SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
-----------------------------------------------------
- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to _____________________
SEC File Number: 0-24668
FFVA FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Virginia 74-2712490
- ------------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
925 Main Street, Lynchburg, Virginia 24504
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 845-2371
--------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the last sale price of such stock on March 17, 1997,
was $93.7 million. (4,073,014 shares at $23.00 per share).
As of March 17, 1997, the Registrant had 4,542,552 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of the Registrant's Annual Report to
Stockholders for the year ended December 31, 1996.
2. Part III -- Portions of the Registrant's Proxy Statement for Annual Meeting
of Stockholders to be held on April 22, 1997.
PART I
Item 1. Business
- -----------------
General
FFVA Financial Corporation ("Registrant" or "Company") is a unitary
savings and loan holding company that was incorporated in May 1994 under the
laws of the Commonwealth of Virginia for the purpose of acquiring all of the
common stock of First Federal Savings Bank of Lynchburg (the "Bank"). This
acquisition occurred in October of 1994 at which time the Bank simultaneously
converted from a mutual to stock institution, sold all of its outstanding
capital stock to the Company and the Company made its initial public offering of
common stock. As of December 31, 1996, the Company had total assets of $533.8
million, total deposits of $397.4 million and stockholders' equity of $74.5
million or 13.95% of total assets under generally accepted accounting principles
("GAAP"). The only subsidiary of the Company is the Bank. The Bank has no
subsidiaries at this time.
The Bank is a federally chartered capital stock savings bank located in
Lynchburg, Virginia. The Bank was founded in 1923 as Lynchburg Mutual Building
and Loan Association and operated under a charter granted by the Commonwealth of
Virginia. A federal charter was obtained in 1936 and the name was changed to
First Federal Savings and Loan Association of Lynchburg. In 1988, the Bank
obtained a federal savings bank charter and changed its name to First Federal
Savings Bank of Lynchburg. The Bank's deposits are federally insured by the
Savings Association Insurance Fund ("SAIF"), as administered by the Federal
Deposit Insurance Corporation ("FDIC").
The Company directs and plans the activities of the Bank, the Company's
primary asset. The Company's business activities to date have been limited to
its investment in the Bank, other equity investments, loans made to the Bank for
use in the normal course of the Bank's business, and loans made to the First
Federal Savings Bank Employee Stock Ownership Plan ("ESOP") to enable the ESOP
to purchase shares of the Company's common stock in the initial public offering.
References to the Company include the Bank, unless the context otherwise
indicates.
The Company offers a variety of financial services to meet the needs of
the communities it serves. The Company's principal business is attracting
deposits from the general public and investing those deposits, together with
funds generated from operations, to originate one- to four-family residential
mortgage loans. To a lesser extent, the Company invests in multi-family mortgage
loans, commercial real estate loans, construction loans, land and land
development loans and consumer and other loans. The Company also invests in
mortgaged-backed securities and investment securities. The Company's revenues
are derived principally from interest earned on its mortgage loan and
mortgage-backed securities portfolios and interest and dividends received on its
investment securities. The Company's primary sources of funds are deposits and
principal and interest payments on loans, mortgage-backed and related
securities, investment securities and borrowings.
The Company operates from its main office located at 925 Main Street,
Lynchburg, Virginia and eleven branch offices. The Bank has five locations in
the City of Lynchburg, Virginia, and locations at Altavista, Farmville,
Keysville, Madison Heights, South Boston (2), and South Hill, Virginia. The
office located in Keysville was acquired from Crestar Financial Corporation in
August 1995. The office located in Madison Heights was completed and opened for
business in June 1996. The Company's primary market area includes, but is not
limited to, the City of Lynchburg, and all or portions of Amherst,
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Appomattox, Bedford, Brunswick, Buckingham, Campbell, Charlotte, Cumberland,
Halifax, Lunenburg, Mecklenburg, Nelson, Nottaway, Pittsylvania, and Prince
Edward Counties in Virginia.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences and, to a lesser extent, multi-family, commercial real estate,
construction, land and land development loans, consumer and other loans.
Consumer loans in the Company's portfolio at December 31, 1996 principally
consisted of loans secured by deposits, loans secured by real estate, automobile
loans, mobile home loans and small business loans.
The Company's primary lending strategy is to originate adjustable and
fixed-rate one- to four-family mortgages for portfolio. From time to time, the
Company may chose to limit interest rate risk exposure on fixed-rate mortgages
by serving as closing agent for various mortgage corporations. This relationship
allows the Company to earn fee income on loans produced as agent without
subjecting the Company to undue interest rate risk exposure. The Company
continues to monitor the interest rate environment and evaluate loan volume
related to interest rate risk. The Company continues to pursue high quality
multi-family and commercial real estate loans in the Company's primary market
area. The Company also continued to aggressively market short term consumer and
small business loans during 1996, as year end balances increased to $32.4
million from $20.8 million.
2
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentage at the dates indicated.
At December 31,
--------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------- ------------------ ------------------ ------------------ ----------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Mortgage Loans:
One- to four-family(1)....... $211,675 78.47% $207,649 76.60% $212,872 77.21% $220,433 73.73% $232,237 70.52%
Multi-family ................ 11,484 4.26 12,123 4.47 11,626 4.21 15,361 5.14 15,226 4.62
Commercial real estate....... 26,729 9.91 26,872 9.91 28,882 10.48 30,414 10.17 35,006 10.63
Construction ................ 6,742 2.50 11,245 4.15 6,707 2.43 9,453 3.16 12,554 3.81
Land and land development.... 1,819 .67 2,829 1.05 2,725 .99 2,494 .83 1,939 .59
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total ..................... 258,449 95.81 260,718 96.18 262,812 95.32 278,155 93.03 296,962 90.17
Consumer and other loans....... 11,310 4.19 10,364 3.82 12,906 4.68 20,831 6.97 32,389 9.83
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable..... 269,759 100.00% 271,082 100.00% 275,718 100.00% 298,986 100.00% 329,351 100.00%
====== ====== ====== ====== ======
Less:
Loans in process ............ 2,900 5,964 3,138 3,585 3,533
Unearned discounts and
deferred loan fees ......... 1,170 1,073 994 969 980
Allowance for credit losses.. 2,359 2,576 3,054 3,217 3,310
-------- -------- -------- -------- --------
Loans receivable, net........ $263,330 $261,469 $268,532 $291,215 $321,528
======== ======== ======== ======== ========
----------------------
(1) Includes home equity loans on one- to four-family residences.
