SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File No.: 0-25031
VIRGINIA CAPITAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1913168
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 George Street, Fredericksburg, Virginia 22404
(Address of principal executive offices)
Registrant's telephone number, including area code: (540) 899-5500
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. _____
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $142,208,425, based upon the last sales price of $14.625 as
quoted on the Nasdaq National Market for March 20, 2000. Solely for purposes of
this calculation, the shares held by the directors and officers of the
registrant are deemed to be held by affiliates.
The number of shares outstanding of the registrant's Common Stock as of
March 20, 2000 was 10,292,832.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report to Shareholders and the
definitive Proxy Statement for the Annual Meeting of Stockholders to
be held April 7, 2000 are incorporated herein by reference to Parts
II and III, respectively, of this Form 10-K.
INDEX
Part I
Page
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 25
Item 3. Legal Proceedings........................................................................... 25
Item 4. Submission of Matters to a Vote of Securities Holders....................................... 25
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 26
Item 6. Selected Financial Data..................................................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 26
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................... 26
Item 8. Financial Statements and Supplementary Data................................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 26
Part III
Item 10. Directors and Executive Officers of the Registrant.......................................... 26
Item 11. Executive Compensation...................................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 27
Item 13. Certain Relationships and Related Transactions.............................................. 27
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 27
Signatures
PART I
Item 1. BUSINESS OF THE COMPANY
General
Virginia Capital Bancshares, Inc. (the "Company"), was formed on
September 4, 1998 as the holding company for Fredericksburg Savings Bank (the
"Bank") in connection with the conversion of the Bank from mutual to stock form
of ownership on December 23, 1998. The Company is headquartered in
Fredericksburg, Virginia and its principal business currently consists of the
operations of the Bank. The Company, as a savings and loan holding company, and
the Bank are subject to the regulation of the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). The Company is listed on the Nasdaq Stock
Market under the symbol "VCAP". The Company does not transact any material
business other than through its subsidiary, the Bank.
The Bank is a community oriented savings bank whose principal business
has been and continues to be attracting retail deposits from the general public
in the areas surrounding its branch offices and investing those deposits,
together with funds generated from operations and borrowings, primarily in one-
to four-family residential mortgage loans. In recent years, the Bank has
originated primarily fixed-rate one- to four-family loans with terms of 15 to 30
years. To a lesser extent, the Bank invests in non-residential real estate
loans, including loans to local churches, construction and development loans,
land and land development loans, and consumer loans. The Bank operates through
its four full service banking offices located in the City of Fredericksburg and
Stafford and Spotsylvania Counties, Virginia. The Bank originates loans for
investment. The Bank's revenues are derived principally from interest on its
mortgage loans and, to a lesser extent, interest on its investments, which
generally include short-term U.S. Treasury bonds and U.S. Government Agency
obligations, short-term, highly rated corporate debt securities and municipal
bonds and from loan fee income. The Bank's primary sources of funds are
deposits, principal and interest payments on loans and investments.
Market Area and Competition
The Bank is headquartered in Fredericksburg, Virginia and has been,
and intends to continue to be, a community oriented financial institution. The
Bank's primary market area is comprised of the City of Fredericksburg and
Spotsylvania, Stafford and King George Counties, Virginia, which are serviced
through the Bank's main office and three other full service banking offices. The
Bank's main office is located in Fredericksburg, two branch offices are located
in Spotsylvania County and one is in Stafford County.
The Bank's primary market area consists principally of suburban and
rural communities with service, wholesale/retail trade, government and
manufacturing serving as the basis of the local economy. Service jobs represent
the largest type of employment in the Bank's primary market area, with jobs in
wholesale/retail trade accounting for the second largest employment sector.
Fredericksburg and surrounding communities are located between Richmond,
Virginia and Washington, D.C. and are easily accessible from Interstate 95, a
major Interstate running north to south along the Eastern seaboard. The easy
accessability to the Fredericksburg area and its close proximity to these large
cities has resulted in the Fredericksburg area being among one of the fastest
growing areas in the country in recent years. Businesses that have moved to the
area in recent years and invested substantial capital into their new locations
include Capital One Financial Corp., Intuit, Inc., Dongsung America, Inc., Mapei
Corporation, Vulcan Materials Company, SEI Birchwood, Inc. and Greenhost, Inc.
In addition, GEICO insurance has significantly expanded its presence in the area
and currently employs over 2,000 people at its Stafford County location.
Management believes that its market area continues to show economic growth with
stable to moderately increasing real estate values. Management hopes to
capitalize on this high growth to expand its market share.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these
3
financial institutions are significantly larger and have greater financial
resources than the Bank. The Bank's competition for loans comes principally from
commercial banks, savings banks, credit unions, mortgage brokers, mortgage
banking companies and insurance companies. In addition, the Bank has recently
faced significant competition for first mortgage loans on new home construction
from builders who have been offering financing for purchasers of new homes in
the builders' development projects. Its most direct competition for deposits has
historically come from savings, cooperative and commercial banks and credit
unions. In addition, the Bank faces significant competition for deposits from
non-bank institutions such as brokerage firms and insurance companies in such
instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as a
result of the lifting of restrictions on the interstate operations of financial
institutions. The Bank has also experienced significant competition from credit
unions which have a competitive advantage as they do not pay state or federal
income taxes. Such competitive advantage has placed increased pressure on the
Bank with respect to its loan and deposit pricing.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residences.
The types of loans that the Bank may originate are subject to federal laws
and regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board ("FRB") and legislative tax policies.
