SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain consolidated summary historical
financial information concerning the financial position of Virginia Capital
Bancshares, Inc. ("Virginia Capital"), including its subsidiary, Fredericksburg
Savings Bank ("Fredericksburg Savings"), for the dates indicated. The financial
data is derived in part from, and should be read in conjunction with, the
consolidated financial statements and related notes of Virginia Capital
contained elsewhere herein.
At December 31,
-----------------------------------------------------
1999 1998 1997 1996(1) 1995
-----------------------------------------------------
(In Thousands)
Selected Financial Data:
Total assets........................ $541,639 $576,676 $471,920 $469,917 $468,759
Loans receivable, net(2)............ 422,079 411,791 413,032 405,145 390,541
Mortgage-backed securities.......... 693 990 1,291 1,502 1,879
Investment securities(3)............ 81,884 30,381 31,151 31,979 49,257
Cash and cash equivalents........... 18,555 115,734 11,287 15,937 11,980
Deposits............................ 357,289 354,788 374,114 374,936 384,589
Official bank checks................ 3,291 21,064 3,002 716 1,787
FHLB advances....................... 5,000 8,000 8,000 15,000 8,000
Stockholders' equity................ 173,094 185,206 80,073 73,296 68,703
Years Ended December 31,
------------------------------------------------
1999 1998 1997 1996(1) 1995
------------------------------------------------
(In thousands, except per share data)
Selected Operating Data:
Interest income....................... $38,894 $36,477 $36,504 $35,998 $36,305
Interest expense...................... 17,017 19,212 19,418 19,535 18,997
------- ------- ------- ------- -------
Net interest income................. 21,877 17,265 17,086 16,463 17,308
Provision for loan losses............. 116 461 375 325 412
------- ------- ------- ------- -------
Net interest income after........... 21,761 16,804 16,711 16,138 16,896
provision for loan losses
Total noninterest income.............. 1,635 481 460 409 283
Total noninterest expense............. 8,843 14,886 6,794 9,565 6,451
------- ------- ------- ------- -------
Income before income taxes............ 14,553 2,399 10,377 6,982 10,728
Income tax expense.................... 5,513 1,003 3,952 2,401 4,070
------- ------- ------- ------- -------
Net income......................... $ 9,040 $ 1,396 $ 6,425 $ 4,581 $ 6,658
======= ======= ======= ======= =======
Earnings per share - basic (4).......... $ .88 $ -- $ -- $ -- $ --
Earnings per share - diluted (4)........ $ .88 $ -- $ -- $ -- $ --
(Continued on next page)
4
At or For the Year Ended December 31,
-------------------------------------------------
1999 1998(11) 1997 1996(1) 1995
-------------------------------------------------
Selected Financial Ratios and Other Data(5)
Performance Ratios:
Return on average assets.......................... 1.62% 0.29% 1.36% 0.98% 1.45%
Return on average equity.......................... 4.98 1.53 8.39 6.42 10.17
Interest rate spread(6)........................... 2.46 2.71 2.93 2.89 3.19
Net interest margin(7)............................ 4.04 3.67 3.73 3.61 3.86
Yield on average-interest earning assets.......... 7.18 7.75 7.97 7.90 8.11
Net interest income after provisions for loan
losses, to total noninterest expenses........... 246.09 112.88 245.97 168.72 261.91
Total noninterest expense to average assets....... 1.59 3.08 1.44 2.04 1.41
Efficiency ratio(8)............................... 37.61 83.89 38.72 56.69 36.67
Regulatory Capital Ratios:(12)
Tangible capital.................................. 28.46% 26.11% 16.34% 14.97% 14.53%
Core capital...................................... 28.46 26.11 16.34 14.97 14.53
Risk-based capital................................ 47.34 48.19 26.92 25.70 25.51
Asset Quality Ratios:
Non-performing loans to total assets(9)(10)....... 0.80% 0.82% 1.08% 1.86% 1.45%
Non-performing loans to total loans(9)(10)........ 1.01 1.13 1.21 2.13 1.72
Non-performing assets to total assets(10)......... 1.14 1.26 1.82 2.35 2.20
Allowance for loan losses to non-performing
loans(10)....................................... 131.36% 120.42% 107.96% 63.33% 80.60%
Number of full-service banking facilities.......... 4 4 4 4 4
_______________________________
(1) Includes effect of the one-time special assessment of $2.5 million, on a
pre-tax basis, to recapitalize the Savings Association Insurance Fund,
which was recorded by Fredericksburg Savings in 1996.
(2) Loans receivable, net, consist of loans receivable minus the allowance for
loan losses, deferred loan fees and unadvanced loan funds. The allowance
for loan losses at December 31, 1999, 1998, 1997, 1996 and 1995 was $5.7
million, $5.7 million, $5.5 million, $5.5 million and $5.5 million,
respectively.
(3) Fredericksburg Savings adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" as of January 1, 1995. On December 31, 1995, a majority of
Fredericksburg Savings' portfolio was classified as "available-for-sale."
Securities do not include Federal Home Loan Bank stock of $3.6 million,
$3.5 million, $3.4 million, $3.2 million and $3.1 million at December 31,
1999, 1998, 1997, 1996 and 1995, respectively.
(4) Prior to December 23, 1998, Virginia Capital was not a public company.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(6) The interest rate spread represents the difference between the weighted
average yield on average interest-earning assets (which includes Federal
Home Loan Bank stock and other equity securities) and the weighted average
cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(9) Non-performing loans include total loans before the allowance for loan
losses. Asset-quality ratios for years prior to 1999 have been revised to
conform to the current year presentation.
(10) Non-performing assets consist of non-performing loans and real estate
acquired through foreclosure. Non-performing loans consist of all loans 90
days or more past due and other loans which have been identified as
presenting uncertainty with respect to the collectibility of interest or
principal. It is Fredericksburg Savings' policy to cease accruing interest
on loans 90 days or more past due.
(11) Includes effect of one-time contribution of $8.4 million, on a pre-tax
basis, to the Fredericksburg Savings Charitable Foundation.
(12) Regulatory capital ratios are computed based on the capital of
Fredericksburg Savings only.
5
SELECTED QUARTERLY FINANCIAL DATA
----------------------------------------------------------------------------------
12/31/99 9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
----------------------------------------------------------------------------------
(In thousands, except per share data)
Interest income................ $ 9,624 $ 9,706 $ 9,792 $ 9,772 $ 9,222 $ 9,011 $ 9,151 $ 9,093
Interest expense............... 4,245 4,237 4,240 4,295 4,764 4,828 4,817 4,803
--------- -------- -------- -------- --------- -------- -------- --------
Net interest income............ 5,379 5,469 5,552 5,477 4,458 4,183 4,334 4,290
Provision for loan losses...... 26 45 45 -- 46 146 163 106
--------- -------- -------- -------- --------- -------- -------- --------
Net interest income after
provision for loan losses... 5,353 5,424 5,507 5,477 4,412 4,037 4,171 4,184
Total noninterest income:...... 1,151 146 223 115 147 85 149 100
Total noninterest expense...... 2,916 2,238 1,880 1,809 10,477 1,340 1,378 1,691
--------- -------- -------- -------- --------- -------- -------- --------
Income (loss) before
income taxes.................. 3,588 3,332 3,850 3,783 (5,918) 2,782 2,942 2,593
Income tax expense
(benefit)..................... 1,383 1,205 1,470 1,455 (2,297) 1,085 1,164 1,051
--------- -------- -------- -------- --------- -------- -------- --------
Net income (loss).............. $ 2,205 $ 2,127 $ 2,380 $ 2,328 $ (3,621) $ 1,697 $ 1,778 $ 1,542
========= ======== ======== ======== ========= ======== ======== ========
Earnings per share - basic
(1)........................... $ .23 $ .21 $ .23 $ .22 $ -- $ -- $ -- $ --
Earnings per share - diluted
(1)........................... $ .23 $ .21 $ .23 $ .22 $ -- $ -- $ -- $ --
___________________________
(1) Prior to December 23, 1998, Virginia Capital was not a public company.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Virginia Capital Bancshares, Inc. ("Virginia Capital" or the "Company"), is
the holding company for Fredericksburg Savings Bank ("Fredericksburg Savings" or
the "Bank"). Virginia Capital is headquartered in Fredericksburg, Virginia and
its principal business currently consists of the operations of Fredericksburg
Savings. Fredericksburg Savings' results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by
Fredericksburg Savings' provision for loan losses and fees and other service
charges. Fredericksburg Savings' noninterest expense principally consists of
compensation and employee benefits, office occupancy and equipment expense,
federal deposit insurance premiums, the cost of foreclosed real estate
operations, data processing, advertising and business promotion and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially impact
Fredericksburg Savings and Virginia Capital.
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements
which are based on certain assumptions and describe future plans, strategies and
expectations of Virginia Capital. These forward-looking statements are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Virginia Capital's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of Virginia Capital and the subsidiaries include, but are not limited
to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
Virginia Capital's market area and accounting principles and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Virginia
Capital does not undertake -- and specifically disclaims any obligation -- to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Analysis
--------------------
The principal objective of Virginia Capital's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given Virginia Capital's
business strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, Virginia Capital seeks
to reduce the vulnerability of its operations to changes in interest rates,
while not subjecting Virginia Capital to undue credit or investment risk.
Virginia Capital monitors its interest rate risk as such risk relates to its
operating strategies. Fredericksburg Savings' Board of Directors has
established an Asset/Liability Committee, responsible for reviewing its
asset/liability policies and interest rate risk position, which meets on a
regular basis, and reports trends and interest rate risk position to the Board
of Directors on a quarterly basis. The extent of the movement of interest rates
is an uncertainty that could have a negative impact on the earnings of Virginia
Capital.
7
In recent years, Fredericksburg Savings has become subject to increasing
risk in the event interest rates begin to rise due to the substantial levels of
fixed-rate loans Fredericksburg Savings has been originating due to high
customer demand for such products in Fredericksburg Savings' primary market
area. As discussed above, Fredericksburg Savings has sought to offset the
interest rate risk associated with originating primarily fixed-rate loans in a
low interest rate environment by investing in short-term U.S. Treasury and
agency obligations to enable Fredericksburg Savings to reinvest relatively
quickly in higher yielding investments if interest rates rise. In the future,
depending upon market conditions, Fredericksburg Savings intends to seek
opportunities to increase its investment in short-term adjustable rate mortgage-
backed securities and may evaluate opportunities to sell long-term fixed-rate
loans in the secondary market. Currently, management believes that
Fredericksburg Savings' strong capital position and level of liquidity coupled
with low operating expenses would enable Fredericksburg Savings to continue
operating profitably in the event of a rapid rise in interest rates, as it would
be positioned to invest in higher yielding investments to offset the negative
impact its high fixed-rate loan portfolio would have on Fredericksburg Savings'
earnings; however, depending upon the magnitude of any change in interest rates,
Fredericksburg Savings may not be able to react quickly enough to reinvest such
funds and therefore may experience a decrease in earnings following a
significant increase in interest rates. Fredericksburg Savings may also
increase non-deposit borrowings which would further enable Fredericksburg
Savings to invest in higher yielding instruments in an increasing rate
environment.
Quantitative Analysis
---------------------
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Company's interest rate sensitivity "gap." An
asset and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At December 31, 1999, Virginia Capital's cumulative one year
interest rate gap (which is the difference between the amount of interest-
earning assets maturing or repricing within one year and interest-bearing
liabilities maturing or repricing within one year) as a percentage of total
assets, was (14.87)%. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, an institution with a negative gap
position would be in a worse position to invest in higher yielding assets as
compared to an institution with a positive gap position which, consequently, may
result in the cost of its interest-bearing liabilities increasing at a rate
faster than its yield on interest-earning assets than if it had a positive gap.
During a period of falling interest rates, an institution with a negative gap
position would tend to have its interest-bearing liabilities repricing downward
at a faster rate than its interest-earning assets as compared to an institution
with a positive gap which, consequently, may tend to positively affect the
growth of its net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
anticipated by Virginia Capital, based upon certain assumptions, to reprice or
mature in each of the future time periods shown (the "Gap Table"). The amount
of assets and liabilities shown which reprice or mature during a particular
period were generally determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The loan
amounts in the table reflect principal balances expected to be redeployed and/or
repriced as a result of contractual amortization of adjustable-rate loans and
fixed-rate loans, and as a result of contractual rate adjustments on adjustable-
rate loans.