3
Loan Maturity. The following table sets forth certain information as of
December 31, 1996, regarding the dollar amount of loans maturing in the
Company's portfolio based on their contractual terms to maturity. ARM loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature. Fixed rate mortgage
loans and construction loans are included in the period in which the final
contractual repayment is due.
After
One
Within Through After
One Five Five
Year Years Years Total
----- ------- ----- -----
(In Thousands)
Real estate loans:
Permanent mortgage loans including,
multi-family and commercial real estate.... $115,548 $ 52,075 $116,785 $284,408
Construction loans, net ...................... 7,998 1,023 -- 9,021
-------- -------- -------- --------
Total real estate loans ........................ 123,546 53,098 116,785 293,429
Consumer and other loans ..................... 10,252 6,809 2,289 19,350
Commercial installment loans ................. 10,099 2,563 377 13,039
-------- -------- -------- --------
Total loans .............................. $143,897 $ 62,470 $119,451 $325,818
======== ======== ======== ========
One- to Four-Family Mortgage Lending. The Company offers both fixed rate
and ARM loans secured by one- to four-family residences, most of which are
located in the Company's primary market area. The majority of such loans are
secured by property which typically serves as the primary residence of the
owner. Sources of loan originations typically include existing or past
customers, building contractors, members of the local communities and real
estate agents in the Company's lending area.
The Company generally originates one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or selling price
of the property securing the loan. One- to four-family mortgage loans may be
originated in amounts up to 95% of the lower of the appraised value or selling
price of the mortgaged property, provided that the property is owner-occupied
and private mortgage insurance ("PMI") is provided on the amount in excess of
80% of the lesser of the appraised value or selling price. Mortgage loans
originated by the Company generally include due-on-sale clauses which provide
the Company with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Company's consent. Due-on- sale clauses are an important means of
adjusting the rates on the Company's fixed-rate mortgage loan portfolio and the
Company has generally exercised its rights under these clauses.
The Company currently offers ARM loans that adjust annually as well as ARM
loans that adjust annually after the first three years or adjust every three
years after the first three year period. The Company offers ARM loans with terms
up to 30 years. The Company's ARM loans typically carry an initial interest rate
below the fully-indexed rate for the loan. The initial discounted rate is
determined by the Company in accordance with market and competitive factors. The
Company's ARM loans adjust by a maximum of 2.0% per adjustment, with a lifetime
cap of 6%.
The volume and types of ARM loans originated by the Company have been
affected by such market factors as the level of interest rates, competition and
consumer preferences. The Company will continue to offer ARM loans, however,
there can be no assurance that in the future the Company will be able to
originate a sufficient volume of ARM loans to increase or maintain the
proportion that these
4
loans bear to total loans. In fact, the proportion of ARM loans outstanding as
compared to total mortgage loans has declined during 1995 and 1996 due to a
relatively stable and affordable fixed rate lending environment.
The origination of ARM loans helps reduce the Company's exposure to
increases in interest rates. However, ARM loans generally pose credit risks
different from the risks inherent in fixed rate loans, primarily because as
interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. In order to minimize risks, borrowers of
ARM loans are qualified at the maximum first adjustment rate at the time of
origination. The Company has not originated, nor does it currently originate ARM
loans which provide for negative amortization.
The Company offers fixed rate mortgage loans with terms of 10 to 30 years,
which amortize monthly. Interest rates charged on fixed rate mortgage loans are
competitively priced based on market conditions and the Company's cost of funds.
From time to time, the Company has chosen to limit interest rate risk exposure
on fixed-rate mortgages by serving as closing agent for various mortgage
corporations. During 1994, 1995 and 1996, fees earned in this capacity were
$196,000, $105,000, and $64,000, respectively.
The Company has in the past sold a portion of its conforming fixed rate
mortgage loans in the secondary market to federal agencies while retaining the
servicing rights on such loans sold. As of December 31, 1996, the Company's
portfolio of loans serviced for others totalled approximately $5.9 million.
Multi-Family Lending. The Company originates multi-family loans generally
with contractual terms of up to 25 years. These loans are secured by apartment
buildings and are made in amounts of up to 80% of the lower of appraised value
or selling price of the property. In making such loans, the Company bases its
underwriting decision primarily on the net operating income generated by the
real estate to support the debt service, the financial resources and the income
level of the borrower, the borrower's experience in owning or managing similar
property, the marketability of the property and the Company's lending experience
with the borrower. The Company generally requires personal guarantees from
borrowers.
Commercial Real Estate Lending. The Company originates commercial real
estate loans that are generally secured by properties used exclusively for
business purposes such as retail stores, mini- warehouse units, churches, hotels
and professional office buildings located primarily in the Company's primary
market area. The Company's commercial real estate loans are generally made in
amounts up to the lower of 80% of the appraised value or selling price of the
property. These loans are generally made with terms of up to 15 years. Most
commercial real estate loans are ARMs or five to 10 year balloons. In making
such loans, the Company considers the net operating income of the property and
the borrower's expertise, financial strength and credit history. The Company
generally requires personal guarantees from the borrowers or the principals of
the borrowing entity.
Since payments on loans secured by commercial real estate properties are
often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy. As a result, loans secured by
commercial real estate properties generally involve a greater degree of risk
than residential mortgage loans.