4
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
At December 31,
1999 1998 1997
-------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Mortgage loans:
Residential:
One- to four-family (1)........................ $370,249 85.80% $362,338 86.05% $354,344 84.00%
Multi-family................................... 2,681 0.62 3,335 0.79 3,455 0.82
Non-residential real estate (2)................... 33,564 7.78 33,117 7.86 40,951 9.71
Land and land development......................... 1,379 0.32 1,175 0.28 3,091 0.73
Construction and development....................... 13,085 3.03 12,089 2.87 11,068 2.62
-------- ------ -------- ------ -------- ------
Total mortgage loans......................... 420,958 97.55 412,054 97.85 412,909 97.88
Consumer and other loans........................... 10,577 2.45 9,065 2.15 8,913 2.12
-------- ------ -------- ------ -------- ------
Total loans............................... 431,535 100.00% 421,119 100.00% 421,822 100.00%
====== ====== ======
Less:
Unearned discounts and deferred loan fees........ 3,767 3,644 3,312
Allowance for loan losses........................ 5,689 5,684 5,478
-------- -------- --------
Loans receivable, net............................ $422,079 $411,791 $413,032
======== ======== ========
1996 1995
Percent Percent
Amount of Total Amount of Total
------- --------- -------- ---------
Mortgage loans:
Residential:
One- to four-family (1)........................ $340,349 82.26% $323,046 80.98%
Multi-family................................... 3,453 0.83 2,340 0.59
Non-residential real estate (2)................... 44,528 10.76 44,520 11.16
Land and land development......................... 4,136 1.00 6,398 1.61
Construction and development....................... 13,221 3.20 15,413 3.86
-------- ------- -------- -------
Total mortgage loans......................... 405,687 98.05 391,717 98.20
Consumer and other loans........................... 8,046 1.95 7,159 1.80
-------- ------- -------- -------
Total loans............................... 413,733 100.00% 398,876 100.00%
======= =======
Less:
Unearned discounts and deferred loan fees........ 3,045 2,855
Allowance for loan losses........................ 5,543 5,480
-------- --------
Loans receivable, net........................... $405,145 $390,541
======== ========
________________________________________
(1) Includes home equity lines of credit.
(2) Includes 40 loans to local churches totalling $13.4 million at December 31,
1999.
5
Loan Maturity. The following table shows the remaining contractual maturity
of the Bank's loans at December 31, 1999. The table does not include the effect
of future principal prepayments.
At December 31, 1999
----------------------------------------------------------------------------------------
One- to Construction Land and
Four- Multi- Non- and Land Total
Family Family Residential Development Development Consumer Loans
----------------------------------------------------------------------------------------
(In thousands)
Amounts due:
One year or less........................ $ 2,647 $ -- $ 2 $13,085 $ 26 $ 1,806 $ 17,566
After one year:
More than one year to three years.... 2,877 -- 139 -- 109 3,163 6,288
More than three years to five years.. 6,458 115 1,096 -- 14 4,548 12,231
More than five years to ten years.... 55,343 571 6,899 -- 321 767 63,901
More than ten years to twenty years.. 148,795 413 17,316 -- 762 293 167,579
More than twenty years............... 154,129 1,582 8,112 -- 147 -- 163,970
-------- ------ ------- --------- ------ ------- --------
Total amount due.................. $370,249 $2,681 $33,564 $13,085 $1,379 $10,577 $431,535
======== ====== ======= ========= ====== =======
Less:
Unearned discounts and deferred loan fees............................................................................. 3,767
Allowance for loan losses............................................................................................. 5,689
--------
Loans, net............................................................................................................ $422,079
========
The following tables set forth at December 31, 1999 the dollar amount
of loans contractually due after December 31, 2000 and whether such loans have
fixed interest rates or adjustable interest rates.
Due After December 31, 2000
--------------------------------------------------------------
Fixed Adjustable Total
---------------- ------------------ ------------------
(In thousands)
Real estate loans:
One- to four-family.................... $292,202 $75,400 $367,602
Multi-family........................... 1,850 831 2,681
Non-residential........................ 20,298 13,264 33,562
Land and land development.............. 716 637 1,353
-------- ------- --------
Total real estate loans............. 315,066 90,132 405,198
Consumer and other loans.................. 7,272 1,499 8,771
-------- ------- --------
Total loans............................... $322,338 $91,631 $413,969
======== ======= ========
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its four
offices. In-market loan originations are generated by the Bank's marketing
efforts, which include print, radio and television advertising, lobby displays
and direct contact with local civic and religious organizations, as well as by
the Bank's present customers, walk-in customers and referrals from real estate
agents, brokers and builders. Loans originated by the Bank are underwritten by
the Bank pursuant to the Bank's policies and procedures and are generally
underwritten in accordance with Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC") underwriting standards. The
Bank originates both adjustable-rate and fixed-rate loans. The Bank's ability to
originate fixed- or adjustable-rate loans is dependent upon the relative
customer demand for such loans, which is affected by the current and expected
future level of interest rates. In recent years, the Bank has originated
primarily fixed-rate loans as a result of low customer demand for adjustable-
rate loans given the prevailing low interest rate environment.
Generally, all loans originated by the Bank are held for investment,
although currently the Bank is exploring opportunities to sell fixed-rate loans
originated by the Bank through the secondary market. The Bank generally does
not originate mortgage loans insured by the FHA and VA.
6
During the years ended December 31, 1999, 1998 and 1997, the Bank
originated $89.4 million, $117.9 million and $85.1 million of one- to four-
family mortgage loans, respectively, all of which were retained by the Bank.
The following table sets forth the Bank's loan originations for the
periods indicated:
For the Year Ended December 31,
----------------------------------------------
1999 1998 1997
--------- ---------------- -------------
Mortgage loans originated:
One- to four-family.......................... $89,439 $117,959 $85,099
Non-residential real estate.................. 145 491 1,763
Land and land development.................... 268 -- --
Construction and development................. 23,566 18,424 19,333
------- ------- -------
Total mortgage loans originated............ 113,418 136,874 106,195
Consumer and other loans originated............ 10,799 6,809 6,323
------- ------- -------
Total loans originated..................... $124,217 $143,683 $112,518
======= ======= =======
One-to Four-Family Lending. The Bank currently offers fixed-rate
mortgage loans with terms from ten to 30 years. The Bank retains all of the
fixed-rate residential loans that it originates. The Bank is considering selling
fixed-rate loans originated by the Bank, but to date has not established a
policy for such sales. The Bank did not purchase any mortgage loans during 1999,
1998 and 1997.
The Bank currently offers one-year residential ARM loans with an
interest rate that adjusts annually based on the change in the relevant United
States Treasury index. The Bank also offers loans that bear fixed rates of
interest for specified periods of time and, thereafter, adjust on an annual
basis. These loans provide for up to a 2.0% periodic cap and a lifetime cap of
6.0% over the initial rate. As a consequence of using caps, the interest rates
on these loans may not be as rate sensitive as the Bank's cost of funds.