8
More More
than More More than
1 Year than than 4 Years More
1 Year to 2 Years to 3 Years to to than Total
or Less 2 Years 3 Years 4 Years 5 Years 5 Years Amount
-------- ---------- ---------- ----------- -------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans................. $ 89,808 $ 1,674 $ 3,893 $ 2,918 $ 7,900 $314,765 $420,958
Consumer and other loans....... 1,806 1,123 2,041 2,331 2,217 1,059 10,577
Mortgage-backed and related
securities................... 208 208 208 69 -- -- 693
Overnight and short term
investments................. 16,625 -- -- -- -- -- 16,625
Investments and
interest-earning deposits..... 22,858 21,158 31,159 6,322 1,893 2,107 85,497
-------- --------- --------- --------- --------- -------- --------
Total interest-earning
assets..................... $131,305 $ 24,163 $ 37,301 $ 11,640 $ 12,010 $317,931 $534,350
======== ========= ========= ========= ========= ======== ========
Interest-bearing liabilities:
Money market deposit
accounts and other
transaction accounts........ $ 22,596 11,298 $ 11,298 $ -- $ -- $ 45,192
Savings accounts............... 7,429 7,429 7,429 7,428 7,428 -- 37,143
Certified accounts.............. 181,801 46,082 33,181 10,581 1,726 -- 273,378
-------- --------- --------- --------- --------- -------- --------
Total interest-bearing
deposits........................ 211,826 64,809 51,915 18,009 9,154 -- 355,713
FHLB advances................... -- 5,000 -- -- -- -- 5,000
-------- --------- --------- --------- --------- -------- --------
Total interest-bearing
liabilities.............. $211,826 $ 69,809 $ 51,915 $ 18,009 $ 9,154 $ -- 360,713
======== ========= ========= ========= ========= ======== ========
Interest sensitivity gap.......... $(80,521) $ (45,646) $ (14,614) $ (6,369) $ 2,856 $317,931 $173,637
======== ========= ========= ========= ========= ======== ========
Cumulative interest-rate
sensitivity gap.................. $(80,521) $(126,167) $(140,781) $(147,150) $(144,294) $173,637
Cumulative interest-rate
sensitivity gap as a
percentage of total assets...... (14.87)% (23.29)% (25.99)% (27.17)% (26.64)% 32.06%
Cumulative interest-rate
gap as a percentage of
total interest-earning assets.... (15.07)% (23.61)% (26.35)% (27.54)% (27.00)% 32.49%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities.. 61.99% 55.20% 57.79% 58.14% 60.00% 148.14%
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of borrowers to service
their adjustable-rate loans may decrease in the event of an interest rate
increase.
Net Portfolio Value. As part of its interest rate risk analysis,
Fredericksburg Savings uses an interest rate sensitivity model which generates
estimates of the change in Fredericksburg Savings' net portfolio value ("NPV")
over a range of interest rate scenarios and which is prepared by the OTS on a
quarterly basis. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The OTS produces such analysis using its
own
9
model, based upon data submitted on Fredericksburg Savings' quarterly Thrift
Financial Reports, including estimated loan prepayment rates, reinvestment rates
and deposit decay rates. The following table sets forth Fredericksburg Savings'
NPV as of December 31, 1999.
Change in Interest Rates in NPV as % of Portfolio
Basis Points (Rate Shock) Net Portfolio Value Value of Assets
- ------------------------ ---------------------------------- --------------------------
NPV
Amount $ Change % Change Ratio Change(1)
------ -------- -------- ------- ---------
(Dollars in thousands)
+300................... $111,534 (33,910) (23.00) 23.61% (477)
+200................... 122,879 (22,565) (16.00) 25.30 (308)
+100................... 134,413 (11,031) (8.00) 26.92 (146)
Static.................. 145,444 -- -- 28.38 --
-100................... 154,599 9,155 6.00 29.50 112
-200................... 160,788 15,344 11.00 30.18 180
-300................... 164,723 19,279 13.00 30.53 216
____________________________
(1) Expressed in basis points.
As is the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of Fredericksburg Savings' interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly, although
the NPV measurements and net interest income models provide an indication of
Fredericksburg Savings' interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on Fredericksburg
Savings' net interest income and will differ from actual results.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
depends upon the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them.
Average Balance Sheets. The following tables set forth certain information
relating to Virginia Capital for the years ended December 31, 1999, 1998 and
1997. The average yields and costs are derived by dividing income or expense by
the average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.
10
For The Years Ended December 31,
-------------------------------------------------------------------
1999 1998
---------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------- ----------- ------- --------- --------- --------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans, net................................... $405,516 $31,204 7.69% $403,766 $32,620 8.08%
Consumer and other loans, net......................... 9,554 906 9.48 8,845 810 9.16
Mortgage-backed and related securities................ 832 183 22.00 1,165 185 15.88
Overnight and short-term deposits..................... 48,193 2,284 4.74 23,164 962 4.15
Investment securities(1).............................. 77,395 4,317 5.58 33,450 1,900 5.68
-------- ------- ----- -------- ------- -----
Total interest-earning assets..................... 541,490 38,894 7.18% 470,390 $36,477 7.75%
Noninterest-earning assets............................. 15,998 ------- ----- 13,408 ------- -----
-------- --------
Total assets..................................... $557,488 $483,798
======== --------
Total Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Transaction accounts................................ $ 1,612 $ 43 2.67% $ 2,930 $ 11 0.38%
Savings accounts.................................... 77,810 2,270 2.92 82,138 2,674 3.26
Certificates of deposit............................. 273,829 14,229 5.20 288,258 16,032 5.56
-------- ------- ----- -------- ------- -----
Total deposits................................... 353,251 16,542 4.68 373,326 18,717 5.01
FHLB advances and other borrowings.................. 7,538 475 6.30 8,000 495 6.19
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities................ 360,789 $17,017 4.72% 381,326 $19,212 5.04%
Other liabilities................................... 14,989 ------- ----- 11,432 ------- -----
-------- --------
Total liabilities................................. 375,778 392,758
Stockholders' equity................................ 181,710 91,040
-------- --------
Total liabilities and equity capital.............. $557,488 $483,798
======== --------
Net interest income/Net interest rate spread(2)....... $21,877 2.46% $17,265 2.71%
======= ===== ======= =====
Net earning assets/Net interest margin(3)............. $180,701 4.04% $ 89,064 3.67%
======== ===== ======== =====
Ratio of interest-earning assets to interest-
bearing liabilities................................. 150.08% 123.36%
For The Years Ended December 31,
---------------------------------------------
1997
---------------------------------------------
Average
Average Yield/
Balance Interest Cost
----------- ------------ ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans, net................................... $399,924 $32,879 8.22%
Consumer and other loans, net......................... 8,495 696 8.19
Mortgage-backed and related securities................ 1,396 237 16.98
Overnight and short-term deposits..................... 13,076 623 4.76
Investment securities(1).............................. 34,851 2,069 5.94
-------- ------- -----
Total interest-earning assets..................... 457,742 $36,504 7.97%
------- -----
Noninterest-earning assets............................ 13,052
--------
Total assets..................................... $470,794
========
Total Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Transaction accounts................................ $ 3,329 $ 7 0.21%
Savings accounts.................................... 86,907 2,818 3.24
Certificates of deposit............................. 285,410 15,991 5.60
-------- ------- -----
Total deposits................................... 375,646 18,816 5.01
FHLB advances and other borrowings.................. 9,667 602 6.23
-------- ------- -----
Total interest-bearing liabilities................ 385,313 $19,418 5.04%
------- -----
Other liabilities................................... 8,897
--------
Total liabilities................................. 394,210
Stockholders' equity................................ 76,584
--------
Total liabilities and equity capital.............. $470,794
========
Net interest income/Net interest rate spread(2)....... $17,086 2.93%
======= =====
Net earning assets/Net interest margin(3)............. $ 72,429 3.73%
======== =====
Ratio of interest-earning assets to interest-
bearing liabilities................................. 118.80%
- ----------------
(1) Includes securities available-for-sale and stock in FHLB-Atlanta.
(2) Net interest rate spread represents the difference between the weight
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
11
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected Virginia Capital's interest
income and interest expense during the periods indicated. Information is
provided in each category with respect to: (i) changes attributable to changes
in volume (changes in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) the net change. The changes attributable to the combined impact of
volume and rate have been allocated on a proportional basis between changes in
rate and volume.
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Compared to
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------------------ -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------ -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest-earning assets:
Mortgage loans, net........................................ $ 141 $(1,557) $(1,416) $ 317 $(576) $(259)
Consumer and other loans................................... 65 31 96 29 85 114
Mortgage-backed and related
securities............................................... (53) 51 (2) (39) (13) (52)
Overnight and short term deposits.......................... 1,039 283 1,322 480 (141) 339
Investment securities and interest-earning
deposits................................................. 2,496 ( 79) 2,417 (83) (86) (169)
------ ------- ------- ----- ----- -----
Total interest-earning assets.......................... $3,688 $(1,271) $ 2,417 $ 704 $(731) $ (27)
====== ======= ======= ===== ===== =====
Interest-bearing liabilities:
Transaction accounts....................................... $ (5) $ 37 $ 32 $ (1) $ 5 4
Savings accounts........................................... (141) (263) (404) (155) 11 (144)
Certificate of deposits.................................... (802) (1,001) (1,803) 159 (118) 41
------ ------- ------- ----- ----- -----
Total interest-bearing deposits....................... (948) (1,227) (2,175) 3 (102) (99)
FHLB advances.............................................. (29) 9 (20) (104) (3) (107)
------ ------- ------- ----- ----- -----
Total interest-bearing liabilities..................... $ (977) $(1,218) $(2,195) $(101) $(105) $(206)
====== ======= ======= ===== ===== =====
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Virginia Capital's consolidated assets totalled $541.6 million at December
31, 1999, a decrease of $35.1 million, or 6.1%, from total assets of $576.7
million at December 31, 1998. Assets decreased in the first quarter of 1999 due
to the return of excess funds received from the public offering of stock
completed in December 1998. Assets decreased in the second half of 1999 with
Virginia Capital's purchase of 456,192 shares of common stock for its Stock-
Based Incentive Plan Trust and Virginia Capital's repurchase of 570,240 shares
of common stock. Dividends of $.40 per share were paid totalling $4.1 million in
1999. Stockholders' equity of $173.1 million at December 31, 1999 represented
31.96% of total assets.
Loans. Virginia Capital's loan portfolio increased $10.4 million, or 2.5%,
from $421.1 million at December 31, 1998 to $431.5 million at December 31, 1999.
Total mortgage loans, which include real estate construction loans, were $421.0
million at December 31, 1999, an increase of $8.9 million from $412.1 million at
December 31, 1998. Mortgage loans, including real estate construction loans,
represented 97.55% of the lending portfolio at December 31, 1999 and 97.85% at
December 31, 1998. One- to four-family residential mortgage loans were $370.2
million at December 31, 1999, an increase of $7.9 million from $362.3 million at
December 31, 1998. Non-residential real estate mortgage loans were $33.6 million
at December 31, 1999, an increase of $447,000 from $33.1 million at December 31,
1998. Construction and development loans increased $1.0 million from $12.1
million at December 31, 1998 to $13.1 million at December 31, 1999. The increase
in Virginia Capital's loan
12
portfolio was funded by principal repayments on loans, redemption of investment
securities and, to a minor extent, deposit growth.
Allowance for Loan Losses. The allowance for loan losses was $5.7 million
at December 31, 1999 and December 31, 1998. The stable allowance during this
period reflects continued improvement in non-performing assets and net charged
off loans, as well as management's belief that there is economic stability in
Fredericksburg Savings' market area. The adequacy of the allowance for loan
losses is evaluated monthly by management based upon a review of significant
loans, with particular emphasis on nonperforming and delinquent loans that
management believes warrant special attention. At December 31, 1999, the
allowance for loan losses provided coverage of 131.36% of total nonperforming
loans of $4.3 million, an increase from 120.42% of total nonperforming loans of
$4.7 million at December 31, 1998. The ratio of allowance for loan losses to net
loans receivable was 1.33% compared to 1.36% for 1998 and 1.31% for 1997.