5
Construction Loans. The Company's construction loans primarily have been
made to finance the construction of one- to four-family residential properties
and, to a lesser extent, multi-family residential and commercial real estate
properties. Construction loans generally are made to customers of the Company
and developers and contractors in the Company's lending area. The Company offers
construction loans in amounts up to 80% of the appraised value of the property
securing the loan. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Single-family residential loans are
structured to allow the borrower to pay interest only on the funds advanced for
construction for a period of up to 18 months. Multi-family and commercial real
estate construction loans are originated for up to one year with the borrower
paying a variable rate of interest indexed to prime rate as published in The
Wall Street Journal. Upon or prior to completion of the construction, the
borrower generally applies to the Company for a permanent loan.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate as
the builder may encounter cost over-runs or construction delays. As a result,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the construction. At December
31, 1996, the Company had $12.6 million, or 3.81% of its total loan portfolio
invested in construction loans. At that date, the Company had originated $3.9
million in construction loans to various local contractors on unsold properties
located in the Company's primary market area.
Land and Land Development Loans. The Company originates loans for the
acquisition and development of property to contractors and individuals. Land
development loans typically are short-term loans. The Company offers land
development loans in amounts up to 75% of the appraised value of the property
securing the loan. Loan proceeds are disbursed in increments as development
progresses and as inspections warrant. Land development loans are originated for
up to five years with the borrower paying interest only, indexed to the prime
rate as published in The Wall Street Journal. Land development loans generally
are made to customers of the Company and developers and contractors with whom
the Company has had prior lending experience.
In addition to land development loans, the Company originates loans
secured by improved lots and raw land. The Company offers lot loans of up to 75%
of lesser of the appraised value or selling price of the property. Raw land
(unimproved) loan to value is limited to 65%. Such loans have terms of up to 15
years. Land and land development lending is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate.
Consumer and Other Loans. The Company also offers secured and unsecured
consumer loans. The primary collateral for secured loans consists of real
estate, automobiles, and deposits, however other types of collateral may be
considered. In underwriting consumer loans, the Company considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral, if any. Federal regulations
allow the Company to make secured and unsecured consumer loans of up to 35% of
the Company's assets. In addition, the Company has lending authority above the
35% limit for certain consumer loans, such as home improvement loans and loans
secured by savings accounts.
The Company may make secured or unsecured loans for commercial, corporate,
business or agricultural purposes, including the issuance of letters of credit
secured by real estate, business equipment, inventories, accounts receivable and
cash equivalents in amounts not exceeding 10% of the Company's assets. These
loans are generally for the purpose of small business operations.
6
Consumer and business loans generally involve more risk than first
mortgage one- to four-family residential real estate loans. In the case of
certain collateralized consumer and business loans, the value of repossessed
collateral may not prove to be an adequate source of repayment. In addition, the
collateral may be less marketable than single family real estate. Further, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered.
These loans may also give rise to claims and defenses by a borrower against the
Company, and a borrower may be able to assert against the Company claims and
defenses which it has against the seller of the underlying collateral.
7
Delinquent Loans. At December 31, 1994, 1995 and 1996, delinquencies in the
Company's portfolio were as follows:
At December 31, 1994 At December 31, 1995 At December 31, 1996
----------------------------------- ----------------------------------- ----------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------- ----------------- ----------------- ---------------- ----------------- ----------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------
(Dollars in Thousands)
One- to four-family.... 7 $ 140 16 $ 656 7 $ 233 18 $ 729 13 $ 469 12 $ 619
Multi-family........... -- -- -- -- -- -- -- -- -- -- -- --
Commercial real estate. -- -- 4 1,730 -- -- 4 1,776 -- -- -- --
Construction .......... -- -- -- -- -- -- -- -- -- -- -- --
Land and land development -- -- 1 150 -- -- -- -- -- -- -- --
---- ------ ---- ----- ------ ------ ------ ------- ------ ------ ------ -----
Total mortgage loans 7 140 21 2,536 7 233 22 2,505 13 469 12 619
Other loans............ -- -- 6 23 3 9 12 93 12 166 11 67
---- ------ --- ------ ----- ----- ----- ----- ----- ----- ----- -----
Total loans......... 7 $ 140 27 $2,559 10 $ 242 34 $2,598 25 $ 635 23 $ 686
=== ===== === ===== ===== ===== ===== ===== ===== ===== ===== =====
Delinquent loans to
net loans............. .09% .05% .36% .95% .12% .08% .42% .89% .30% .20% .27% .21%
Delinquent loans to
total loans.......... .09% .05% .36% .93% .12% .08% .42% .88% .30% .19% .27% .21%
8
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and loans that are 90 days or more delinquent but on
which the Company is accruing interest at the dates indicated. The Company
continues accruing interest on loans delinquent 90 days or more past due, but
reserves 100% of the interest due on such loans, thus effecting a non-accrual
status. This policy was established at the request of the Office of Thrift
Supervision ("OTS").