Borrowers of one-year residential ARM loans are generally qualified at a rate of
2.0% above the initial interest rate. The Bank also offers ARM loans that are
convertible into fixed-rate loans with interest rates based upon the then
current market rates. ARM loans generally pose greater credit risks than fixed-
rate loans, primarily because as interest rates rise, the required periodic
payment by the borrower rises, increasing the potential for default. However, as
of December 31, 1999, the Bank had not experienced higher default rates on these
loans relative to its other loans.
All one- to four-family mortgage loans are underwritten according to
the Bank's policies and guidelines. Generally, the Bank originates one- to four-
family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
97% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. The Bank requires fire,
casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Bank.
Included in the Bank's one- to-four family loan portfolio are home
equity loans. The Bank originates home equity loans that are secured by a lien
on the borrower's residence and generally do not exceed $250,000. The Bank uses
the same underwriting standards for home equity loans as it uses for one- to
four-family residential mortgage loans. Home equity loans are generally
originated in amounts which, together with all prior liens on such residence, do
not exceed 80% of the appraised value of the property securing the loan. The
interest rates for home equity loans either float at a stated margin over the
prime rate or have fixed interest rates. As of December 31, 1999, the Bank had
$3.2 million, or 0.74% of the Bank's total loan portfolio outstanding, in home
equity loans.
Non-Residential and Multi-Family Lending. The Bank originates non-
residential real estate loans that are generally secured by properties used for
business purposes such as office buildings, schools, nursing homes, retail
stores and churches located in the Bank's primary market area. The Bank lends to
local churches to fund construction of or
7
renovations to church facilities. Such loans are generally fixed-rate loans with
a maximum loan to value ratio of 80%. All such loans are performing in
accordance with their terms. Multi-family loans are generally secured by 5 or
more unit apartment buildings located in the Bank's primary market area. The
Bank's multi-family and non-residential real estate underwriting policies
provide that such real estate loans may be made in amounts up to 75% of the
appraised value of the property, subject to the Bank's current internal loan-to-
one-borrower limit, which at December 31, 1999 was $10.0 million.
Non-residential real estate loans and multi-family loans generally
have adjustable rates and terms to maturity that do not exceed 25 years. The
Bank's current lending guidelines generally require that the property securing
commercial real estate loans and multi-family loans generate net cash flows of
at least 125% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not to exceed 75% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some non-residential real estate loans and multi-
family loans in the Bank's portfolio may exceed the initial loan-to-value ratio.
Adjustable-rate non-residential real estate loans and multi-family loans provide
for interest at a margin over a designated index, often a designated prime rate,
with periodic adjustments, generally at frequencies of up to five years. In
underwriting non-residential real estate loans and multi-family loans, the Bank
analyzes the financial condition of the borrower, the borrower's credit history,
the reliability and predictability of the net income generated by the property
securing the loan and the value of the property itself. The Bank generally
requires personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing non-
residential real estate loans and multi-family loans originated by the Bank are
performed by independent appraisers approved by the Board of Directors.
Non-residential real estate loans and multi-family loans generally
present a higher level of credit risk than loans secured by one- to four-family
residences. This greater credit risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate and multi-
family properties is typically dependent upon the successful operation of the
related real estate project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed, or a bankruptcy court modifies a
lease term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced. The Bank seeks to minimize these risks through its
underwriting standards.
Construction and Development and Land and Land Development Lending.
The Bank originates construction loans for the development of residential and
commercial property. Construction loans are offered primarily to experienced
local developers operating in the Bank's market area. The majority of the Bank's
construction loans are originated to finance the construction by developers of
one- to four-family residential real estate and, to a lesser extent, multi-
family and commercial real estate properties located in the Bank's primary
market area. Construction loans are generally offered with terms of up to 12
months and may be made in amounts up to 75% of the appraised value of the
property on multi-family and commercial real estate construction and 80% on one-
to four-family residential construction. Land loans are made in amounts up to
60% of the appraised value of the land securing the loan. Construction loan
proceeds are disbursed periodically in increments as construction progresses and
as inspections by the Bank's inspecting officers warrant.
Construction financing is generally considered to involve a higher
degree of credit risk 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 compared to the estimated cost (including interest)
of construction and other assumptions, including the estimated time to sell
residential properties. If the estimated value proves to be inaccurate, the Bank
may be confronted with a property, when completed, having a value which is
insufficient to assure full repayment. The Bank seeks to minimize this risk
through its underwriting standards.
Consumer and Other Lending. Consumer loans at December 31, 1999
amounted to $10.6 million, or 2.45%, of the Bank's total loans and consisted
primarily of automobile loans (new and used) and loans secured by savings
accounts. Such loans are generally originated in the Bank's primary market area
and generally are secured by deposit accounts, personal property and
automobiles. These loans are typically shorter term and generally have higher
interest rates than one- to four-family mortgage loans.
8
Loans secured by rapidly depreciable assets such as automobiles or
that are unsecured entail greater credit risks than one- to four-family
residential mortgage loans. In such cases, repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance, since there is a greater likelihood of damage, loss or
depreciation of the underlying collateral. Further, consumer loan collections on
these loans are dependent on the borrower's continuing financial stability and,
therefore, are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Finally, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans in the event of a default.
At December 31, 1999, the Bank had 24 consumer loans 90 days or more delinquent,
whose balances totalled $132,000.
Loan Approval Procedures and Authority. The Board of Directors of the
Bank establishes the lending policies of the Bank. Such policies provide that
the Bank's President, Executive Vice President and Senior Lending Officer may
approve consumer loans up to $50,000. The Loan Committee approves all
residential loans up to $500,000. The Board approves loans of $500,000 and
above. All loans are submitted to the full Board of Directors for ratification
on a monthly basis.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 60 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan
and cause of delinquency and whether the borrower is habitually delinquent.
Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
9
The Bank's Classification of Assets Committee reviews and classifies
the Bank's assets on a regular basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At December 31, 1999,
the Bank had $7.6 million of classified loans, or 1.79% of total loans, all of
which were designated as Substandard.