Investment Securities. Investment securities classified as held-to-maturity
were $693,000 at December 31, 1999, a decrease of $297,000 from $990,000 at
December 31, 1998. These securities consist of Fannie Mae and Ginnie Mae
mortgage-backed securities. The decrease in these securities resulted from
principal payments received during 1999. Investment securities classified as
available-for-sale were $81.9 million at December 31, 1999, an increase of $51.5
million from $30.4 million at December 31, 1998. The increase was primarily due
to the investment of funds received from the public offering of stock completed
in December 1998.
Deposits. Total deposits increased $2.5 million, or .7%, from $354.8
million at December 31, 1998 to $357.3 million at December 31, 1999. Transaction
accounts increased $2.6 million, or 190.8%, from $1.4 million at December 31,
1998 to $4.0 million at December 31, 1999. Savings accounts increased $4.6
million, or 6.1%, from $75.4 million at December 31, 1998, to $80.0 million at
December 31, 1999. Certificates of deposit decreased $4.7 million, or 1.7%, from
$278.1 million at December 31, 1998, to $273.4 million at December 31, 1999.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
General. Net income for the year ended December 31, 1999 was $9.0 million
or $.88 per share compared to $1.4 million for the year ended December 31, 1998.
Net interest income for 1999 totaled $21.9 million, an increase of $4.6 million
from $17.3 million for 1998, resulting primarily from investment of proceeds
from the mutual to stock conversion in December of 1998 and a $2.2 million
decrease in interest expense from 1998. Noninterest income increased by $1.2
million from 1998, primarily the result of gains realized on the sale of
securities in 1999. Noninterest expense decreased $6.0 million from 1998. The
higher noninterest expense in 1998, and lower level of earnings for 1998, was
primarily due to a one-time charitable contribution of $8.4 million to establish
a charitable foundation, Fredericksburg Savings Charitable Foundation, as part
of Fredericksburg Savings' conversion to a stock organization. Virginia
Capital's return on average assets was 1.62% for the year ended December 31,
1999 compared to .29% for the year ended December 31, 1998. Virginia Capital's
return on average equity was 4.98% for the year ended December 31, 1999 compared
to 1.53% for the year ended December 31, 1998. The return on average assets and
return on average equity for 1998 were both substantially affected by the one-
time charge to establish the charitable foundation.
Interest Income. Interest income was $38.9 million for the year ended
December 31, 1999, an increase of $2.4 from $36.5 million for the year ended
December 31, 1998. Interest on mortgage loans, the largest component of interest
income, decreased $1.4 million from $32.6 million for the year ended December
31, 1998 to $31.2 million for the year ended December 31, 1999. While the
average balance of mortgage loans increased $1.7 million from $403.8 million for
the year ended December 31, 1998 to $405.5 for the year ended December 31, 1999,
the average yield on mortgage loans declined 39 basis points from 8.08 % to
7.69% resulting in the decrease in interest on mortgage loans. Interest income
on overnight and short-term deposits and investment securities was $6.6 million
for the year ended December 31, 1999, an increase of $3.7 million from $2.9
million for the year ended December 31, 1998. The $3.7 million increase in
interest income on overnight and short-term deposits and investment securities
was primarily due to a $69.0 million increase in the average balance of
overnight and
13
short-term deposits and investment securities outstanding from $56.6 million for
the year ended December 31, 1998 to $125.6 million for the year ended December
31, 1999. This $69.0 million increase was primarily due to funds raised in
Virginia Capital's public offering of stock. For the year ended December 31,
1999, the average yield on overnight and short-term deposits and investment
securities was 4.74% and 5.58%, respectively. For the year ended December 31,
1998, the average yield on overnight and short-term deposits and investment
securities was 4.15% and 5.68%, respectively. Average interest-earning assets
were $541.5 million for the year ended December 31, 1999, an increase of $71.1
million, or 15.1%, from $470.4 million for the year ended December 31, 1998. The
average yield on interest earning assets decreased 57 basis points to 7.18% for
the year ended December 31, 1999, from 7.75% for the year ended December 31,
1998.
Interest Expense. Interest expense was $17.0 million for the year ended
December 31, 1999, a decrease of $2.2 million from $19.2 million for the year
ended December 31, 1998. Substantially all of Fredericksburg Savings' interest
expense is from interest-bearing deposits, the largest category of the deposits
being certificates of deposit. Interest expense on certificates was $14.2
million for the year ended December 31, 1999, a decrease of $1.8 million from
$16.0 million for the year ended December 31, 1998. The average balance of
certificates of deposit decreased $14.4 million from $288.2 million for the year
ended December 31, 1998 to $273.8 million for the year ended December 31, 1999.
The average cost of certificates of deposit decreased by 36 basis points from
5.56% for the year ended December 31, 1998 to 5.20% for the year ended December
31, 1999. Market conditions continue to effect the ability of Virginia Capital
to attract and maintain time deposits and the rates paid on these deposits.
Interest expense on savings accounts decreased $404,000, from $2.7 million for
the year ended December 31, 1998 to $2.3 million for the year ended December 31,
1999. This decrease is attributable to a $4.3 million decrease in the average
balance of savings accounts from $82.1 million for the year ended December 31,
1998 to $77.8 million for the year ended December 31, 1999; and, a decrease in
the average cost of savings accounts of 34 basis points from 3.26% for the year
ended December 31, 1998 to 2.92% for the year ended December 31, 1999. Interest
expense on Federal Home Loan Bank advances decreased $20,000 from $495,000 for
the year ended December 31, 1998 to $475,000 for the year ended December 31,
1999. This $20,000 decrease resulted from the maturity of a $3.0 million advance
from the Federal Home Loan Bank in November 1999. Average interest-bearing
liabilities decreased $20.5 million from $381.3 million for the year ended
December 31, 1998 to $360.8 million for the year ended December 31, 1999. The
average cost of interest-bearing liabilities was 4.72% and 5.04% for the years
ended December 31, 1999 and 1998, respectively.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1999 was $116,000, a decrease of $345,000 from $461,000 for
the year ended December 31, 1998. Net charge-offs decreased from $255,000 for
the year ended December 31, 1998 to $111,000 for the year ended December 31,
1999. Impaired loans remained constant at $3.3 million at December 31, 1999 and
1998, mitigating the need for additional provisions for loan losses.
Noninterest Income. Total noninterest income increased $1.2 million, or
239.7%, to $1.6 million for the year ended December 31, 1999, compared to
$481,000 for the year ended December 31, 1998. Noninterest income consists of
loan fees and service charges, deposit account fees and service charges, and net
gain from the sale of investments. The increase in noninterest income was due
primarily to a $1.2 million increase in net gain from the sale of investments.
In the fourth quarter of 1999, assets held in a trust to fund a benefit plan
were sold in conjunction with the termination of the benefit plan, resulting in
a fourth quarter gain on sale of securities of approximately $1.0 million.
Noninterest Expense. Total noninterest expense decreased $6.0 million from
$14.8 million for the year ended December 31, 1998 to $8.8 million for the year
ended December 31, 1999. Noninterest expense for the year ended December 31,
1998 includes a one-time expense of $8.4 million to establish the Fredericksburg
Savings Charitable Foundation, which is a tax-exempt organization established by
Fredericksburg Savings to serve Fredericksburg Savings' local community area.
Excluding this one-time expense in 1998, Virginia Capital's noninterest expense
was $6.4 million, which is $2.4 million less than the $8.8 million of
noninterest expense for 1999. Virginia Capital's efficiency ratio was 37.61% for
the year ended December 31, 1999 and was 83.89% for the year ended December 31,
1998.
14
Compensation and benefits expense increased $1.4 million from $3.6 million
for the year ended December 31, 1998 to $5.0 million for the year ended December
31, 1999. The 1999 compensation expense includes $890,000 related to the
employee stock ownership plan and stock-based compensation plan compared to
$275,000 for 1998. The employee stock ownership plan was established by
Fredericksburg Savings in the fourth quarter of 1998, therefore, there is no
expense related to this plan in the first three-quarters of 1998. Stockholders
approved the stock-based compensation plan on June 25, 1999, therefore, there is
no expense related to this plan in 1998. During the fourth quarter of 1999, two
of Fredericksburg Savings' benefit plans were terminated and another modified in
an effort to better align Fredericksburg Savings' benefits structure with
corporate goals. The additional compensation cost incurred in the fourth quarter
of 1999 to terminate and modify these plans was $1.2 million, which was
partially offset by the approximately $1.0 million gain on sale of securities
held by a Rabbi-Trust used to fund one of these plans. Excluding this $1.2
million of compensation expense to terminate and modify these plans, 1999
compensation expense related to these three plans was $345,000 compared to
$857,000 in 1998. The early termination and modification of these plans reduced
future accruals, and accordingly, Virginia Capital's obligation under these
plans.
Advertising expense increased $164,000 from $251,000 for the year ended
December 31, 1998 to $415,000 for the year ended December 31, 1999 with the
commencement of a new marketing program in 1999.
Income Taxes. Income tax expense increased $4.5 million from $1.0 million
for the year ended December 31, 1998 to $5.5 million for the year ended December
31, 1999. The significantly lower income tax expense in 1998 was primarily the
result of an approximately $3.5 million tax benefit related to the charitable
contribution to establish the Fredericksburg Savings Charitable Foundation.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. Net income for the year ended December 31, 1998 was $1.4 million,
a decrease of $5.0 million from $6.4 million for the year ended December 31,
1997. Net interest income increased $179,000, or 1.1%, from $17.1 million for
the year ended December 31, 1997 to $17.3 million for the year ended December
31, 1998, resulting primarily from a decrease in interest expense. Noninterest
income increased by $21,000 from 1997, while noninterest expense increased $8.1
million from 1997. The increase in noninterest expense was primarily the result
of a one-time charitable contribution of $8.4 million to establish a charitable
foundation as part of Fredericksburg Savings' conversion to a stock
organization. Virginia Capital's return on average assets was .29% for the year
ended December 31, 1998 compared to 1.36% for the year ended December 31, 1997.
Virginia Capital's return on average equity was 1.53% for the year ended
December 31, 1998 compared to 8.39% for the year ended December 31, 1997. Both
of these ratio's being substantially affected by the current year one-time
charge to establish the charitable foundation.
Interest Income. Interest income was $36.5 million for each of the years
ended December 31, 1998 and 1997. Interest on mortgage loans, the largest
component of interest income decreased $259,000 from $32.9 million for the year
ended December 31, 1997 to $32.6 million for the year ended December 31, 1998.
While the average balance of mortgage loans increased $3.9 million from $399.9
million for the year ended December 31, 1997 to $403.8 million for the year
ended December 31, 1998, the average yield on mortgage loans declined 14 basis
points from 8.22% to 8.08% resulting in the decrease in interest on mortgage
loans. Interest income on investment securities was $3.0 million for the year
ended December 31, 1998, an increase of $118,000 from $2.9 million for the year
ended December 31, 1997. The increase in interest income on investments was due
primarily to a $339,000 increase in interest income from overnight and short-
term deposits investments, partially offset by a $221,000 decrease in interest
income from mortgage-backed and investment securities. The $221,000 decrease in
interest on mortgage-backed and investment securities was due to a $1.6 million
decrease in the average balance of mortgage-backed and investment securities
outstanding from $36.2 million for the year ended December 31, 1997 to $34.6
million for the year ended December 31, 1998. In addition, the average yield on
mortgage-backed and investment securities declined 136 basis points from 1997 to
1998, further decreasing interest income. The $339,000 increase in interest
income from overnight and short-term deposits was primarily due to a $10.1
million increase in the average balance of this investment from $13.1 million
for the year ended December 31, 1997 to
15
$23.2 million for the year ended December 31, 1998. This $10.1 million increase
was primarily due to funds raised in Virginia Capital's public offering of
stock. Average interest-earning assets were $470.4 million for the year ended
December 31, 1998, an increase of $12.7 million, or 2.77%, from $457.7 million
for the year ended December 31, 1997. The average yield on interest-earning
assets decreased 22 basis points to 7.75% for the year ended December 31, 1998,
from 7.97% for the year ended December 31, 1997.