At December 31,
----------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family .......................................... $1,000 $ 866 $ 656 $ 677 $ 619
All other mortgage loans ..................................... 5,206 3,669 2,814 1,776 1,074
Consumer and other loans ....................................... -- -- -- -- 67
------ ------ ------ ------ ------
Total(1) ................................................... 6,206 4,535 3,470 2,453 1,760
------ ------ ------ ------ ------
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by one- to four-
family dwelling units ...................................... -- -- -- 52 --
All other mortgage loans ..................................... -- -- -- -- --
Consumer and other loans ....................................... 73 13 23 93 --
------ ------ ------ ------ ------
Total ...................................................... 73 13 23 145 --
------ ------ ------ ------ ------
Total non-performing loans ................................. 6,279 4,548 3,493 2,598 1,760
Total foreclosed real estate ............................... 249 400 85 -- 154
------ ------ ------ ------ ------
Total non-performing assets(2) ............................. $6,528 $4,948 $3,578 $2,598 $1,914
====== ====== ====== ====== ======
Restructured loans ............................................. $ 656 $ 372 $ -- $ -- $ --
Non-performing loans to net loans .............................. 2.38% 1.74% 1.30% .89% .55%
Non-performing loans to total loans ............................ 2.33% 1.68% 1.28% .88% .54%
Total non-performing assets to total
assets .................................................. 1.79% 1.30% .81% .52% .36%
- -----------------------------------
(1) The amount of interest income which would have been recorded under the
original terms of such nonperforming loans was $225,000, $135,000, and
$44,000 for the years ended December 31, 1994, 1995, and 1996,
respectively. During the year ended December 31, 1996, $36,000 of
delinquent interest was reserved on non-accrual loans, while $108,000 of
interest was included in interest income as a result of non-accrual loans
being paid-off or being returned to a full accrual status. Consequently,
interest income was increased $72,000 for the year ended December 31, 1996
as a result of changes in the status of non-accrual loans. Changes in
accrued interest on nonperforming consumer loans are disregarded based on
immateriality.
(2) All non-performing assets at December 31, 1996 were included in classified
assets at that date.
The reduction in non-performing assets from $2.6 million at December 31,
1995 to $1.9 million at December 31, 1996 resulted primarily from the payoff of
a delinquent commercial real estate loan secured by property located in the
Lynchburg area. At December 31, 1996 non-performing loans included a $1.1
million loan participation secured by a shopping center in Bedford, Virginia.
Classified Assets. Federal regulations and the Company's Classification of
Assets Policy provide for the classification of loans and other assets
considered by the OTS to be of lesser quality as "Substandard," "Doubtful" or
"Loss" assets. An asset is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any.
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Substandard assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as Doubtful have all of the weaknesses inherent
in those classified Substandard with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as Loss are those considered "uncollectible" and
of such little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted. Assets which do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are required to be
designated "Special Mention" by management.
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
allowance for credit losses in an amount deemed prudent by management. General
allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies one or more assets, or portions thereof, as Loss,
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge-off such amount. The
Company's policies provide that the senior management and the Board of Directors
regularly review problem loans and review quarterly all classified assets
reported to the OTS.
The following table sets forth the Company's classified assets at December
31, 1996.
At
December 31,
1996
--------------
(In Thousands)
Special Mention............... $ 813
Substandard................... 3,257
Doubtful...................... --
Loss.......................... 29
------
Total........................ $4,099
======
The Company's most significant classified asset is a loan participation
secured by a shopping center in Bedford, Virginia. At December 31, 1996, this
loan had a balance of $1.1 million and was classified Substandard.
Allowance for Credit Losses
The allowance for credit losses is established through a provision for
credit losses based on management's evaluation of the risk inherent in its loan
portfolio and the regional and national economy. The determination of the
adequacy of the valuation allowance is based on a detailed analysis and
classification of loans with known or anticipated adverse performance
characteristics, and includes consideration of historical patterns, industry
experience, current economic conditions, changes in composition and risk
characteristics of the loan portfolio, and other factors deemed relevant to the
collectibility of the loans currently outstanding. In addition, various
regulatory agencies, as an integral
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part of their examination process, periodically review the Company's allowance
for credit losses and valuation of foreclosed real estate. Such authorities may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
When the Company determines that an asset should be classified, it
generally does not establish a specific allowance for such asset unless it
determines that such asset may result in a loss. The Company may, however,
increase its general valuation allowance in an amount deemed prudent. General
valuation allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. The Company's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS and the
FDIC which can order the establishment of additional general or specific loss
allowances.
The Company provided $255,000 and $60,000 to its allowance for credit
losses for the years ended December 31, 1995 and 1996, respectively. At December
31, 1996, the total allowance was $3.3 million, which included $29,000 in
specific valuation allowances with the remaining balance representing general
valuation allowances. Adjustments to the allowance reflect management's
evaluation of the risks inherent in its loan portfolio. The Company will
continue to monitor and modify the level of its allowance for credit losses in
order to maintain a level which management considers adequate. For the years
ended December 31, 1995 and 1996, the Company had charge-offs of $154,000 and
$27,000, respectively, against this allowance.
The following table sets forth an analysis of the Company's allowance for
credit losses for the periods indicated.
For the Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
-------- --------- -------- -------- -------
(Dollars in Thousands)
Balance at beginning of period ............................. $ 1,652 $ 2,359 $ 2,576 $ 3,054 $ 3,217
Provision for credit losses ................................ 726 900 600 255 60
Charge-offs:
Mortgage loans ........................................... 55 698 196 14 15
Other loans .............................................. 26 12 2 140 12
Recoveries:
Mortgage loans ........................................... 55 5 52 8 6
Other loans .............................................. 7 22 24 54 54
------- ------- ------- ------- -------
Balance at end of period ................................... $ 2,359 $ 2,576 $ 3,054 $ 3,217 $ 3,310
======= ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the period to
average net loans outstanding during the period........... 01% .26% .05% .03% (.01)%
Ratio of allowance for credit losses to net loans receivable
at the end of the period ................................. .90 .99 1.14 1.10 1.03
Ratio of allowance for credit losses to total
non-performing assets at the end of the priod............. 36.14 52.06 85.35 123.83 172.94
Ratio of allowance for credit losses to
non-performing loans at the end of the period............. 37.57 56.64 87.43 123.83 188.07
11
The following table sets forth the allocation of the Company's allowance
for credit losses by loan category and the percent of loans in each category to
total loans receivable, at the dates indicated. The portion of the credit loss
allowance allocated to each loan category does not represent the total available
for future losses which may occur within the loan category since the total
credit loss allowance is a valuation reserve applicable to the entire loan
portfolio.