The following table sets forth the delinquencies in the Bank's loan
portfolio:
At December 31, 1999
---------------------------------------------------
60-89 Days 90 Days or More
----------------------- -------------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
---------- ----------- ------------ ------------
(Dollars in thousands)
Mortgage loans:
One- to four-family...................................... 8 $ 404 14 $1,063
Multi-family............................................. -- -- -- --
Non-residential real estate.............................. -- -- -- --
Construction and development............................. -- -- 1 18
Land and land development................................ -- -- -- --
---- ----- ---- ------
Total mortgage loans................................... 8 404 15 1,081
Consumer and other loans................................... 7 61 24 132
---- ----- ---- ------
Total loans................................................ 15 $ 465 39 $1,213
==== ===== ==== ======
Delinquent loans to total loans............................ 0.22% 0.11% 0.56% 0.28%
==== ===== ==== ======
10
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and REO. At December 31, 1999, the Bank
had $416,000 of REO net of a valuation allowance. It is the policy of the Bank
to cease accruing interest on loans 90 days or more past due and to charge-off
all accrued interest. The Bank does, however, continue accruing interest on
loans 90 days or more past due that are in the process of being renewed or
extended.
At December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------------- ----------- ------------- ---------
Non-performing assets(1):
Non-accrual loans:
Mortgage loans:
One- to four-family....................... $ 2,876 $3,227 $3,282 $ 5,366 $ 3,959
Non-residential real estate.............. 978 1,026 1,163 1,920 1,389
Construction and development............. -- -- -- 774 529
Land and development..................... 347 349 493 558 653
Consumer and other loans.................... 130 118 136 135 269
------- ------ ------ ------- -------
Total non-accrual loans............... 4,331 4,720 5,074 8,753 6,799
Restructured loans.......................... 1,422 1,347 1,575 694 1,365
Real estate acquired through foreclosure.... 416 1,177 1,959 1,611 2,135
------- ------ ------ ------- -------
Total non-performing assets.................... $ 6,169 $7,244 $8,608 $11,058 $10,299
======= ====== ====== ======= =======
Non-accrual loans to total loans................... 1.01% 1.13% 1.21% 2.13% 1.72%
====== ====== ====== ======= =======
Non-performing assets to total assets.............. 1.14% 1.26% 1.82% 2.35% 2.20%
====== ====== ====== ======= =======
Loans 90 days or more past due and accruing $ -- $ 202 $ -- $ 65 $ --
interest........................................ ====== ====== ====== ======= =======
----------------------------------
(1) Loans are presented before allowance for loan losses.
Restructured loans include loans that were modified while delinquent.
Although the original amount due under these loans has not been modified from
the terms of the loans when originated, certain adjustments were made to these
loans to help the borrower make payments while the loans were delinquent and to
enable the Bank to avoid foreclosure proceedings. Outstanding restructured loans
consist of single-family loans and non-residential loans with balances less than
$188,000 and $215,000 per loan, respectively.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in its loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses on loans which are deemed probable and
estimable based on information currently known to management. The allowance is
based upon a number of factors, including economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon judgments different from those
of management. As of December 31, 1999, the Bank's allowance for loan losses was
1.33% of net loans as compared to 1.36% as of December 31, 1998. The Bank had
non-accrual loans of $4.3 million and $4.7 million at December 31, 1999 and
1998, respectively. The Bank will continue to monitor and modify its allowances
for loan losses as conditions dictate. While management believes the Bank's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for loan losses will be sufficient to cover loan losses incurred by
the Bank or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
11
The following table sets forth activity in the Bank's allowance for loan
losses for the periods as indicated.
At or For the Year Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Balance at beginning of period................ $5,684 $5,478 $5,543 $5,480 $5,537
Provision for loan losses..................... 116 461 375 325 412
Charge-offs:
Mortgage loans:
One- to four-family....................... (97) (185) (260) (244) (17)
Construction and development.............. - (5) (148) - (469)
Consumer loans.............................. (45) (70) (32) (19) (3)
------ ------ ------ ------ ------
Total charge-offs....................... (142) (260) (440) (263) (489)
Recoveries.................................... 31 5 - 1 20
------ ------ ------ ------ ------
Balance at end of period...................... $5,689 $5,684 $5,478 $5,543 $5,480
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average net loans
outstanding during the period.............. 0.03% 0.06% 0.11% 0.07% 0.13%
====== ====== ====== ====== ======
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loans losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
At December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ----------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
One-to four-family (1)........... $2,202 38.70% 85.80% $2,130 37.47% 86.05% $1,862 33.99% 84.00%
Multi-family..................... 27 0.47 0.62 33 0.58 0.79 35 0.63 0.82
Non-residential real estate...... 706 12.41 7.78 710 12.49 7.86 762 13.90 9.71
Land and land development........ 249 4.37 0.32 204 3.59 0.28 225 4.11 0.73
Construction and development..... 172 3.03 3.03 174 3.06 2.87 80 1.46 2.62
Consumer and other loans......... 246 4.31 2.45 243 4.28 2.15 252 4.61 2.12
Unallocated general allowance.... 2,087 36.71 -- 2,190 38.53 -- 2,262 41.30 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance.............. $5,689 100.00% 100.00% $5,684 100.00% 100.00% $5,478 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
____________________
(1) Includes home equity lines of credit.
12
At December 31,
------------------------------------------------------------------------------
1996 1995
------------------------------------- ------------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ ------ ------ ------ ------ ------
(Dollars in thousands)
One-to four-family(1)................ $1,860 33.58% 82.26% $2,047 37.35% 80.98%
Multi-family......................... 289 5.17 0.83 276 5.04 0.59
Non-residential real estate.......... 982 17.71 10.76 639 11.65 11.16
Land and land development............ 251 4.54 1.00 141 2.57 1.61
Construction and development......... 116 2.09 3.20 194 3.55 3.86
Consumer and other loans............. 229 4.12 1.95 208 3.79 1.80
Unallocated general reserves......... 1,816 32.79 - 1,975 36.05 -
------ ------ ------ ------ ------ ------
Total allowance.................... $5,543 100.00% 100.00% $5,480 100.00% 100.00%
====== ====== ====== ====== ====== ======
______________________
(1) Includes home equity lines of credit.