Interest Expense. Interest expense was $19.2 million for the year ended
December 31, 1998, a decrease of $200,000 from $19.4 million for the year
December 31, 1997. Substantially all of Fredericksburg Savings' interest expense
is from interest-bearing deposits, the largest category of the deposits being
certificates of deposit. Interest expense on certificates of deposit was $16.0
million for the years ended December 31, 1998 and 1997. The average balance of
certificates of deposit increased $2.9 million from $285.4 million for the year
ended December 31, 1997 to $288.3 million for the year ended December 31, 1998,
the effect of which was partially offset by a decrease in the average cost of
certificates of deposit by 4 basis points from 5.60% for the year ended December
31, 1997 to 5.56% for the year ended December 31, 1998. Interest expense on
savings accounts decreased $144,000, from $2.8 million for the year ended
December 31, 1997 to $2.7 million for the year ended December 31, 1998. This
decrease is primarily attributable to a $4.8 million decrease in the average
balance of savings accounts, which decreased from $86.9 million for the year
ended December 31, 1997 to $82.1 million for the year ended December 31,1998.
The average cost of savings accounts increased 2 basis points from 3.24% for the
year ended December 31, 1997 to 3.26% for the year ended December 31, 1998.
Interest expense on Federal Home Loan Bank advances decreased $107,000 from
$602,000 for the year ended December 31, 1997 to $495,000 for the year ended
December 31, 1998. This $107,000 decrease resulted from the maturity of a $2
million advance from the Federal Home Loan Bank in November 1997. Average
interest-bearing liabilities decreased $4.0 million from $385.3 million for the
year ended December 31, 1997 to $381.3 million for the year ended December 31,
1998. The average cost of interest-bearing liabilities was 5.04% for the years
ended December 31, 1998 and 1997.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1998 was $461,000, an increase of $86,000 from $375,000 for the
year ended December 31,1997. The increase resulted from management's continuing
assessment of the adequacy of the allowance for loan losses.
Noninterest Income. Total noninterest income increased $21,000, or 4.6%, to
$481,000 for the year ended December 31, 1998, compared to $460,000 for the year
ended December 31, 1997. Noninterest income consists of loan fees and service
charges, deposit account fees and service charges, and net gain from the sale of
investments. The increase in noninterest income was due primarily to a $65,000
increase in net gain from the sale of investments, partially offset by a $44,000
decrease in fees, service charges and other income.
Noninterest Expense. Total noninterest expense increased $8.1 million from
$6.8 million for the year ended December 31, 1997 to $14.9 million for the year
ended December 31, 1998. Noninterest expense for the year ended December 31,
1998 includes a one-time expense of $8.4 million to establish the Fredericksburg
Savings Charitable Foundation. Excluding this one-time expense, Virginia
Capital's noninterest expense was $6.5 million, a decrease of $300,000 from
1997. Virginia Capital's efficiency ratio was 83.89% for the year ended December
31, 1998 and was 38.72% for the year ended December 31, 1997. Excluding the
expense to establish the Fredericksburg Savings Charitable Foundation, Virginia
Capital's efficiency ratio was 36.28%, a 2.4% decline from 1997.
Compensation and benefits expense increased $41,000 from $3.5 million for
the year ended December 31, 1997 to $3.6 million for the year ended December 31,
1998. The 1998 expense includes $275,000 of compensation expense related to the
employee stock ownership plan established by Fredericksburg Savings during 1998.
As this plan was established during 1998, there is no expense related to this
plan in the 1997 compensation and benefits expense. The stable compensation
expense from 1997 to 1998 is directly related to ongoing measures of management
to increase operating efficiencies. Occupancy and equipment costs have remained
stable with only a 3.2% increase of $23,000 from 1997 to 1998. Federal deposit
insurance premium expense remained relatively stable from 1997 to 1998 with a
5.0% decline to $228,000 for the year ended December 31, 1998. Other noninterest
expense decreased $456,000, or 20.4%, from $2.2 million for the year ended
December 31, 1997, to
16
$1.8 million for the year ended December 31, 1998. This decrease was the result
of a $202,000 decrease in legal and professional fees and a decline of $254,000
in general operating expenses.
Income Taxes. Income tax expense decreased $3.0 million from $4.0 million
for the year ended December 31 1997 to $1.0 million for the year ended December
31, 1998. The decrease was primarily the result of an approximately $3.5 million
tax benefit related to the charitable contribution to establish the
Fredericksburg Savings Charitable Foundation.
Liquidity and Capital Resources
Fredericksburg Savings' primary sources of funds are deposits, principal
and interest payments on loans, mortgage-backed and investment securities and
Federal Home Loan Bank advances. While maturities and scheduled amortization of
loans are predictable sources of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition. Fredericksburg Savings has continued to maintain the required
levels of liquid assets as defined by Office of Thrift Supervision regulations.
This requirement of the Office of Thrift Supervision, which may be varied at the
direction of the Office of Thrift Supervision depending upon economic conditions
and deposit flows, is based upon a percentage of deposits and short-term
borrowings. Fredericksburg Savings' currently required liquidity ratio is 4.00%.
At December 31, 1999, Fredericksburg Savings' liquidity ratio was 20.82%, which
is higher than desired at this time due to proceeds received from Virginia
Capital's public offering.
Virginia Capital's most liquid assets are cash and cash equivalents and
securities available-for-sale. The levels of these assets are dependent on
Fredericksburg Savings' operating, financing, lending and investing activities
during any given period. At December 31, 1999, Virginia Capital's cash and cash
equivalents and securities available-for-sale totalled $100.4 million, or 18.5%
of Virginia Capital's total assets.
Fredericksburg Savings has other sources of liquidity if a need for
additional funds arises. At December 31, 1999, Fredericksburg Savings had $5.0
million in advances outstanding from the Federal Home Loan Bank and, at December
31, 1999, had an additional overall borrowing capacity from the Federal Home
Loan Bank of $46.4 million.
At December 31, 1999, Fredericksburg Savings had commitments to fund loans
and unused outstanding lines of credit, unused standby letters of credit and
undisbursed proceeds of construction mortgages totaling $35.3 million.
Fredericksburg Savings anticipates that it will have sufficient funds available
to meet its current loan origination commitments. Certificate accounts,
including IRA and Keogh accounts, which are scheduled to mature in less than one
year from December 31, 1999, totalled $181.8 million. Based upon experience,
management believes the majority of maturing certificates of deposit will remain
with Fredericksburg Savings. In addition, management of Fredericksburg Savings
believes that it can adjust the rates offered on certificates of deposit to
retain deposits in changing interest rate environments. In the event that a
significant portion of these deposits are not retained by Fredericksburg
Savings, Fredericksburg Savings would be able to utilize Federal Home Loan Bank
advances to fund deposit withdrawals, which would result in an increase in
interest expense to the extent that the average rate paid on such advances
exceeds the average rate paid on deposits of similar duration.
At December 31, 1999, Fredericksburg Savings exceeded all minimum
regulatory capital requirements. See Note 11 to the Consolidated Financial
Statements.
The primary investing activities of Fredericksburg Savings are the
origination of residential one- to four-family loans, non-residential real
estate loans, real estate construction and development loans, and the purchase
of United States Treasury and agency securities, mortgage-backed and mortgage-
related investment securities and other investment securities. During the years
ended December 31, 1999, 1998 and 1997, Fredericksburg Savings' loan
originations totalled $123.9 million, $143.7 million and $112.5 million,
respectively. Purchases of United States Treasury and agency securities,
mortgage-backed and mortgage related investment securities and other investment
securities totalled $66.2 million, $10.3 million and $5.4 million for the years
ended December 31,
17
1999, 1998 and 1997, respectively. These activities were funded primarily by
principal repayments on loans and mortgage-backed and mortgage related
investment securities and other investment securities, and to a minor extent
deposit growth.
Fredericksburg Savings experienced a net increase (decrease) in total
deposits of $2.5 million, ($19.3 million) and ($800,000) for the years ended
December 31, 1999, 1998 and 1997, respectively. Deposit flows are affected by
the level of interest rates, the interest rates and products offered by local
competitors, interest rates offered by Fredericksburg Savings and other factors.
Year 2000 Compliance
The Year 2000 issue which confronted Fredericksburg Savings and its
suppliers and customers centered on the inability of computer systems to
recognize the Year 2000. Many computer programs and systems originally were
programmed with six-digit dates that provided only two digits to identify the
calendar year in the date field. These programs and computers would have
recognized "00" as the year 1900 rather than the year 2000.
Fredericksburg Savings management was assigned the tasks of ensuring that
all systems across Fredericksburg Savings were identified, analyzed for Year
2000 compliance, corrected when necessary and tested, and ensured that all
changes were implemented. Total costs related to Year 2000 remediation efforts
were approximately $221,000. Since January 1, 2000, Fredericksburg Savings' Year
2000 project team has reviewed and analyzed all systems for Year 2000 compliance
and found no material adverse impact on Fredericksburg Savings' operations, or
in turn, its financial condition and results of operations. Fredericksburg
Savings continues to monitor its Year 2000 compliance.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
provide for the measurement of financial position and operating results
generally in terms of historical dollar amounts without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of Virginia Capital's
operations. Unlike nonfinancial service companies, nearly all of the assets and
liabilities of Virginia Capital are monetary in nature. As a result, interest
rates have a greater impact on Virginia Capital's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
18
[LETTERHEAD OF KPMG]
Independent Auditors' Report
The Board of Directors
Virginia Capital Bancshares, Inc.
Fredericksburg, Virginia
We have audited the accompanying consolidated balance sheet of Virginia Capital
Bancshares, Inc. and subsidiary (the Company) as of December 31, 1999, and the
related consolidated statements of income, comprehensive income (loss), changes
in stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The accompanying financial statements
of the Company as of December 31, 1998 and for each of the years in the two-year
period then ended, were audited by other auditors whose report thereon dated
January 21, 1999 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Virginia
Capital Bancshares, Inc. and subsidiary as of December 31, 1999, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Richmond, Virginia
January 18, 2000
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
(In Thousands Except Share Data)
Assets 1999 1998
--------- ----------
Cash and cash equivalents (includes interest-bearing deposits
of $16,625 in 1999; $114,963 in 1998) $ 18,555 115,734
Investment securities (note 3):
Held-to-maturity (fair value $705 in 1999; $1,003 in 1998) 693 990
Available-for-sale (cost $84,116 in 1999; $29,709 in 1998) 81,884 30,381
Federal Home Loan Bank stock, restricted, at cost 3,613 3,539
Loans receivable, net (notes 4 and 8) 422,079 411,791
Property and equipment, net (note 6) 3,580 3,587
Accrued interest receivable 3,418 2,588
Real estate acquired through foreclosure, net (note 5) 416 1,177
Other assets 2,019 472
Deferred tax asset (note 14) 5,382 6,417
--------- ----------
$ 541,639 576,676
========= ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7) $ 357,289 354,788
Official bank checks 3,291 21,064
Advances from Federal Home Loan Bank (note 8) 5,000 8,000
Advances from borrowers for taxes and insurance 1,041 1,048
Accrued expenses and other liabilities (note 9) 1,924 6,570
--------- ----------
Total liabilities 368,545 391,470
========= ==========
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 75,000,000 shares authorized,
issued and outstanding 10,834,560 in 1999 and 11,404,800
in 1998 108 114
Additional paid-in capital 103,226 112,303
Common stock held by stock benefit plans (notes 9 and 10) (15,062) (8,920)
Retained earnings, substantially restricted 86,206 81,292
Accumulated other comprehensive income (loss) (1,384) 417
--------- ----------
Total stockholders' equity 173,094 185,206
Commitments and contingencies (note 12)
--------- ----------
Total liabilities and stockholders' equity $ 541,639 576,676
========= ==========
See accompanying notes to consolidated financial statements
20
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands Except Per Share Data)
1999 1998 1997
------------ ------------ ------------
Interest income:
Interest and fees on loans $ 32,110 33,430 33,575
Interest on investment securities 6,784 3,047 2,929
------------ ------------ ------------
Total interest income 38,894 36,477 36,504
------------ ------------ ------------
Interest expense:
Deposits (note 7) 16,542 18,717 18,816
Advances and other borrowings 475 495 602
------------ ------------ ------------
Total interest expense 17,017 19,212 19,418
------------ ------------ ------------
Net interest income before provision
for loan losses 21,877 17,265 17,086
Provision for loan losses (note 4) 116 461 375
------------ ------------ ------------
Net interest income after provision
for loan losses 21,761 16,804 16,711
------------ ------------ ------------
Noninterest income:
Fees and service charges 298 290 330
Securities gains, net (note 3) 1,290 123 67
Other 47 68 63
------------ ------------ ------------
Total noninterest income 1,635 481 460
------------ ------------ ------------
Noninterest expense:
Compensation and benefits 5,029 3,552 3,506
Occupancy and equipment 828 740 717
Advertising 415 251 217
Charitable contributions (note 2) 3 8,591 95
Other 2,568 1,752 2,259
------------ ------------ ------------
Total noninterest expense 8,843 14,886 6,794
------------ ------------ ------------
Income before income taxes 14,553 2,399 10,377
Income tax expense (note 14) 5,513 1,003 3,952
------------ ------------ ------------
Net income $ 9,040 1,396 6,425
============ ============ ============
Earnings per share - basic $ 0.88 -- --
Earnings per share - diluted 0.88 -- --
============ ============ ============
See accompanying notes to consolidated financial statements.