At December 31,
----------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------------- ------------------- ------------------ ------------------ -----------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans of
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
At end of period allocated to:
One- to four-family.......... $ 221 78.47% $ 230 76.60% $ 203 77.21% $ 301 73.73 $ 235 70.52%
Multi-family................. 57 4.26 61 4.47 58 4.21 77 5.14 77 4.62
Commercial real estate....... 1,166 9.91 984 9.91 1,201 10.48 1,108 10.17 839 10.63
Construction................. 42 2.50 152 4.15 34 2.43 68 3.16 82 3.81
Land and land development.... 70 .67 73 1.05 58 .99 25 .83 19 .59
Consumer and other loans..... 258 4.19 205 3.82 229 4.68 260 6.97 412 9.83
Unallocated general reserves. 545 -- 871 -- 1,271 -- 1,378 -- 1,646 --
----- ------ ----- ----- ----- -------- ----- ----- ----- ------
Total allowance.......... $2,359 100.00% $2,576 100.00% $3,054 100.00% $3,217 100.00% $3,310 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
12
Investment Activities
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Company must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations.
Historically, the Company has maintained liquid assets above the minimum OTS
requirements and at a level believed to be adequate to meet its normal daily
activities. In addition, the Company may invest in mortgage-backed and mortgage
related securities, such as collateralized mortgage obligations, to supplement
its lending activities.
The investment policy of the Company, which is approved by the Board of
Directors and implemented by the Company's President and Senior Vice
President/Treasurer, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Company's lending activities and to provide and maintain liquidity. In
establishing its investment strategies, the Company considers its business and
growth plans, the economic environment, its interest rate sensitivity "gap"
position, the types of securities to be held, and other factors. The President
presents a monthly report to the Board of Directors detailing all investment
activity and commitments to purchase securities.
Securities which are classified as held to maturity are accounted for
based on historical cost adjusted for amortization of premiums or discounts
using the level yield method. Securities classified as held to maturity totalled
$82.9 million as of December 31, 1996. The held to maturity portfolio consists
primarily of U.S. Government obligations and securities of various federal
agencies, mortgage-backed and related securities. Mortgage-backed securities
held to maturity consists of fixed rate, five year, and seven year balloons
insured or guaranteed by either FNMA or FHLMC. Mortgage-backed related
securities held to maturity consist of adjustable rate and fixed rate
collateralized mortgage obligations. All of the collateralized mortgage
obligations are also guaranteed by FNMA or FHLMC with the exception of $10.6
million in "AAA" rated private mortgage collateral.
Mortgage-backed and related securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgage loans with
varying interest rates and maturities. The interest rate risk characteristics of
the underlying pool of mortgages as well as the prepayments risk are passed on
to the holder of the mortgage-backed securities. Consequently, in a declining
interest rate environment there is a risk that mortgage-backed securities will
prepay faster than anticipated and the Company may not be able to reinvest the
cash flow from prepaid mortgage-backed securities into comparable yielding
investments. In a rising interest rate environment the value of the
mortgage-backed securities may be impaired and the mortgage-backed securities
with fixed-rate underlying mortgage loans will be worth less as investors seek
higher yielding investments.
Securities that are classified as available for sale are accounted for at
their market value, with unrealized gains and losses reported as a separate
component of capital designated as "unrealized holding gains/losses on available
for sale securities." Securities classified as available for sale totalled
$106.6 million as of December 31, 1996. Equity capital was increased for the
period ending December 31, 1996 as a result of this adjustment. The net
unrealized holding gain on available for sale securities totalled $1.2 million
at December 31, 1996. The available for sale portfolio consists primarily of
U.S. Government obligations and securities of various federal agencies,
investment grade corporate obligations,
13
and 30-year fixed and adjustable rate mortgage-backed securities issued by GNMA,
FHLMC, and FNMA. While the market value of U.S. Government and federal agency
securities are directly related to changes in interest rates after the time of
purchase, the market value of the investment grade corporate securities could
also be affected by upgrades or downgrades in the credit rating of the issuer.
The market value of both fixed and adjustable rate mortgage-backed securities is
not only affected by changes in the general level of interest rates, but is also
affected by prepayment experience and changes in prepayment assumptions. While
adjustable rate mortgage-backed securities tend to exhibit more price stability
than fixed rate mortgage-backed securities, their market value may also be
influenced by the annual and lifetime caps to which they are subject. The
interest rate risk associated with adjustable mortgage-backed securities is that
if interest rates increase to such an extent that full interest rate adjustments
cannot be made as a result of the annual or lifetime caps, the market value of
such securities may be adversely affected despite its adjustable rate features.
The following table sets forth the carrying and market values of the
Company's investment securities portfolio, short-term investments, FHLB-Atlanta
stock, and mortgage-backed and related securities at the dates indicated. At
December 31, 1996, the market value of the Company's investment securities
portfolio and mortgage-backed securities portfolio were $61.4 million and $131.6
million, respectively.
1994 1995 1996
--------------------- ----------------- --------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
--------- ---------- -------- ------- ---------- --------
(In Thousands)
Investment securities held to maturity:
U.S. Government and related
securities and agency obligations.... $27,986 $ 26,750 $ 31,482 $ 32,209 $ 35,558 $ 35,756
Corporate obligations ................ 21,888 21,150 -- -- -- --
Other debt securities ................ 1,485 1,427 1,832 1,836 732 742
-------- -------- -------- -------- -------- --------
Total .............................. 51,359 49,327 33,314 34,045 36,290 36,498
Investment securities,
available for sale .................. 25,875 25,875 34,724 34,724 21,652 21,652
FHLB-Atlanta stock ................... 3,075 3,075 3,075 3,075 3,268 3,268
-------- -------- -------- -------- -------- --------
Total investment securities ........... $ 80,309 $ 78,277 $ 71,113 $ 71,844 $ 61,210 $ 61,418
======== ======== ======== ======== ======== ========
Mortgage-backed and related
securities held to maturity:
Agency backed fixed rate ............ $ 38,339 $ 36,973 $ 12,857 $ 12,920 $ 11,892 $ 11,844
Agency backed adjustable rate....... 2,582 2,545 -- -- -- --
Collateralized mortgage obligations,
variable rate ....................... -- -- 12,145 12,539 16,413 16,748
Collateralized mortgage obligations,
fixed rate .......................... 10,920 10,299 10,944 11,012 18,265 18,146
-------- -------- -------- -------- -------- --------
Total .............................. 51,841 49,817 35,946 36,471 46,570 46,738
Mortgage-backed and related
securities available for sale........ 13,024 13,024 78,844 78,844 84,899 84,899
-------- -------- -------- -------- -------- --------
Total mortgage-backed and
related securities .................. $ 64,865 $ 62,841 $114,790 $115,315 $131,469 $131,637
======== ======== ======== ======== ======== ========
There were no investment securities issued by any one entity (exclusive of
obligations of the U.S. Government or federal agencies) with a total carrying
value in excess of 10% of the Company's equity capital at December 31, 1996.