Real Estate Owned. At December 31, 1999 and 1998, the Bank had $416,000 and
$1.2 million of REO, respectively. At December 31, 1999, REO consisted of 7 one-
to four-family properties. When the Bank acquires property through foreclosure
or by deed in lieu of foreclosure, it is initially recorded at the lower of the
recorded investment in the corresponding loan or the fair value of the related
assets at the date of foreclosure, less costs to sell. Thereafter, if there is a
further deterioration in value, the Bank provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the Bank to have obtained an appraisal on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the Bank's
policy to require appraisals on a periodic basis on foreclosed properties and
conduct inspections on foreclosed properties. The Bank seeks to sell its REO
properties to the tenants of those properties and encourages tenants to take
advantage of this opportunity by selling the properties at a favorable market
value and with favorable loan terms, including 100% financing. Management
believes this type of lending enhances the Bank's Community Reinvestment Act
("CRA") performance.
Investment Activities
The Company is authorized to invest in various types of liquid assets,
including United States Treasury obligations with terms of five years or less,
U.S. Agency obligations, including mortgage-backed securities with terms of five
years or less, municipal bonds with terms of five years or less rated by a
highly regarded rating service, such as Standard & Poors, as AA or better and
certain certificates of deposit of insured banks and savings institutions,
corporate obligations up to a maximum of 10% of the Company's total assets that
have terms of five years or less and are rated by a highly regarded rating
service, such as Standard & Poors, as A or better. The Company is also
authorized to invest in mutual funds whose assets conform to the investments
that the Company is otherwise authorized to make directly. At December 31, 1999,
all corporate obligations and state and local municipal obligations owned by the
Company were in accordance with the types of investments the Company is
authorized to invest in.
Generally, the investment policy of the Company is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to achieve the proper balance between its desire to minimize risk
and maximize yield, and, to a much lesser extent, to provide collateral for
borrowings and to fulfill the Company's asset/liability management policies. To
date, the Company's investment strategy has been directed toward high-quality
assets (primarily U.S. Treasury obligations, federal agency obligations and high
grade corporate debt securities) with short and intermediate terms (five years
or less) to maturity. At December 31, 1999, the weighted average term to
maturity for investment securities available-for-sale and mortgage-backed and
related securities held-to-maturity was 2.13 years and 5.23 years, respectively.
13
At December 31, 1999 the Company had dual indexed consolidated bonds with a
fair value of $2.0 million, which was $500,000 below the Company's amortized
cost. These instruments were purchased in 1993 and do not comply with the
Company's current investment policy. The Company does not intend to invest in
this type of instrument in the future and, based upon market conditions, intends
to evaluate opportunities to divest itself of these instruments.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
equity securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported, net of
income taxes, as a separate component of equity. As a member of the FHLB of
Atlanta, the Bank is required to hold FHLB of Atlanta stock which is carried at
cost since there is no readily available market value. Historically, the Company
has not held any securities considered to be trading securities.
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's securities at the dates indicated.
At December 31,
----------------------------------------------------------------------
1999 1998 1997
------------------- ---------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- ------------- ------- ----------- ---------
(In thousands)
Investment securities,
available-for-sale
U.S. Treasury and agency
obligations................................ $39,457 $38,764 $14,897 $15,058 $19,812 $19,836
Corporate obligations........................ 35,250 34,295 6,858 6,934 3,345 3,413
Equity securities............................ - - 2,263 3,201 3,596 4,343
State and local municipal bonds.............. 5,521 5,462 1,868 1,896 350 371
Mutual funds................................. 1,388 1,356 1,323 1,305 1,262 1,242
Duel indexed consolidated bonds.............. 2,500 2,007 2,500 1,987 2,500 1,946
------- ------- ------- ------- ------- -------
Total investment securities.................. $84,116 $81,884 $29,709 $30,381 $30,865 $31,151
======= ======= ======= ======= ======= =======
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed and mortgage-related
securities, all of which were classified as held-to-maturity at the dates
indicated.
At December 31,
----------------------------------------------------------------------
1999 1998 1997
------------------- ---------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- ------------- ------- ----------- ---------
(In thousands)
Mortgage-backed and related
securities held-to-maturity:
Fixed rate:
FNMA pass through securities....... $535 $535 $731 $ 724 $ 838 $ 838
GNMA certificates.................. 158 170 259 279 453 497
---- ---- ---- ------ ------ ------
Total mortgage-backed.................. $693 $705 $990 $1,003 $1,291 $1,335
and related securities............... ==== ==== ==== ====== ====== ======
14
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Company's
investment securities, and mortgage-related securities as of December 31, 1999.
At December 31, 1999
---------------------------------------------------------------------------------------
One Five to More than
One Year or Less to Five Years Ten Years Ten Years
---------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
------- ----- -------- ----- ------ ----- ----- -----
(Dollars in thousands)
Investment securities,
available-for-sale:
U.S. Treasury.................... $ 2,503 5.80% $ -- --% $ -- --% $ -- --%
Agency obligations............... 12,515 5.10 24,439 5.42 -- -- --
Corporate obligations............ 1,502 6.22 33,748 5.71 -- -- --
Tax-exempt municipal bonds (1)... -- 563 5.63 -- -- 99 8.06
Taxable municipal bonds.......... 1,480 5.79 3,379 6.07 -- -- -- --
Mutual funds..................... 1,388 -- -- -- -- -- --
Duel indexed consolidated
bonds.......................... -- -- -- 2,500 3.95 -- --
------- ----- -------- ----- ------ ----- ----- -----
Total investment securities..... $19,388 4.96% $ 62,129 5.61% $2,500 3.95% $ 99 8.06%
======= ===== ======== ===== ====== ===== ===== =====
Mortgage-backed and related
securities held-to-maturity:
FNMA pass through securities...... $ -- --% $ -- --% $ 535 8.91% $ -- --%
GNMA certificates................. -- 158 10.16 -- -- -- --
------- ----- -------- ----- ------ ----- ----- -----
Total mortgage-backed and
related securities............. $ -- --% $ 158 10.16% $ 535 8.91% $ -- --%
======= ===== ======== ===== ====== ===== ===== =====
----------------------------------------------
Total
----------------------------------------------
Average
Remaining Weighted
Years to Amortized Fair Average
Maturity Cost Value Yield
----------- --------- --------- ----------
Investment securities,
available-for-sale:
U.S. Treasury....................... 0.66 $ 2,503 $ 2,497 5.80%
Agency obligations.................. 1.65 36,954 36,267 5.31
Corporate obligations............... 2.25 35,250 34,295 5.73
Tax-exempt municipal bonds (1)...... 2.01 662 658 6.00
Taxable municipal bonds............. 1.66 4,859 4,804 5.98
Mutual funds........................ 0.25 1,388 1,356 --
Duel indexed consolidated
bonds............................... 5.70 2,500 2,007 3.95
----- ------- ------- -----
Total investment securities......... 2.13 $84,116 $ 81,884 5.43%
===== ======= ======= =====
Mortgage-backed and related
securities held-to-maturity:
FNMA pass through securities........ 6.00 $ 535 $ 535 8.91%
GNMA certificates................... 2.61 158 170 10.16
----- -------- ------- -----
Total mortgage-backed and
related securities.................. 5.23 $ 693 $ 705 9.19%
===== ======== ======= =====
______________________
(1) Tax equivalent basis, based on amortized cost.