21
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
---------- ---------- ----------
Net income $ 9,040 1,396 6,425
Other comprehensive income (loss):
Holding gains (losses) on securities available-
for-sale arising during the year, net of tax of
$613, $195 and $243, for 1999, 1998 and 1997, respectively (1,001) 316 394
Less reclassification adjustment for net gains
included in net income, net of tax of $490,
$47 and $25, for 1999, 1998 and 1997, respectively 800 76 42
---------- ---------- ----------
Total other comprehensive income (loss) (1,801) 240 352
---------- ---------- ----------
Comprehensive income $ 7,239 1,636 6,777
========== ========== ==========
See accompanying notes to consolidated financial statements.
22
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands Except Share Data)
Common Retained Accumulated
Additional Stock Earnings Other Total
Preferred Common Paid-in held by Substantially Comprehensive Stockholders'
Stock Stock Capital Benefit Plans Restricted Income (Loss) Equity
--------- -------- ---------- ------------- ------------- ------------- ------------
Balance, December 31, 1996 $ -- -- -- -- 73,471 (175) 73,296
Net income -- -- -- -- 6,425 -- 6,425
Other comprehensive income -- -- -- -- -- 352 352
--------- -------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 -- -- -- -- 79,896 177 80,073
Net income -- -- -- -- 1,396 -- 1,396
Issuance of 10,560,000 shares
in the initial public
offering at $10.00 per share -- 106 103,863 -- -- -- 103,969
Issuance of 844,800 shares
to charitable foundation -- 8 8,440 -- -- -- 8,448
Loan to ESOP for purchase of
common stock -- -- -- (9,124) -- -- (9,124)
ESOP shares committed to be
released -- -- -- 204 -- -- 204
Other comprehensive income -- -- -- -- -- 240 240
--------- -------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 -- 114 112,303 (8,920) 81,292 417 185,206
Net income -- -- -- -- 9,040 -- 9,040
Cash dividends declared ($.40
per share) -- -- -- -- (4,126) -- (4,126)
Stock repurchases -- (6) (8,923) -- -- -- (8,929)
Shares acquired for restricted
stock awards, net -- -- (329) (7,067) -- -- (7,396)
Amortization of restricted stock
awards -- -- -- 559 -- -- 559
ESOP shares committed to be
released -- -- 175 366 -- -- 541
Other comprehensive loss -- -- -- -- -- (1,801) (1,801)
--------- -------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 $ -- 108 103,226 (15,062) 86,206 (1,384) 173,094
========= ======== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
23
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
---------- --------- --------
Cash flows from operating activities:
Net income $ 9,040 1,396 6,425
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 440 370 371
Provision for loan losses 116 461 375
Realized gains on investment securities (1,290) (123) (67)
ESOP shares committed to be released 541 -- --
Amortization of restricted stock awards 559 -- --
Charitable contribution funded with Company stock -- 8,448 --
Provision for loss on real estate owned -- 21 167
Premium/discount on investment securities 149 (80) (66)
Deferred loan fees and costs, net 123 332 266
Deferred income taxes 2,138 (3,177) (38)
Increase in accrued interest receivable (830) (13) (150)
(Increase) decrease in other assets (2,767) (430) 610
Increase (decrease) in advances by borrowers for
taxes and insurance (7) 112 92
Increase (decrease) in other liabilities (4,646) 1,138 5
--------- ------- -------
Net cash provided by operating activities 3,566 8,455 7,990
--------- ------- -------
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale 5,637 692 737
Proceeds from redemption of securities available-for-sale 8,250 10,823 6,075
Purchase of FHLB stock (74) (91) (215)
Purchases of securities available-for-sale (67,160) (10,322) (5,420)
Principal payments on mortgage-backed securities 378 346 281
held-to-maturity
Loan originations and principal payments, net (10,527) (1,462) (11,422)
Purchases of property and equipment (570) (459) (271)
Proceeds from sale of real estate acquired through
foreclosure 2,044 2,751 3,134
--------- ------- -------
Net cash provided by (used in) investing activities (62,022) 2,278 (7,101)
--------- ------- -------
Cash flows from financing activities:
Net increase (decrease) in savings account 7,189 (8,089) (4,894)
Net increase (decrease) in certificates of deposit (4,688) (11,235) 6,355
Net increase (decrease) in official bank checks (17,773) 18,062 --
Net decrease in advances from Federal Home Loan Bank (3,000) -- (7,000)
Cash dividends paid (4,126) -- --
Shares acquired for stock benefit plans (7,396) -- --
Stock repurchases (8,929) -- --
Proceeds from issuance of common stock, net of
ESOP loan (note 2) -- 94,976 --
--------- ------- -------
Net cash provided by (used in) financing activities (38,723) 93,714 (5,539)
--------- ------- -------
Net increase (decrease) in cash and cash equivalents (97,179) 104,447 (4,650)
Cash and cash equivalents at beginning of year 115,734 11,287 15,937
--------- ------- -------
Cash and cash equivalents at end of year $ 18,555 115,734 11,287
========= ======= =======
See accompanying notes to consolidated financial statements
24
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(1) Summary of significant accounting policies
Virginia Capital Bancshares, Inc. (the Company) and its wholly-owned
subsidiary Fredericksburg Savings Bank (the Bank), are located in
Fredericksburg, Virginia. The Bank is a Federal stock savings bank engaged
in the business of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one-to-four family residences.
To a lesser extent, the Bank invests in multi-family, construction and
development, commercial real estate and consumer loans. The Company and the
Bank are subject to the regulations of Federal banking agencies (primarily
the Office of Thrift Supervision) and are periodically examined by them.
Most of the Bank's loans and loan commitments have been granted to
customers in Fredericksburg, Virginia and surrounding counties. Many of the
Bank's loan customers are also depositors of the Bank. The Bank provides
services from four locations.
The accounting and reporting policies of the Company follow generally
accepted accounting principles and conform to the general practices within
the financial services industry. Significant principles used in preparing
the financial statements are described below.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary Bank. Significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Cash and Cash Equivalents
The Company considers cash on hand, cash due from banks, which are
maintained in financial institutions, and interest-earning deposits,
which are maintained with the Federal Home Loan Bank, as cash and cash
equivalents. Amounts due from banks and interest-earning deposits may
exceed insured amounts.
(d) Investment Securities
The Company classifies investment securities as held-to-maturity or
available-for-sale.
Securities held-to-maturity are purchased with the intent and ability
to hold to maturity or call date and are reported at amortized cost.
The amortization of premium and accretion of discount are recognized
as adjustments to interest income. Securities available-for-sale are
those identified as available to meet liquidity needs, assist in
portfolio restructuring, or manage interest rate risk. They are
reported at fair value, with unrealized gains and losses, net of
related income tax effects, reported in other comprehensive income.
Gains or losses on the disposition of securities are computed on the
specific identification method.
(Continued)
25
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(e) Loans Receivable and Allowance for Losses
Loans receivable are stated at the amount of unpaid principal, net of
participation interests of others, less the allowance for loan losses,
undisbursed loans in process, and net deferred loan origination fees
and discounts. The allowance for loan losses is established through a
provision for losses charged to expense. Loans are charged to the
allowance for loan losses when management of the Bank believes the
collectibility of the principal is unlikely. Management's periodic
determination of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the loan
portfolio, adverse situations that may affect the ability of borrowers
to repay, the estimated value of underlying collateral, and current
economic conditions.
Fees charged on the origination of real estate loans and certain
direct loan origination costs are deferred and the net amount is
amortized as an adjustment of the related loan's yield over the
contractual life of the loan.
Loans are deemed to be "impaired" if upon management's assessment of
the relevant facts and circumstances, it is probable that the Bank
will be unable to collect all amounts due according to the contractual
terms of the loan agreement. For purposes of applying the measurement
criteria for impaired loans, the Bank excludes large groups of smaller
balance homogeneous loans, primarily consisting of residential real
estate and consumer loans.
The Company's policy for the recognition of interest income on
impaired loans is the same as for non-accrual loans discussed below.
Impaired loans are charged off when the Company determines that
foreclosure is probable, and the fair value of the collateral is less
than the recorded investment of the impaired loan.
Uncollected interest receivable on loans is accrued to income as
earned. Nonaccrual loans are loans on which the accrual of interest
has ceased because the collection of principal or interest payments is
determined to be doubtful by management. It is the policy of the Bank
to discontinue the accrual of interest when principal or interest
payments are delinquent 90 days or more, or earlier if the financial
condition of the borrower raises significant concern with regard to
the ability of the borrower to service the debt in accordance with the
terms of the loan. Interest income on such loans is not accrued until
the financial condition and payment record of the borrower
demonstrates the ability to service the debt in which case the loan is
returned to accrual status.
(f) Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure or by deed in lieu of
foreclosure is initially recorded at the lower of cost or fair value
less estimated selling costs at the date of foreclosure. Costs
relating to development and improvement of property are capitalized,
whereas costs relating to the holding of property are expensed.
Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the carrying
value of a property exceeds its fair value less estimated costs to
sell.
(Continued)
26
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(g) Property and Equipment
The various classes of property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the estimated
useful lives of the assets (from 5 to 39 years) primarily by the
straight-line method. The costs of major improvements are capitalized,
while the costs of maintenance and repairs, which do not improve or
extend the life of the respective properties, are expensed currently.
The cost and accumulated depreciation on property are eliminated from
the accounts upon disposal, and any resulting gain or loss is included
in the determination of net income.
(h) Income Taxes
The Company uses the asset and liability method in accounting for
income taxes. Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period
that includes the enactment date.
(i) Reclassification of Financial Statement Presentation
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(j) Retirement and Benefit Plans
The Company sponsors a Supplemental Executive Retirement Plan (SERP).
The SERP is a nonqualified plan designed to provide supplemental
retirement benefits to certain key employees, whose benefits under the
Company's other retirement plans are limited by Federal tax laws.
The Company has an Employee Stock Ownership Plan (ESOP), covering
eligible employees with one year of service as defined by the ESOP.
The Company records compensation expense in an amount equal to the
fair value of shares committed to be released from the ESOP to
employees.
(k) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) establishes a fair value based
method of accounting for stock-based compensation arrangements with
employees, rather than the intrinsic value based method that is
contained in Accounting Principles Board Opinion No. 25 (APB 25).
However, SFAS No. 123 does not require an entity to adopt the new fair
value based method for purposes of preparing its basic financial
statements and allows entities to continue to use the intrinsic value
based method under APB 25. For entities not adopting the SFAS No. 123
fair value based method, SFAS No. 123 requires the entity to display
in the notes to the financial statements pro forma net earnings and
earnings per share information as if the fair value based method had
been
(Continued)
27
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
adopted. The Company accounts for stock-based compensation under the
intrinsic value based method under APB 25, as allowed by SFAS No. 123,
and includes presentation of the appropriate required pro forma
disclosures in the notes to the consolidated financial statements.
(l) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
effective January 1, 1998. SFAS No. 130 establishes standards for
reporting comprehensive income and its components (revenue, expenses,
gains and losses). Components of comprehensive income are net earnings
and all other non-owner changes in equity. The Company's accumulated
other comprehensive income included in stockholders' equity is
comprised exclusively of net unrealized gains on securities available
for sale, net of related tax effects. The Company discloses
comprehensive income in a separate statement of comprehensive income.
(m) Disclosure about Segments
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information," effective January 1, 1998. SFAS
No. 131 establishes standards for reporting information about segments
in annual and interim financial statements. SFAS No. 131 introduces a
new model for segment reporting called the "management approach." The
management approach is based on the way the chief operating decision-
makers organize segments within the company for making operating
decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management
structure and any other manner in which management disaggregates a
company. Based on the "management approach" model, the Company has
determined that its business is comprised of a single operating
segment and that SFAS No. 131 has no impact on its consolidated
financial statements.