14
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and expected maturities of the Company's
investment securities portfolio as of December 31, 1996. Expected maturities may
differ from contractual maturities because issuers may have the right to call
some obligations without penalty. Market value adjustments recorded in
compliance with SFAS 115 are not considered when computing the yields and cost
of securities.
At December 31, 1996
-------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years After Ten Years Investment Securities
----------------- ----------------- ----------------- ----------------- ------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- ------
Investment securities held to
maturity:
U.S. Government and related
securities and agency
obligations.....................$ 8,000 7.69 $21,579 7.12% $ 4,000 7.10% $ 1,979 7.19% $35,558 7.25% $35,756
Other asset-backed securities ..... -- -- 732 10.24 -- -- -- -- 732 10.24 742
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Total, held to maturity ........... 8,000 7.69 22,311 7.22 4,000 7.10 1,979 7.19 36,290 7.31 36,498
------- ------- ------- ------- ------- -------
Investment securities available
for sale:
U.S. Government and related
securities and agency
obligations ..................... 2,024 7.18 4,039 6.48 -- -- -- -- 6,063 6.72 6,063
Corporate obligations ............. 5,023 5.78 4,082 7.29 -- -- 1,003 7.89 10,108 6.59 10,108
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Total available for sale .......... 7,047 6.17 8,121 6.87 -- -- 1,003 7.89 16,171 6.64 16,171
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Preferred stock and other equity
securities....................... 2,491 -- -- -- -- -- 2,990 -- 5,481 -- 5,481
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- -------
Total investment securities .......$17,538 6.98% $30,432 7.13% $ 4,000 7.10% $ 5,972 7.43% $57,942 7.10% $58,150
======= ==== ======= ==== ======= ==== ======= ==== ======= ==== =======
15
The following table sets forth the carrying value of Registrant's
mortgage-backed securities portfolio at the dates indicated.
Weighted
Average
Rate at
December 31, December 31, December 31,
1995 1996 1996
---- ---- ----
Held to maturity: (Dollars in Thousands)
Agency backed, fixed rate.... $ 12,857 $ 11,892 6.59%
CMOs, fixed rate............. 10,944 18,265 6.46%
CMOs, adjustable rate........ 12,145 16,413 6.86%
-------- -------- ----
Total held to maturity..... 35,946 46,570 6.63%
-------- -------- ----
Available for Sale:
Agency backed, fixed rate.... 27,429 40,181 8.05%
Agency backed, adjustable rate 50,591 44,118 6.79%
CMOs, fixed rate............. 824 600 7.79%
-------- -------- ----
Total available for sale... 78,844 84,899 7.39%
-------- -------- ----
Total mortgage-backed securities $114,790 $131,469 7.12%
======== ======== ====
Mortgage-Backed Securities Maturity. The following table sets forth the
contractual maturity of Registrant's mortgage-backed securities portfolio at
December 31, 1996. The table does not include scheduled principal payments and
estimated prepayments.
Contractual
Maturities Due
--------------
(In Thousands)
Less than 1 year....................... $ 74
1 to 5 years........................... 10,067
5 to 10 years.......................... 4,789
Over 10 years.......................... 116,539
--------
Total mortgage-backed securities.. $131,469
========
16
The following table sets forth the activity in the Company's
mortgage-backed securities during the periods indicated.
Year Ended December 31,
------------------------------------
1994 1995 1996
--------- ----------- -----------
(Dollars in Thousands)
Mortgage-backed securities:
At beginning of period ...................... $ 40,109 $ 64,865 $ 114,790
Mortgage-backed securities purchased...... 42,012 57,388 46,544
Mortgage-backed securities sold .......... (2,801) -- (5,183)
Provision appreciation (depreciation) in
market value ........................... (1,438) 3,256 (189)
Amortization and repayments .............. (13,017) (10,719) (24,493)
--------- --------- ---------
Balance of mortgage-backed and related
securities at end of period ........... $ 64,865 $114,790 $ 131,469
========= ========= =========
Sources of Funds
Deposits. The Company offers a variety of deposit accounts having a range
of interest rates and terms. The Company presently offers regular savings,
interest-bearing checking, noninterest-bearing checking, money market and
certificate accounts (including retirement accounts). The flow of deposits is
influenced significantly by general economic conditions, changes in prevailing
interest rates, pricing of deposits and competition. The Company's deposits are
primarily obtained from areas surrounding its twelve offices, and the Company
relies primarily on service and long-standing relationships with customers to
attract and retain these deposits. Deposits increased $19.4 million to $397.4
million at December 31, 1996 from $378.0 million at December 31, 1995. The
weighted average rate of deposits decreased from 4.96% at December 31, 1995 to
4.71% at December 31, 1996, as interest rates remained fairly stable during
1996. The opening of our newest branch office in Madison Heights, Virginia
(Amherst County) contributed a $2.8 million deposit gain in six months of
operations.