15
Sources of Funds
General. Deposits, loan repayments and prepayments, maturities of
securities and cash flows generated from operations are the primary sources of
the Bank's funds for use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposits consist of passbook and
statement savings accounts, money market accounts, transaction accounts and time
deposits currently ranging in terms from one to five years. At December 31,
1999, the balance of core deposits (total deposits less certificates of deposit
of $100,000 or more) represented 88.38% of total deposits. The flow of deposits
is influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Bank's deposits are
obtained predominantly from the areas surrounding its branch offices. The Bank
has historically relied primarily on providing a higher level of customer
service and long-standing relationships with customers to attract and retain
these deposits and also relies on competitive pricing policies and advertising;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. The Bank has become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. The Bank
manages the pricing of its deposits in keeping with its asset/liability
management, liquidity and profitability objectives. Based on its experience,
the Bank believes that its passbook and statement savings, money market accounts
and transaction accounts are relatively stable sources of deposits. The Bank's
time deposits have been a relatively stable source of funds as well, including
the $182 million of certificates of deposit maturing in one year or less;
however, the ability of the Bank to attract and maintain time deposits and the
rates paid on these deposits has been and will continue to be significantly
affected by market conditions. The Bank is seeking opportunities to increase
transaction deposit accounts through aggressive advertising, offering ATM
services, and offering interest on such accounts. The Bank also intends to
expand its deposit products to attract new customers, including local
businesses.
At December 31, 1999, the Bank had $41.5 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
Maturity Period Amount
--------------- --------------
(In thousands)
3 months or less.................................................................... $ 1,456
Over 3 through 6 months............................................................. 1,522
Over 6 through 12 months............................................................ 21,416
Over 12 months...................................................................... 17,107
-------
Total........................................................................... $41,501
=======
16
The following table sets forth the distribution of the Bank's deposit
accounts as of the dates indicated and the weighted average interest rates on
each category of deposits presented.
At December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------
Percent Weighted Percent Weighted Percent Weighted
Balance of Total Average Balance of Total Average Balance of Total Average
Deposits Rate Deposits Rate Deposits Rate
-------- ----------- --------- ---------- ------------ -------- ---------- ----------- ---------
(Dollars in thousands)
Transaction accounts(1).... $ 2,383 0.67% 2.72% $ 779 0.22% 2.65% -- --% --%
Non-interest-bearing
transaction accounts..... 1,576 0.44 -- 583 0.16 -- 266 0.07 --
Savings.................... 79,952 22.38 2.97 75,360 21.24 2.96 84,547 22.60 3.25
-------- ------ -------- ------ -------- ------
Total.................... 83,911 23.49 2.91 76,722 21.62 2.93 84,813 22.67 3.13
-------- ------ -------- ------ -------- ------
Certificate accounts(2)(3):
Within 12 months......... 181,801 50.88 5.06 191,999 54.12 5.23 192,592 51.48 5.74
Over 12 through 36 months.. 79,270 22.19 5.37 64,762 18.25 5.59 82,054 21.93 5.81
Over 36 months............. 12,307 3.44 5.81 21,305 6.01 6.05 14,655 3.92 6.32
-------- ------ -------- ------ -------- ------
Total certificate
accounts................. 273,378 76.51 5.18 278,066 78.38 5.38 289,301 77.33 5.79
-------- ------ -------- ------ -------- ------
Total deposits............. $357,289 100.00% 4.65% $354,788 100.00% 4.85% $374,114 100.00% 5.19%
======== ====== ======== ====== ======== ======
- -----------------------
(1) Does not include official bank checks.
(2) Based on remaining maturity of certificates.
(3) Includes retirement accounts such as IRA and Keogh accounts.
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1999.
Period to Maturity from
December 31, 1999
----------------------------------
One to Over At December 31,
Less than Three Three --------------------------------
One Year Years Years 1999 1998 1997
---------- ---------- ----------- -------- --------- -----------
Certificate accounts:
4.01% to 5.00%................. 98,936 25,147 939 125,022 62,254 17,303
5.01% to 6.00%................. 79,781 41,570 6,923 128,274 196,415 233,582
6.01% to 7.00%................. -- 12,553 4,445 16,998 16,532 32,589
7.01% to 8.00%................. 3,084 -- -- 3,084 2,865 5,827
-------- ------- ------- -------- -------- --------
Total...................... $181,801 $79,270 $12,307 $273,378 $278,066 $289,301
======== ======= ======= ======== ======== ========
Borrowings. As part of its operating strategy, the Bank has utilized
advances from the FHLB as an alternative to retail deposits to fund its
operations when borrowings are less costly and can be invested at a positive
interest rate spread or when the Bank needs additional funds to satisfy loan
demand. By utilizing FHLB advances, which possess varying stated maturities,
the Bank can meet its liquidity needs without otherwise being dependent upon
retail deposits and revising its deposit rates to attract retail deposits, which
have no stated maturities (except for certificates of deposit), which are
interest rate sensitive and which are subject to withdrawal from the Bank at any
time. These FHLB advances are collateralized by certain of the Bank's mortgage
loans. FHLB advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. The maximum
amount that the FHLB will advance to member institutions, including the Bank,
fluctuates from time-to-time in accordance with the policies of the FHLB. See
"Regulation--Federal Home Loan Bank System." At December 31, 1999, the Bank had
$5.0 million in outstanding advances from the FHLB compared to $8.0 million at
December 31, 1998. The Bank has overnight
17
borrowing capacity at the FHLB of $51.4 million and additional borrowing
capacity at December 31, 1999 of $46.4 million.