(n) Earnings per Share
The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share (EPS) computations for the
year ended December 31, 1999. Earnings per share data for the year
ended December 31, 1998 have not been presented as such data would not
be meaningful given the short period during which common stock of the
Company was outstanding.
Basic EPS
Net income $ 9,040
Dividends on unvested restricted stock awards (73)
--------------
Net income - basic $ 8,967
==============
Weighted average shares outstanding 11,241,089
Less - Unallocated/unearned shares held by stock benefit plans (1,096,064)
Add - ESOP shares released or committed to be released 21,132
--------------
Weighted average shares outstanding - basic 10,166,157
==============
(Continued)
28
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Diluted EPS
Net income $ 9,040
Dividends on unvested restricted stock awards, net (69)
--------------
Net income - diluted $ 8,971
==============
Basic weighted average shares outstanding 10,166,157
Add effect of dilutive instruments:
Restricted stock awards 20,035
Stock options 7,313
--------------
Weighted average shares outstanding - diluted 10,193,505
==============
(2) Conversion to stock form of ownership
On July 14, 1998, the Board of Directors of the Fredericksburg Savings and
Loan Association (now Fredericksburg Savings Bank) adopted the Plan of
Conversion (the Plan). Pursuant to the Plan, on December 23, 1998, the Bank
converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank and became the wholly-owned subsidiary of
Virginia Capital Bancshares, Inc., a Virginia corporation. The Company was
incorporated on September 4, 1998, to serve as the Bank's holding company,
and prior to December 23, 1998, had no operations and insignificant assets
and liabilities. In addition, pursuant to the Plan of Conversion, the
Company sold 10,560,000 shares of its $.01 par value common stock to the
Bank's eligible customers for $10.00 per share (the Offering). Gross
proceeds of the Offering totaled $105,600, and expenses associated with the
Conversion totaled approximately $1,700. The ESOP established by the Bank
and formed in connection with the Conversion, purchased 912,384 shares of
the Common Stock issued in the Conversion utilizing proceeds of a loan from
the Company for $9,124.
Pursuant to the Plan, the Company established the Fredericksburg Savings
Charitable Foundation (the "Foundation") in connection with the Conversion.
The Plan provided that the Bank and the Company would create the Foundation
and donate an amount of the Company's common stock equal to 8% of the
common stock sold in the Conversion. The Foundation is dedicated to
charitable purposes within the communities in which the Bank operates. As a
result of the Conversion, the Company donated 844,800 shares of common
stock valued at $8,448 to the Foundation.
The Foundation has submitted a request to the Internal Revenue Service to
be recognized as a tax-exempt organization and will likely be classified as
a private foundation. The contribution of common stock to the Foundation by
the Company is tax deductible under Federal regulations, and is subject to
a limitation based on ten percent of the Company's taxable income. The
Company, however, is able to carry forward any unused portion of the
deduction for five years following the contribution. Upon funding the
Foundation, the Company recognized an expense of $8,448, the full amount of
the contribution.
(Continued)
29
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
At the time of Conversion, the Bank established a liquidation memo account
in an amount equal to $83,500, its equity as reflected in the latest
balance sheet used in the final conversion prospectus. The liquidation
account is maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their
accounts at the Bank after the Conversion. The liquidation account is
reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore
an eligible account holder's or supplemental account holder's interest in
the liquidation account. In the event of a complete liquidation of the
Bank, each eligible account holder and supplemental eligible account holder
will be entitled to receive a distribution from the liquidation account in
an amount proportionate to the current adjusted qualifying balances for
accounts then held. The balance of the liquidation account has not
materially changed since December 31, 1998.
Subsequent to the conversion, the Bank may not declare or pay dividends on
or repurchase any of its shares of common stock if the effect thereof would
cause the Bank's stockholder's equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and
payment would otherwise violate regulatory requirements. The Company,
unlike the Bank, is not subject to the same restrictions regarding the
declaration or payment of dividends to its stockholders, although the
source of the Company's dividends may depend upon the Bank's ability to pay
dividends.
(3) Investment Securities
The amortized cost and estimated fair values of investment securities are
as follows as of December 31, 1999 and 1998:
Gross Gross
Amortized unrealized unrealized Estimated
Securities held-to-maturity cost gains losses fair value
--------------------------- -------------- -------------- -------------- --------------
December 31, 1999
Mortgage Backed Securities:
FNMA pass-through securities $ 535 -- -- 535
GNMA certificate 158 12 -- 170
-------------- -------------- -------------- --------------
$ 693 12 -- 705
============== ============== ============== ==============
December 31, 1998
Mortgage Backed Securities:
FNMA pass-through securities $ 731 -- 7 724
GNMA certificate 259 20 -- 279
-------------- -------------- -------------- --------------
$ 990 20 7 1,003
============== ============== ============== ==============
(Continued)
30
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement
(Dollars in Thousands)
Gross Gross
Amortized unrealized unrealized Estimated
Securities available-for-sale cost gains losses fair value
- ----------------------------- ---------------- --------------- --------------- ----------------
December 31, 1999
U.S. Treasury and agency obligations $ 39,457 5 698 38,764
Corporate securities 35,250 1 956 34,295
State and local municipal bonds 5,521 2 61 5,462
Mutual fund 1,388 -- 32 1,356
Dual Index Consolidated Bonds 2,500 -- 493 2,007
---------------- --------------- -------------- ---------------
$ 84,116 8 2,240 81,884
================ =============== ============== ===============
December 31, 1998
U.S. Treasury and agency obligations $ 14,897 182 21 15,058
Corporate securities 6,858 88 12 6,934
State and local municipal bonds 1,868 28 -- 1,896
Equity securities 2,263 1,001 63 3,201
Mutual fund 1,323 -- 18 1,305
Dual Index Consolidated Bonds 2,500 -- 513 1,987
---------------- --------------- --------------- ---------------
$ 29,709 1,299 627 30,381
================ =============== =============== ===============
The mutual fund investment is in funds that invest primarily in obligations of
the U.S. Government or its agencies.
Dual Indexed Consolidated Bonds (DICBs) are issued by the Federal Home Loan Bank
(FHLB). DICBs' coupon rates are determined by the difference between the
designated Constant Maturity Treasury (CMT) and the designated London Interbank
Offered Rate (LIBOR). Interest rates on DICBs are subject to reset annually at
specified dates. This reset may result in an interest rate less than those
payable on conventional fixed rate debt securities issued at the same time.
Management of the Bank utilizes a third-party investment advisory company to
estimate the market value of the DICB's by comparison to bid and asked prices of
similar instruments. As these market values are based on similar instruments,
and are estimates, the actual value the Bank would receive in a sale transaction
is dependent upon the market for these instruments at the time of disposition.
The Bank's exposure to credit risk, on these instruments, is limited to the
amount paid for each DICB, if the FHLB fails to perform.
During 1999, 1998 and 1997, realized gains and losses resulted from the sale and
redemption of securities available-for-sale. In 1999, gross gains were $1,497
and gross losses were $207. During 1998, gross gains were $123 and there were no
gross losses. During 1997, gross gains were $69 and gross losses were $2.
The amortized cost and estimated fair value of investment securities at December
31, 1999 by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment
(Continued)
31
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statement
(Dollars in Thousands)
penalties. Therefore, mortgage backed securities held-to-maturity are not
included in the following maturity summary. As equity type securities do not
have maturity dates, these have not been classified to maturity categories
below.
Amortized Estimated
Securities available-for-sale cost fair value
----------------------------- ----------------- -----------------
Due in one year or less $ 18,000 17,889
Due after one year through five years 62,129 60,532
Due after five years through ten years 2,500 2,006
Due after ten years 99 101
Mutual fund 1,388 1,356
----------------- -----------------
$ 84,116 81,884
================= =================
(4) Loans Receivable
Loans receivable consist of the following:
December 31,
------------------------------------------
1999 1998
---------------- ----------------
Real estate mortgage loans:
One to four family $ 370,249 362,338
Multi-family 2,681 3,335
Non-residential real estate 33,564 33,117
Land and land development 1,379 1,175
---------------- ----------------
Total real estate mortgage loans 407,873 399,965
---------------- ----------------
Real estate construction and development loans 22,960 19,295
Less undisbursed loan funds 9,875 7,206
---------------- ----------------
Net real estate construction loans 13,085 12,089
---------------- ----------------
Consumer and other installment loans 10,577 9,065
---------------- ----------------
Total loans 431,535 421,119
Less:
Deferred loan fees 3,767 3,644
Allowance for loan losses 5,689 5,684
---------------- ----------------
Net loans receivable $ 422,079 411,791
================ ================
(Continued)
32
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Activity in the allowance for loan losses is summarized as follows:
Year ended December 31,
-------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Balance, beginning of year $ 5,684 5,478 5,543
Provision charged to operations 116 461 375
Loans charged off (142) (260) (440)
Recoveries 31 5 --
--------------- --------------- ---------------
Balance, end of year $ 5,689 5,684 5,478
=============== =============== ===============
Nonaccrual loans were $4,331, $4,720 and $5,074 at December 31, 1999, 1998 and
1997, respectively. The amount of additional interest income that would have
been recorded had these loans not been placed on nonaccrual status was $110 in
1999, $111 in 1998 and $193 in 1997.
At December 31, 1999, the Bank's recorded investment in impaired loans was
$3,305, and the related allowance for loan losses for impaired losses was $768.
At December 31, 1998, the Bank's recorded investment in impaired loans was
$3,262, and the related allowance for loan losses for impaired loans was $773.
The average investment in impaired loans during 1999, 1998 and 1997 was $3,399,
$2,764 and $2,916, respectively. During 1999, 1998 and 1997, interest income for
impaired loans was not material.
Loans having carrying values of $1,249, $727 and $937 were transferred to real
estate acquired through foreclosure in 1999, 1998 and 1997, respectively.
Included in loans receivable are restructured loans of $1,422 and $1,347 at
December 31, 1999 and 1998, respectively. The Bank is not committed to lend
additional funds to debtors whose loans have been restructured.
(5) Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure consists of the following:
December 31,
-----------------------------------------
1999 1998
--------------- ---------------
Foreclosed real estate - one to four family $ 423 1,197
Less allowance for losses (7) (20)
--------------- ---------------
$ 416 1,177
=============== ===============
(Continued)
33
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Activity in the allowance for real estate acquired through foreclosure is
summarized as follows:
Year ended December 31,
-----------------------------------
1999 1998 1997
--------- -------- --------
Balance, beginning of year $ 20 126 39
Provision for losses -- 21 167
Charge-offs (13) (127) (80)
--------- -------- --------
Balance, end of year $ 7 20 126
========= ======== ========
(6) Property and Equipment
Property and equipment by major classification is summarized as follows:
1999 1998
----------- -------------
Land $ 1,115 1,115
Buildings 3,759 3,786
Furniture, fixtures and equipment 3,156 2,819
Automobiles 164 176
----------- -------------
Total 8,194 7,896
Less accumulated depreciation 4,614 4,309
----------- -------------
Net property and equipment $ 3,580 3,587
=========== =============
(7) Deposits
Deposits summarized by interest rates are as follows:
December 31,
---------------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Amount Percent Amount Percent
-------------- ----------- -------------- -----------
Transaction accounts (weighted average
rate of 2.72% and 2.65%) $ 2,383 .67 % $ 779 .22 %
Non-interest bearing deposits 1,576 .44 583 .16
Savings accounts (weighted average
rate of 2.97% and 2.96%) 79,952 22.38 75,360 21.24
-------------- ----------- -------------- -----------
83,911 23.49 76,722 21.62
-------------- ----------- -------------- -----------
Certificates:
4.01% to 5.00% 125,022 34.99 62,254 17.55
5.01% to 6.00% 128,274 35.90 196,415 55.36
6.01% to 7.00% 16,998 4.76 16,532 4.66
7.01% to 8.00% 3,084 .86 2,865 .81
-------------- ----------- -------------- -----------
273,378 76.51 278,066 78.38
-------------- ----------- -------------- -----------
Total deposits $ 357,289 100.00 % $ 354,788 100.00 %
============== =========== ============== ===========
(Continued)
34
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100 was approximately $41,501 and $37,875 at December 31,
1999 and 1998, respectively. Deposits in excess of $100 may or may not be
federally insured depending on the form of account ownership.