When management determines the levels of the Company's deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings
and the rates charged on other sources of funds.
17
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented. The Company does not have a significant
amount of deposits from out-of-state sources.
At December 31,
----------------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- -------------------------------- ------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
to Total Nominal to Total Nominal to Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
-------- ----------- --------- ------- -------- -------- ------ --------- ---------
(Dollars in Thousands)
Transaction accounts:
Noninterest-bearing
checking accounts ........ $ 3,274 .97% --% $ 6,218 1.65% --% $ 6,790 1.71% --%
NOW and Super NOW ......... 26,048 7.72 2.76 30,664 8.11 2.76 32,957 8.29 2.30
Money market .............. 52,130 15.46 3.41 45,642 12.08 3.58 43,735 11.00 3.52
Savings ................... 32,314 9.58 3.00 33,956 8.98 3.00 34,520 8.69 3.03
-------- ------ -------- ------ -------- ------
Total ................ 113,766 33.73 3.05 116,480 30.82 3.00 118,002 29.69 2.83
-------- ------ -------- ------ -------- ------
Certificate accounts:
Contractual maturities:
Within 12 months ......... 137,840 40.87 4.96 163,861 43.35 5.66 158,156 39.80 5.21
12-36 months ............. 46,905 13.91 5.57 55,844 14.77 5.84 86,648 21.80 5.61
Beyond 36 months ......... 38,745 11.49 5.87 41,790 11.06 6.51 34,629 8.71 6.51
-------- ------ -------- ------ -------- ------
Total ................. 223,490 66.27 5.25 261,495 69.18 5.83 279,433 70.31 5.50
-------- ------ -------- ------ -------- ------
Total deposits......... $337,256 100.00% 4.50% $377,975 100.00% 4.96% $397,435 100.00% 4.71%
======== ====== ======== ====== ======== ======
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity at December 31,
1996.
Certificates
Maturity Period of Deposits
--------------
(In Thousands)
Within three months.................. $ 8,934
Three through six months............. 4,980
Six through twelve months............ 9,595
Over twelve months................... 17,080
-------
$40,589
=======
18
Borrowings
Deposits are the Company's primary source of funds. The Company's policy
has been to utilize borrowings to meet liquidity needs and when they are a less
costly source of funds or can be invested at a positive rate of return. The
Company may obtain from the FHLB-Atlanta advances which are generally secured by
a blanket lien against the Company's mortgage loan portfolio. At December 31,
1996, the Company had $41.0 million in outstanding advances from the
FHLB-Atlanta. The Company, from time to time, also makes use of other forms of
borrowings, primarily reverse repurchase agreements. At December 31, 1996, the
Company had $19.0 million in outstanding reverse repurchase agreements
collateralized by mortgage backed and mortgage related securities. The weighted
average interest rate for all borrowed funds was 5.69% at December 31, 1996.
The following table sets forth certain information regarding FHLB -
Atlanta advances and other borrowings at the dates or for the periods indicated.
At or for the Year
Ended December 31,
-----------------------------
1994 1995 1996
------ ------ ------
(Dollars in Thousands)
Average balance outstanding ............................ $13,199 $30,702 $50,236
Maximum amount outstanding at any month-end
during the period .................................... 19,250 43,250 60,000
Balance outstanding at end of period ................... 11,250 29,250 60,000
Weighted average interest rate during the period ....... 6.74% 6.36% 5.57%
Weighted average interest rate at the end of period..... 7.14% 5.97% 5.69%
The following table sets forth at December 31, 1996 the repayment
schedule, interest rates and amounts of FHLB-Atlanta advances and other
borrowings due by year.
Interest
Year Due Rate Amount
- -------- -------- ------
(In Thousands)
1997 5.66% $56,000
1998 5.51 2,000
1999 -- --
2000 6.16 2,000
-------
$60,000
Personnel
As of December 31, 1996, the Company had 132 full-time and 8 part-time
employees. None of the Company's employees are represented by a collective
bargaining group. The Company believes that its relationship with its employees
is good.
19
Regulation
Set forth below is a brief description of certain laws which relate to the
regulation of the Company. The description does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
Unless otherwise indicated, this section discusses regulations that apply to the
Company indirectly through their direct application to the Bank. However, the
section entitled "Company Regulation" applies to the Company rather than the
Bank.
General. As a federally chartered, SAIF-insured savings association, the
Company is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Company is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board").
The OTS, in conjunction with the FDIC, regularly examines the Company and
prepares reports for the consideration of the Company's Board of Directors on
any deficiencies that they find in the Company's operations. The Company's
relationship with its depositors and borrowers is also regulated to a great
extent by federal law, especially in such matters as the ownership of savings
accounts and the form and content of the Company's mortgage documents.
The Company must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company and its operations.
The Company, as a holding company, is also required to file certain reports
with, and otherwise comply with the rules and regulations of the OTS and the
Securities and Exchange Commission ("SEC").
Insurance of Deposit Accounts
The deposit accounts held by the Company are insured by the SAIF to a
maximum of $100,000 for each insured member (as defined by law and regulation).
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system as of September 30, 1996, SAIF members paid within a range of 23 to
31 basis points (23 cents to 31 cents per $100 of domestic deposits), depending
upon the institution's risk classification. This risk classification is based on
an institution's capital group and supervisory subgroup assignment. Pursuant to
a law adopted during 1996, the FDIC imposed a special assessment on SAIF members
to capitalize the SAIF at the designated reserve level of 1.25% as of October 1,
1996. Based on the Company's deposits as of March 31, 1995, the date for
measuring the amount of the special assessment pursuant to the Act, the
assessment for the Company totalled $2.2 million. The FDIC has lowered the
premium for deposit insurance to a level necessary to maintain the SAIF at its
required reserve level. As of January 1, 1997, the Company was not required
20
to pay any deposit insurance premium; however, the FDIC may choose to reinstate
premiums in the future.