The following table sets forth certain information regarding the
Bank's borrowed funds at or for the periods ended on the dates indicated:
At or For the Year Ended
December 31,
--------------------------------------
1999 1998 1997
-------- --------------- -----------
FHLB advances:
Average balance outstanding (monthly).......................... $7,500 $8,000 $ 9,667
Maximum amount outstanding at any
month-end during the period................................. 8,000 8,000 10,000
Balance outstanding at end of period........................... 5,000 8,000 8,000
Weighted average interest rate during the period............... 6.30% 6.19% 6.23%
Weighted average interest rate at end of period................ 6.09% 6.25% 6.19%
Personnel
As of December 31, 1999 the Bank had 47 full-time employees and 10
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
Subsidiary Activities
The Company's sole subsidiary is the Bank. The Bank has no subsidiaries.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the Office of Thrift Supervision ("OTS"). The Bank is subject to
extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of
the Federal Home Loan Bank System and, with respect to deposit insurance, of the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
18
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that savings and
loan holding companies may only engage in such activities. The Gramm-Leach-
Bliley Act, however, grandfathered the unrestricted authority for activities
with respect to unitary savings and loan holding companies existing prior to May
4, 1999, such as the Company, so long as the Bank continues to comply with the
QTL Test. Upon any non-supervisory acquisition by the Company of another
savings institution or savings bank that meets the qualified thrift lender test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would generally be limited to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding
companies to acquire savings institutions, the OTS considers the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMEL financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1 risk-
based capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
19
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge. At December 31, 1999, the Bank met
each of its capital requirements.
The following table presents the Bank's capital position at December 31,
1999.
Capital
-----------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
----------- ---------- ----------- ----------- -----------
(Dollars in thousands)
Tangible..................... $146,666 $ 7,730 $138,936 28.46% 1.50%
Core (Leverage).............. 146,666 20,615 126,051 28.46% 4.00%
Risk-based................... 150,655 25,459 125,196 47.34% 8.00%
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-
weighted assets of less than 4% or a ratio of core capital to total assets of
less than 4% (3% or less for institutions with the highest examination rating)
is considered to be "undercapitalized." A savings institution that has a total
risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or
a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed
by any parent holding company. In addition, numerous mandatory supervisory
actions become immediately applicable to an undercapitalized institution,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. The Bank is a member of the SAIF.
The FDIC maintains a risk-based assessment system by which institutions are
assigned to one of three categories based on their capitalization and one of
three subcategories based on examination ratings and other supervisory
information. An institution's assessment rate
20
depends upon the categories to which it is assigned. Assessment rates for SAIF
member institutions are determined semiannually by the FDIC and currently range
from zero basis points for the healthiest institutions to 27 basis points for
the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 basis points. By law, there is equal
sharing of FICO payments between SAIF and BIF members beginning on January 1,
2000.
The Bank's assessment rate for fiscal 1999 ranged from 5.80 to 6.10
basis points and the premium paid for this period was $215,000. Payments toward
the FICO bonds amounted to $215,000. The FDIC has authority to increase
insurance assessments. A significant increase in SAIF insurance premiums would
likely have an adverse effect on the operating expenses and results of
operations of the Bank. Management cannot predict what insurance assessment
rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily-marketable collateral. At
December 31, 1999, the Bank's limit on loans to one borrower was $37.7 million,
and the Bank's largest aggregate outstanding balance of loans to one borrower
was $1.9 million.
QTL Test. The Home Owners' Loan Act requires savings institutions to
meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 1999, the Bank maintained 93.16% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger. The rule effective in the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. An institution that exceeded all capital
requirements before and after a proposed capital distribution ("Tier 1 Bank")
and had not been advised by the OTS that it was in need of more than normal
supervision, could, after prior notice but without obtaining approval of the
OTS, make capital distributions during the calendar year equal to the greater of
(i) 100% of its net earnings to date during the calendar year plus the amount
that would reduce by one-half the excess capital over its capital requirements
at the beginning of the calendar year or (ii) 75% of its net income for the
previous four quarters. Any additional capital distributions required prior
regulatory approval. Effective April 1, 1999, the OTS' capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the OTS is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment " of
applications under OTS regulations (i.e., generally,
21
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with OTS. If an application is
not required, the institution must still provide prior notice to OTS of the
capital distribution if, like the Bank, it is a subsidiary of a holding company.
In the event the Bank's capital fell below its regulatory requirements or the
OTS notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Bank's liquidity ratio for December 31, 1999 was 20.82%, which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended December 31, 1999 totaled $102,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
22
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. The Bank,
as a member of the Federal Home Loan Bank, is required to acquire and hold
shares of capital stock in that Federal Home Loan Bank in an amount at least
equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
The Bank was in compliance with this requirement with an investment in Federal
Home Loan Bank stock at December 31, 1999 of $3.6 million.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, The Bank's net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $44.3 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $44.3
million. The first $5.0 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. 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
Bank or the Company. The Bank has not been audited by the IRS or the Virginia
Department of Taxation ("DOT") in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income.
23
The Bank's deductions with respect to "qualifying real property loans," which
are generally loans secured by certain interests in real property, were computed
using an amount based on the Bank's actual loss experience, or a percentage
equal to 8% of the Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. Due to the Bank's loss experience, the Bank generally recognized a bad
debt deduction equal to 8% of taxable income.
In August 1996, provisions repealing the current thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase and
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continues to be subject to provision
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created by an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus, if
the Bank makes a "non-dividend distribution," then approximately one and one-
half times the amount so used would be includable in gross income for federal
income tax purposes, presumably taxed at an effective federal and state tax rate
of approximately 38%. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The Bank does
not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
24
State and Local Taxation
Commonwealth of Virginia. 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, and a recomputation of
the bad debt reserve deduction on reduced modified taxable income.
ITEM 2. PROPERTIES
The Bank currently conducts its business through its four full service
banking offices including its main banking office. The Bank owns all four
branches. The following table sets forth information regarding the Bank's
properties.
