |
32.0 | Section 1350 Certification | |
| * | Incorporated by reference from the Company’s Registration Statement on Form S-4, as amended (SEC File No. 333-142256), filed with the Commission on June 15, 2007. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VIRGINIA SAVINGS BANCORP, INC. | ||||||
| By: | /s/ W. Michael Funk | Date: April 29, 2009 | ||||
| W. Michael Funk | ||||||
| President | ||||||
| Chief Executive Officer | ||||||
Pursuant to the requirements 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.
Signature | Title | Date | ||
/s/ Francis D. Hall | Chairman of the Board | April 29, 2009 | ||
| Francis D. Hall | Director | |||
/s/ W. Michael Funk | President, Chief Executive Officer, and Director (Principal Executive Officer) | April 29, 2009 | ||
| W. Michael Funk | ||||
/s/ J. William Gilliam | Director | April 29, 2009 | ||
| J. William Gilliam | ||||
/s/ Samuel J. Baggarly | Director | April 29, 2009 | ||
| Samuel J. Baggarly | ||||
/s/ David L. Wines | Director | April 29, 2009 | ||
| David L. Wines | ||||
/s/ Kent E. Coons | Director | April 29, 2009 | ||
| Kent E. Coons | ||||
/s/ Webb R. Davis | Director | April 29, 2009 | ||
| Webb R. Davis | ||||
/s/ Arnold M. Williams, Sr. | Director | April 29, 2009 | ||
| Arnold M. Williams, Sr. | ||||
/s/ Noel F. Pilon | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | April 29, 2009 | ||
| Noel F. Pilon | ||||
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