The scheduled maturities of certificates of deposit are as follows:
December 31,
----------------------------------
1999 1998
--------------- ------------
One year or less $ 181,801 191,999
Over one through two years 46,082 43,060
Over two through three years 33,188 21,702
Over three through four years 10,581 11,203
Over four through five years 1,726 10,102
--------------- ------------
$ 273,378 278,066
=============== ============
Interest expense on deposits is summarized as follows:
Year ended December 31,
-------------------------------------------
1999 1998 1997
---------- ----------- ------------
Transaction accounts $ 43 11 7
Savings 2,270 2,674 2,818
Certificates of deposit 14,229 16,032 15,991
---------- ----------- ------------
$ 16,542 18,717 18,816
========== =========== ============
Cash paid for interest on deposits and borrowings totaled $17,032, $19,212
and $19,418 for the years ended December 31, 1999, 1998 and 1997,
respectively.
(8) Advances from Federal Home Loan Bank
Advances from the Federal Home Loan Bank are summarized as follows:
December 31,
-------------------------------
1999 1998
------------ -----------
Advances due:
Less than 1 year $ -- 3,000
Over 1 to 2 years 5,000 --
Over 2 to 3 years -- 5,000
------------ -----------
$ 5,000 8,000
============ ===========
(Continued)
35
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The Bank had approved borrowing capacity at the FHLB of $51.4 million and
$45 million as of December 31, 1999 and 1998, respectively. Weighted
average interest rates on the outstanding balances were 6.09% and 6.25% at
December 31, 1999 and 1998, respectively.
Under the terms of its floating blanket lien collateral agreement with the
FHLB, the Bank maintains otherwise unencumbered qualifying assets
(principally one to four family residential mortgage loans) in the amount
of at least 125% of its advances from the FHLB.
(9) Benefit and Retirement Plans
The Company and Bank sponsor qualified and non-qualified pension and
benefit plans for employees of the Company and the Bank. Presented below is
information regarding the plans' benefit obligations, fair value of assets
and funded status, in addition to descriptive plan information.
(a) Pension Plan
The Bank has a qualified, noncontributory defined benefit plan (the
Pension Plan) covering substantially all of its full-time employees.
Benefits under the Pension Plan are based upon the employee's average
compensation during the last five years of employment. An employee
becomes fully vested upon completion of five years of qualifying
service. The Bank contributes to the plan the maximum amount allowable
in accordance with ERISA funding standards. Prior service costs are
amortized on the straight-line method over 19 years, based on the
average remaining service period of active employees expected to
receive benefits.
Effective December 31, 1999, the Pension Plan was terminated resulting
in a curtailment as defined by SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits. All benefits under the Pension Plan were frozen
effective with the termination and the Pension Plan's investments were
liquidated and invested in short-term interest bearing investments.
The Company has filed with the Internal Revenue Service (IRS) for a
qualified tax ruling on the termination. Management of the Company
plans to settle the Pension Plan by disbursing to employees all assets
held by the Pension Plan once the IRS ruling is obtained which is
anticipated in 2000.
(Continued)
36
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
1999 1998
---------- ----------
Reconciliation of benefit obligation:
Obligation at January 1 $ 4,156 4,061
Service cost 198 225
Interest cost 306 268
Benefit payments (214) (611)
Actuarial (gain) loss (586) 213
Unrecognized net gain 1,942 --
Curtailment gain (800) --
---------- ----------
Obligation at December 31 $ 5,002 4,156
========== ==========
Reconciliation of fair value of assets:
Fair value of plan assets at January 1 $ 4,612 4,761
Actual return on plan assets 604 204
Employer contributions -- 258
Benefit payments (214) (611)
---------- ----------
Fair value of plan assets at December 31 $ 5,002 4,612
========== ==========
Funded status:
Funded status at December 31 $ -- 456
Unrecognized transition obligation -- 584
Unrecognized prior service costs -- (200)
Unrecognized net (gain) -- (1,143)
---------- ----------
Net amount recognized as accrued benefit liability $ -- (303)
========== ==========
The plan's accumulated benefit obligation was $2,472 and $2,556 at
December 31, 1999 and 1998, respectively.
Net periodic benefit cost for the plan was as follows for the years
ended December 31, 1999, 1998 and 1997:
December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Service cost $ 198 225 212
Interest cost 306 268 277
Expected return on plan assets (352) (356) (341)
Net amortization and deferral 25 1 12
---------- ---------- ----------
Net periodic benefit cost $ 177 138 160
========== ========== ==========
37
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The assumptions used in the measurement of the benefit obligation are
presented below:
1999 1998
---------- ----------
Discount rate 7.50% 7.00%
Expected return on plan assets 7.75 7.75
Rate of compensation increase 5.50 5.50
(b) 401(k) Plan
The Bank maintains a tax qualified profit-sharing plan with a
qualified cash or deferred arrangement. All employees of the Bank are
eligible to participate upon completion of six months of service and
attainment of age 21. The Bank contributes to the plan based on a
percentage of the participant's contributions. The Bank contributed
$63, $65 and $58 for the years ended December 31, 1999, 1998 and 1997,
respectively.
(c) Employee Stock Ownership Plan
In connection with the conversion (see note 2), the Bank established
an ESOP. The ESOP is a tax-qualified retirement plan designed to
invest primarily in the Company's common stock. All employees of the
Bank who have attained age 21 and completed one year of service with
the Bank are eligible to participate in the ESOP. The ESOP utilized
funds borrowed from the Company totaling $9,124, to purchase
approximately 8%, or 912,384 shares of the Company's common stock
issued in the Conversion. The loan to the ESOP will be primarily
repaid with contributions from the Bank to the ESOP over a period not
to exceed 20 years. The Bank will contribute to the ESOP sufficient
amounts to cover all payments and interest as they become due. At
December 31, 1999 the balance of the loan to the ESOP was $8,720. The
loan has a fixed interest rate of 7.75%.
Shares are committed to be released from the ESOP on a pro-rata basis
as quarterly loan payments are made. Dividends on allocated shares
may, at the direction of the Bank, be credited to participants'
accounts, distributed to participants or used to repay the loan from
the Bank. Dividends on unallocated shares may be used for debt
service.
Compensation expense is measured based on the fair value of the
Company's common stock when shares are committed to be released.
Compensation expense recognized for the years ended December 31, 1999
and 1998 was $541 and $275, respectively.
At December 31, 1999, 57,024 shares were allocated.
The fair value of unearned ESOP shares at December 31, 1999 was
$13,793.
(d) Management Security Plan
The Bank has established the Management Security Plan (MSP) to provide
non-qualified deferred compensation arrangements for certain key
management personnel upon retirement. Benefits are based on years of
service to the Bank. During October 1999, the MSP was terminated and
the present value of benefits due under the Management Security Plan
were distributed to all but one participant. In conjunction with the
termination, assets held by a Rabbi-Trust used to fund the MSP were
liquidated resulting in a gain on securities available-for-sale of
(Continued)
38
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
$1,020 and the Rabbi-Trust was subsequently terminated. Deferred
compensation expense, including the effects of the termination during
1999 totaled $1,833, $699 and $647 for the years ended December 31,
1999, 1998 and 1997, respectively. Included in accrued expenses and
other liabilities in the accompanying consolidated balance sheets are
$971 and $5,294 at December 31, 1999 and 1998, respectively, related
to the MSP.
(e) Supplemental Executive Retirement Plan
The Company maintains a non-qualified Supplemental Executive
Retirement Plan (SERP) for certain key employees. The SERP is intended
to constitute an unfunded "excess benefit plan" as defined in Section
3(36) of ERISA. The SERP contains individual provisions related to the
Company's defined benefit pension plan, 401(k) Plan and ESOP plan. In
conjunction with the termination of the Company's Pension Plan, the
pension plan element of the SERP was also eliminated. During the year
ended December 31, 1999, the Company incurred no compensation expense
related to the SERP. SERP expense during the year ended December 31,
1998 totaled $6. Included in accrued expenses and other liabilities in
the accompanying consolidated balance sheets is $494 and $496 at
December 31, 1999 and 1998, respectively, related to the SERP.
(10) Stock Based Compensation
In June 1999, the Company adopted the Virginia Capital Bancshares, Inc.
1999 Stock-Based Incentive Plan (the Stock Plan) for officers, directors
and certain employees of the Company. This Stock Plan contains two
components: (a) the issuance of up to 456,192 restricted stock awards, and
(b) the granting of up to 1,140,480 stock options.
(a) Stock Awards
On June 29, 1999, the Company's Board of Directors awarded 364,953
shares of restricted stock, of which 228,096 shares were awarded to
executive officers and 136,857 shares were awarded to outside
directors. The fair value of shares awarded on the date of grant was
$15.31 per share. Shares vest ratably over a period of five years.
Included in compensation and benefits and other noninterest expense in
the consolidated statements of income are $349 and $210, respectively,
related to stock awards during 1999.
(b) Stock Options
On June 29, 1999, the Company's Board of Directors granted 570,240
options to employees and 342,146 options to directors to acquire
shares of the Company's common stock. Additionally, on December 21,
1999, the Board of Directors granted 228,000 options to employees.
Each option entitles the holder to purchase one share of the Company's
common stock at an exercise price equal to the fair value of the stock
at the date of grant, $15.31 and $15.69 at June 29, 1999 and December
21, 1999, respectively. Options vest ratably over a period of five
years and expire ten years following the date of grant.
(Continued)
39
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
A summary of the status of the Company's options and changes during the
year ended December 31, 1999 follows:
Weighted
average
Shares exercise price
--------------- ---------------
Outstanding at January 1 -- --
Granted 1,140,386 15.32
Exercised -- --
--------------- ---------------
Outstanding at December 31 1,140,386 15.32
=============== ===============
Options exercisable at December 31 -- --
=============== ===============
The Bank applies APB 25 in accounting for stock options. Accordingly, no
compensation expense was recognized for options granted as the exercise
price equaled the fair value of the stock on the grant date. Had
compensation cost been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been as follows
(dollars in thousands except per share data):
Net income - basic $ 8,854
Basic earnings per share 0.87
Net income - diluted 8,858
Diluted earnings per share 0.87
Fair value of options 3.21
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for the 1999 grants: expected dividend yield of 2.58%; expected
volatility of 15.71%; risk free interest rate of 5.89%; and expected life
of 5 years.
Common stock held by stock benefit plans included in the consolidated
balance sheets is comprised of the following at December 31:
1999 1998
--------------- ---------------
Unallocated ESOP shares $ 8,554 8,920
Unearned compensation related to restricted stock awards 5,030 --
Common stock of the Company held by a grantor trust 1,478 --
--------------- ---------------
Total $ 15,062 8,920
=============== ===============
(11) Regulatory matters
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly discretionary--
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weighting and other factors.
(Continued)
40
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). Management believes, as of December 31, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum ratios as set forth in the
table below. There are no conditions or events that management believes
have changed the Bank's category.
Well capitalized under
For capital prompt corrective
Actual adequacy purposes action provision
-------------------------- --------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------------ ---------- ----------- ----------- ----------- ----------
As of December 31, 1999
Core Capital
(To adjusted total assets) $ 146,666 28.46 % $ 20,615 4.00 % 25,768 5.00 %
Tangible Capital
(To adjusted total assets) 146,666 28.46 7,730 1.50 15,461 3.00
Risk-Based Capital
(To risk weighted assets) 150,655 47.34 25,459 8.00 31,823 10.00
As of December 31, 1998
Core Capital
(To adjusted total assets) 138,489 26.11 21,217 4.00 26,521 5.00
Tangible Capital
(To adjusted total assets) 138,489 26.11 7,956 1.50 15,913 3.00
Risk-Based Capital
(To risk weighted assets) 142,191 48.19 23,604 8.00 29,621 10.00
(12) Off Balance Sheet Risks
Financial instruments with off-balance sheet risk consist primarily of
commitments to extend credit made in the normal course of the Bank's
business. These commitments to extend credit are not shown in the
accompanying financial statements until such commitments are funded. The
Bank uses the same credit policies in making commitments as in funding
other loans and may require collateral to secure the loan. Collateral held
varies, but generally includes real estate, primarily single-family homes,
and in some cases, income-producing commercial properties. At December 31,
1999, the Bank had commitments to originate loans of approximately $20,841
and approximately $8,779 at December 31, 1998. Of these commitments,
$19,522 and $8,144 were fixed rate loan commitments at December 31, 1999
and 1998, respectively. The fixed rate loan commitments were at interest
rates ranging from 6.25% to 9.50% for 1999 and 6.50% to 9.75% for 1998.