Original Net Book Value of
Year Property at
Location Acquired December 31, 1999
-----------------------------------------------------------------
(In thousand)
Executive/Branch Office:
400 George Street
Fredericksburg, VA 22404...... 1962 $1,424
Branch Offices:
Route Three Branch
3600 Plank Road
Fredericksburg, VA 22407...... 1983 1,050
Four Mile Fork Branch
4535 Lafayette Boulevard
Fredericksburg, VA 22408...... 1972 452
Aquia Branch
117 Garrisonville Road
P.O. Box 382
Stafford, VA 22555............ 1978 321
The Bank also owns property for possible branch expansion located on
Route 17 North, in Stafford County. The net book value of this property, as of
December 31, 1999 was $333,000.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition and results of the
operation of the Company and the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The information regarding the market for the Company's common equity and
related stockholder matters is incorporated herein by reference to the Company's
1999 Annual Report to Stockholders on page 48.
ITEM 6. SELECTED FINANCIAL DATA
The information regarding the Company's selected financial data is
incorporated herein by reference to the Company's 1999 Annual Report to
Stockholders on pages 4 through 5.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information regarding the Company's management's discussion and
analysis of financial condition and results of operations is incorporated herein
by reference to the Company's 1999 Annual Report to Stockholders on pages 7
through 18.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information regarding the Company's quantitative and qualitative
disclosures about market risk is incorporated herein by reference to the
Company's 1999 Annual Report to Stockholders on pages 7 through 10.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information regarding the Company's financial statements and
supplemental data is incorporated herein by reference to the Company's 1999
Annual Report to Stockholders on pages 6 and 19 through 46.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information regarding change in accountants is incorporated herein by
reference to the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on April 7, 2000 at page 22.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers of the
registrant is incorporated herein by reference to the Company's Proxy Statement
for the 2000 Annual Meeting of Stockholders to be held on April 7, 2000 at pages
4 through 6 and 16.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by
reference to the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on April 7, 2000 at pages 6 through 15.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS MANAGEMENT
The information regarding security ownership of certain beneficial owners
and management is incorporated herein by reference to the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders to be held on April 7,
2000 at pages 3 through 4.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions is
incorporated herein by reference to the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders to be held on April 7, 2000 at pages 16 through
17.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following are filed as a part of this report by means of
incorporation by reference to the Company's 1999 Annual
Report to Stockholders:
. Independent Auditors' Report:
1999 - KPMG LLP
1998 and 1997 - Cherry, Bekaert & Holland, LLP
. Consolidated Balance Sheets as of December 31, 1999 and 1998
. Consolidated Statements of Income for the Years Ended December
31, 1999, 1998 and 1997
. Consolidated Statements of Comprehensive Income (Loss) for the
Years Ended December 31, 1999, 1998 and 1997
. Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997
. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
. Notes to Consolidated Financial Statements
(2) All financial statement schedules are omitted because they are not
required or applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
27
(3) Exhibits
3.1 Amended and Restated Articles of Incorporation of Virginia
Capital Bancshares, Inc.(1)
3.2 Amended and Restated Bylaws of Virginia Capital Bancshares,
Inc.(1)
4.1 Draft Stock Certificate of Virginia Capital Bancshares, Inc.(2)
10.1 Fredericksburg Savings Bank Employee Stock Ownership Trust
Agreement(3)
10.2 ESOP Loan Commitment Letter and ESOP Loan Documents(3)
10.3 Employment Agreement between Fredericksburg Savings Bank and
Samuel C. Harding, Jr.(3)
10.4 Employment Agreement between Fredericksburg Savings Bank and
Peggy J. Newman(3)
10.5 Employment Agreement between Virginia Capital Bancshares, Inc.
and Samuel C. Harding, Jr.(3)
10.6 Employment Agreement between Virginia Capital Bancshares, Inc.
and Peggy J. Newman(3)
10.7 Fredericksburg Savings Bank Employee Severance Compensation
Plan(3)
10.8 Fredericksburg Savings Bank Supplemental Executive Retirement
Plan(3)
10.9 Virginia Capital Bancshares, Inc. 1999 Stock-Based Incentive
Plan(4)
11.0 Computation of earnings per share
13.0 Portions of the Annual Report
21.0 Subsidiary information is incorporated herein by reference to
"Item I. Business - General."
23.1 Consent of KPMG LLP
23.2 Consent of Cherry, Bekaert & Holland LLP
27.1 Financial Data Schedule
99.1 Opinion of Cherry, Bekaert & Holland LLP
____________________
(1) Incorporated herein by reference into this document from the Form 10-Q
filed on November 15, 1999.
(2) Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement and amendments thereto, initially filed on
September 11, 1998, Registration No. 33-63309.
(3) Incorporated herein by reference into this document from the Form 10-K
filed on March 31, 1999.
(4) Incorporated herein by reference into this document from the Proxy
Statement dated May 20, 1999.
(b) Reports on Form 8-K
On October 28, 1999, the Company filed a Form 8-K reporting that it had
completed its repurchase of 570,240 shares of its common stock. The press
release announcing the completion of the stock repurchases was attached as
an exhibit to the Form 8-K.
28
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 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, in the City of Fredericksburg,
Commonwealth of Virginia, on March 29, 2000.
VIRGINIA CAPITAL BANCSHARES, INC.
By: /s/ Samuel C. Harding, Jr.
----------------------------
Samuel C. Harding, Jr.
President and Director
Pursuant to the requirements of the Section 13 of Securities Exchange Act
of 1934, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Samuel C. Harding, Jr. President and Director March 29, 2000
- ------------------------------ (principal executive officer)
Samuel C. Harding, Jr.
/s/ Peggy J. Newman Executive Vice President, Treasurer, March 29, 2000
- ------------------------------ Secretary and Director
Peggy J. Newman (principal accounting
and financial officer)
/s/ H. Smith McKann Chairman of the Board March 29, 2000
- ------------------------------
H. Smith McKann
/s/ Ronald G. Beck Vice Chairman of the Board March 29, 2000
- ------------------------------
Ronald G. Beck
/s/ William M. Anderson, Jr. Director March 29, 2000
- ------------------------------
William M. Anderson, Jr.
/s/ O'Conor Ashby Director March 29, 2000
- ------------------------------
O'Conor Ashby
/s/ Ernest N. Donahoe, Jr. Director March 29, 2000
- ------------------------------
Ernest N. Donahoe, Jr.
/s/ DuVal Q. Hicks, Jr. Director March 29, 2000
- ------------------------------
DuVal Q. Hicks, Jr.
/s/ Charles S. Rowe Director March 29, 2000
- ------------------------------
Charles S. Rowe
29