Standby letters of credit are conditional commitments issued by the Bank.
At December 31, 1999, the Bank was committed under standby letters of
credit aggregating approximately $563 and at December 31, 1998
approximately $784.
The amount of unfunded lines of credit for home equity loans was
approximately $3,982 at December 31, 1999 and $2,931 at December 31, 1998.
(Continued)
41
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(13) Disclosures about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments.
(a) Cash and Cash Equivalents
Due to the demand nature of cash and cash equivalents, fair value is
estimated to be carrying amount.
(b) Investment Securities
For debt securities including mortgage-backed securities, estimated
fair values are based on market prices or market prices of similar
instruments. Where market prices are not available, discounted cash
flow techniques are utilized. For equity securities, estimated fair
value is based on quoted market prices. Due to the restricted nature
of FHLB stock, a fair value estimate is not determinable and cost is
utilized.
(c) Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, residential mortgage and consumer. The fair value of loans
is then estimated by discounting scheduled cash flows through
estimated maturity using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loan categories.
(d) Deposits
Due to their demand nature, the fair value of passbook and money
market accounts is estimated to be the carrying amount. The fair value
of fixed maturity certificates of deposit is estimated by discounting
cash flows from expected maturities using rates currently offered for
deposits of similar maturities.
(e) Advances
Fair value of advances outstanding from the Federal Home Loan Bank is
estimated based on the rates currently available for advances of
similar maturities.
(f) Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counter parties. All commitments to extend credit and standby
letters of credit are issued on a short-term or floating rate basis.
The fair value of these instruments is not material.
(Continued)
42
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The estimated fair values of the Bank's financial instruments are as follows:
December 31,
-------------------------------------------------------------------------------
1999 1998
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------- -------------- --------------- --------------
Financial assets:
Cash and cash equivalents $ 18,555 18,555 115,734 115,734
Investment securities:
Held-to-maturity 693 705 990 1,003
Available-for-sale 81,884 81,884 30,381 30,381
Loans 422,079 413,318 411,791 416,100
Financial liabilities:
Deposits 360,580 359,914 375,852 373,206
Advances from FHLB 5,000 5,000 8,000 7,876
(14) Income Taxes
The components of income tax expense are summarized as follows:
Year ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Current tax expense:
Federal $ 2,926 3,623 3,437
State 449 557 553
-------------- -------------- --------------
Total current 3,375 4,180 3,990
-------------- -------------- --------------
Deferred tax expense (benefit):
Federal 1,849 (2,748) (36)
State 289 (429) (2)
-------------- -------------- --------------
Total deferred 2,138 (3,177) (38)
-------------- -------------- --------------
Total expense $ 5,513 1,003 3,952
============== ============== ==============
(Continued)
43
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The following is a reconciliation of the differences between the statutory
Federal income tax rate and the effective income tax rate for the years
ended December 31, 1999, 1998 and 1997.
1999 1998 1997
-------------- -------------- --------------
Tax at expected rates 35.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from:
Tax exempt interest income (0.6) (3.2) (2.0)
State income tax, net of federal tax benefit 3.5 3.5 3.5
Other -- 7.6 2.6
-------------- -------------- --------------
37.9% 41.9% 38.1%
============== ============== ==============
Deferred income taxes result from timing differences in the recognition of
income and expense for income tax and financial reporting purposes. The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 1999
and 1998 are summarized below:
1999 199
-------------- --------------
Deferred tax assets:
Allowance for loan losses $ 1,852 1,840
Charitable contribution 2,464 3,223
Deferred compensation 612 2,315
Net unrealized losses on securities available-for-sale 848 --
Other 455 72
-------------- --------------
Total deferred tax assets 6,231 7,450
-------------- --------------
Deferred tax liabilities:
FHLB stock dividends 480 480
Depreciation 266 185
Net unrealized gains on securities available-for-sale -- 255
Other 103 113
-------------- --------------
Total deferred tax liabilities 849 1,033
-------------- --------------
Net deferred tax asset $ 5,382 6,417
============== ==============
The charitable contribution carryover is available to offset taxable
income, subject to annual limitations, for tax years through December 31,
2003.
The Bank, in accordance with SFAS No. 109, has not recorded a deferred tax
liability at December 31, 1999 of $3,686 related to the cumulative special
bad debt deduction for savings and loan associations recognized for income
tax reporting prior to December 31, 1988, the Bank's base year.
The Bank has sufficient taxable income in the available carryback periods
and future taxable income from reversing taxable differences to realize all
of its deferred income tax assets. Management believes, based on the Bank's
history of generating significant earnings and expectations of future
earnings, it is more likely than not that all recorded deferred income tax
assets will be realized.
Cash paid for taxes totaled $5,320, $4,232 and $3,591 for the years ended
December 31, 1999, 1998 and 1997, respectively.
(Continued)
44
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(15) Parent-Only Financial Information
The earnings of the Bank are recognized by Virginia Capital Bancshares,
Inc. using the equity method of accounting. Accordingly, undistributed
earnings of the Bank are recorded as increases in the Company's investment
in the Bank. The following are the condensed financial statements of the
Company as of December 31, 1999 and 1998, and for the years then ended
(although the Company did not commence operations until December 23, 1998,
the full year 1998 results have been presented).
1999 1998
---------------- -------------
Condensed Balance Sheets
Assets
Cash and cash equivalents $ 5,322 42,913
Investment securities available-for-sale 17,807 --
Investment in subsidiary 145,433 138,563
Deferred tax asset 2,542 3,220
Other 2,062 780
-------------- --------------
Total assets $ 173,166 185,476
============== ==============
Accrued expenses and other liabilities $ 72 270
Stockholders' equity 173,094 185,206
-------------- --------------
Total liabilities and stockholders' equity $ 173,166 185,476
============== ==============
1999 1998
-------------- --------------
Condensed Statements of Income
Interest income $ 1,721 167
Charitable contribution -- 8,448
Interest expense -- 78
Other noninterest expense 577 --
-------------- --------------
577 8,526
-------------- --------------
Income (loss) before income tax benefit and
undistributed earnings of subsidiary Bank 1,144 (8,359)
Income tax expense (benefit) 770 (3,523)
-------------- --------------
Income (loss) before undistributed earnings of
subsidiary Bank 374 (4,836)
Undistributed earnings of subsidiary Bank 8,666 6,232
-------------- --------------
Net income $ 9,040 1,396
============== ==============
(Continued)
45
VIRGINIA CAPITAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
1999 1998
------------ ------------
Condensed Statements of Cash Flows
Operating activities:
Net income $ 9,040 1,396
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary Bank (8,666) (6,232)
Charitable contribution funded with Company stock -- 8,448
Tax benefit 678 (3,523)
Increase in other assets, net (157) (204)
Decrease in other liabilities (198) --
------------ ------------
Net cash provided by (used in) operating activities 697 (115)
------------ ------------
Investing activities:
Loan to ESOP, net of payments 200 (8,920)
Net investment in subsidiary Bank -- (51,948)
Purchase of securities available-for-sale (18,037) --
------------ ------------
Net cash used in investing activities (17,837) (60,868)
------------ ------------
Financing activities:
Proceeds from common stock issuance -- 103,896
Cash dividends paid (4,126) --
Stock repurchases (7,396) --
Shares acquired for stock benefit plans (8,929) --
------------ ------------
Net cash provided by (used in) financing activities (20,451) 103,896
------------ ------------
Net increase (decrease) in cash and cash equivalents (37,591) 42,913
Cash and cash equivalents, beginning of year 42,913 --
------------ ------------
Cash and cash equivalents, end of year $ 5,322 42,913
============ ============
Noncash financing activities:
Retained earnings acquired from subsidiary Bank $ -- 86,419
Employee stock ownership plan fair value adjustment -- 71
Accrued costs of stock issue -- 272
============ ============
46
DIRECTORS AND OFFICERS
- ----------------------
Directors of
Virginia Capital Bancshares, Inc. Principal Officers of
and Fredericksburg Savings Bank Virginia Capital Bancshares, Inc.
- ------------------------------------------------------- --------------------------------------
H. Smith McKann O'Conor Ashby Samuel C. Harding, Jr.
Chairman of the Board Partner, Willis & Ashby President
President and Owner,
General Products Company
Ronald G. Beck Ernest N. Donahoe, Jr. Peggy J. Newman
Vice Chairman of the Board Partner, Sullivan, Donahoe Executive Vice President,
President, Clayborne C. Beck & Ingalls, P.C. Secretary and Treasurer
& Sons, Inc.
Samuel C. Harding, Jr. DuVal Q. Hicks, Jr.
President, Virginia Capital Retired attorney
Bancshares, Inc. and Principal Officers of
Fredericksburg Savings Bank Fredericksburg Savings Bank
----------------------------
Peggy J. Newman Charles S. Rowe Samuel C. Harding, Jr.
Executive Vice President, Retired newspaper editor President
Secretary and Treasurer, and publisher
Virginia Capital
Bancshares, Inc. and
Fredericksburg Savings Bank
William M. Andersen, Jr. Peggy J. Newman
President, Mary Washington Executive Vice President,
College Secretary and Treasurer
47
INVESTOR AND CORPORATE INFORMATION
- ----------------------------------
CORPORATE HEADQUARTERS
Virginia Capital Bancshares, Inc.
400 George Street, Fredericksburg, Virginia 22404
(540) 899-5500
Annual Meeting
The annual meeting of shareholders will be held at 10:00 a.m. on Friday, April
7, 2000 at the Central Park Hotel (formally the Sheraton Inn), 2801 Plank Road
(I-95 and Route 3), Fredericksburg, Virginia.
Annual Report on Form 10-K
A copy of Virginia Capital Bancshares, Inc.'s annual report on Form 10-K without
exhibits is available without charge to shareholders upon written request.
Requests should be sent to Mr. Scott M. Fuller, Controller, Virginia Capital
Bancshares, Inc., 400 George Street, Fredericksburg, Virginia 22404.
Stock Transfer/Register
Questions regarding the transfer of stock, lost certificates, address changes,
account consolidation and cash dividends should be addressed to Registrar and
Transfer Company, 10 Commerce, Cranford, New Jersey 07203 or call (908) 241-
9880. Allow three weeks for a reply.
Special Counsel
Muldoon, Murphy and Faucette LLP, 5101 Wisconsin Avenue, NW, Washington, DC
20016.
Independent Accountants
KPMG LLP, 1021 East Cary Street, Suite 1900, Richmond, Virginia 23219-4023.
Inquiries
Security analysts, retail brokers and shareholders seeking financial information
should contact Ms. Peggy J. Newman, Executive Vice President, Secretary and
Treasurer. Requests for written materials can be forwarded to the attention of
Mr. Scott M. Fuller, Controller.
Stock Information
Virginia Capital Bancshares, Inc., is traded on the Nasdaq National Market under
the ticker symbol "VCAP." As of December 31, 1999, Virginia Capital Bancshares,
Inc. had 10,834,560 shares of common stock outstanding and approximately 2,764
shareholders of record.
Stock Price and Dividends
The following table discloses the high and low bids for Virginia Capital's
common stock on the Nasdaq National Market for each quarterly period indicated.
Virginia Capital's common stock began trading on December 23, 1998.
Quarter Ended High Low
------------- ---- ---
December 31, 1999 $ 16.50 $14.375
September 30, 1999 17.125 14.75
June 30, 1999 15.438 11.875
March 31, 1999 13.875 12.625
December 31, 1998 13.50 12.625
The following table lists the dividends declared and paid by the Company.
The Company did not declare or pay dividends in 1998.
1999
Dividends (1) Declared Paid
------------- -------- ----
$0.10 01/26/99 02/25/99
$0.10 04/27/99 05/25/99
$0.10 07/27/99 08/25/99
$0.10 10/26/99 11/26/99
__________________________
(1) Per share.
48
VIRGINIA CAPITAL BANCSHARES, INC.
Corporate Headquarters
- ----------------------
400 George Street
Fredericksburg, Virginia 22404
(540) 899-5500
Branch Offices
- --------------
Route Three Branch Aquia Branch
- ------------------ ------------
3600 Plank Road 117 Garrison Road
Fredericksburg, VA 22407 P.O. Box 382
(540) 899-5503 Stafford, VA 22555
(540) 899-5501
Four Mile Fork Branch
- ---------------------
4535 Lafayette Boulevard
Fredericksburg, VA 22408
(540) 899-5502