The Company will pay, in addition to its deposit insurance premium as a
member of the SAIF, an amount equal to approximately 6.6 basis points toward the
retirement of Financing Corporation bonds ("Fico Bonds") issued in the 1980s to
assist in the recovery of the savings and loan industry. Members of the Bank
Insurance Fund ("BIF"), by contrast, will pay, in addition to their deposit
insurance premium, approximately 1.3 basis points. Beginning no later than
January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. By January 1, 1999, the BIF and the SAIF will
be merged, provided there are no financial institutions still chartered as
savings associations. Should the insurance funds be merged before January 1,
2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a
leverage ratio (core capital) equal to at least 3% of total adjusted assets, and
(3) a risk-based capital requirement equal to 8.0% of total risk-weighted
assets.
Savings associations with a greater than "normal" level of interest rate
exposure may, in the future, become subject to a deduction from capital for an
interest rate risk ("IRR") component for purposes of calculating their
risk-based capital requirement.
The Company is not under any agreement with regulatory authorities nor is
it aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have a material effect on liquidity, capital
resources or operations of the Company.
Prompt Corrective Action
Banking regulators are required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS rules, an institution
shall be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10.0% or more, has a Tier I risk-based capital ratio (core or leverage
capital to risk-weighted assets) of 6.0% or more, has a leverage capital ratio
of 5.0% or more and is not subject to any order or final capital directive to
meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risked -based ratio of 4.0% or more and a leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized", (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage capital ratio that is less than 4.0%
(3.0% in certain circumstances), (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage capital ratio that is less
than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0% In addition, under
certain circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
21
Immediately upon becoming undercapitalized, an institution becomes subject
to restrictive provisions. The appropriate federal banking agency for an
undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long
term cost to the deposit insurance fund, subject in certain cases to specified
procedures.
The Company is currently a well capitalized institution.
Dividend and Other Capital Distribution Limitations
Under Virginia law, the Company may pay any cash dividend, so long as
after giving effect to the dividend, the Company will (1) be able to pay its
bills in the usual course of business; and (2) the Company's total assets will
not be less than the sum of its total liabilities plus the amount that would be
needed, if the Company were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. With
respect to stock dividends, shares may be issued pro rata and without the
requirement that shareholders pay for any part of the dividend.
The Bank, however, is subject to OTS restrictions on the payment of
dividends to its sole stockholder FFVA Financial Corporation. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends. In addition, the Bank may not
declare or pay a cash dividend on its capital stock if the effect thereof would
be to reduce the regulatory capital of the Bank below the amount required for
the liquidation account created in connection with the mutual to stock
conversion of the Bank.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
December 31, 1996, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions to the Company could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized" (not meet any one of its minimum regulatory capital
requirements).
22
Qualified Thrift Lender Test
The Home Owners Loan Act ("HOLA"), as amended, requires savings
institutions to meet a qualified thrift lender ("QTL") test. If the Company
maintains at least 65% of its portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 10% of total assets) in Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Atlanta. Certain
assets are subject to a percentage limitation of 20% of portfolio assets. In
addition, savings associations may include shares of stock of the Federal Home
Loan Banks, FNMA and FHLMC as qualifying QTIs. Compliance with the QTL test is
measured on a monthly basis in nine out of every 12 months. As of December 31,
1996, the Company was in compliance with its QTL requirement with 87.14% of its
total assets invested in QTIs.
A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank.
Liquidity Requirements
All savings associations are required to maintain an average daily balance
of liquid assets, as defined by the OTS, equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. The Company was in compliance with this
requirement on December 31, 1996.
Federal Home Loan Bank System
The Company is a member of the FHLB of Atlanta, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
As a member, the Company is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. As of December 31, 1996, the Company had $3.3
million in FHLB stock, which was in compliance with this requirement.
23
Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-
savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association. This regulation and oversight is intended primarily for the
protection of the depositors of the Company's subsidiary savings association and
not for stockholders of the Company.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions, provided the Company satisfies the QTL
test. If the Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
The Company must obtain approval from the OTS before acquiring control of
any other SAIF- insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Recent and Proposed Legislation
Bills have been introduced to congressional committees that would
consolidate the OTS with the Office of the Comptroller of the Currency ("OCC").
The resulting agency would regulate all federally chartered commercial banks and
thrift institutions. In the event that the OTS is consolidated with the OCC, it
is possible that the thrift charter could be eliminated and thrifts could be
forced to convert to commercial banks. Legislation passed in 1996 required the
recapture (for income tax purposes) of the Bank's post 1987 additions to bad
debt reserves; however, the Bank's management does not believe this recapture
has had a material effect on the earnings of the Bank or the Company because the
Bank has previously provided deferred taxes on its bad debt reserves. Under
current law and regulations, a unitary savings and loan holding company, such as
the Company, which has only one thrift subsidiary such as the Bank, has
essentially unlimited investment authority. Legislation has also been proposed
which, if enacted, would limit the non-banking related activities of savings and
loan holding companies to those activities permitted for bank holding companies.
24
Executive Officers of the Registrant
- ------------------------------------
The following individuals were executive officers of the Registrant as of
December 31, 1996:
Name Age(1) Positions Held With the Registrant
- ---- ------ ----------------------------------
James L. Davidson, Jr. 63 President, and Chief Executive Officer
E. L. (Ron) Rash, Jr. 45 Executive Vice President
Ronald W. Neblett 49 Senior Vice President and Treasurer
Margaret C. Burnette 52 Senior Vice President and Secretary
- ---------------------------
(1) At December 31, 1996.
The following is a description of the principal occupation and employment
of the executive officers of the Registrant as of December 31, 1996, during at
least the past five years.
James L. Davidson, Jr., has served as a director of the Bank since 1965 and
was appointed President in 1975. Mr. Davidson's employment with the Bank
commenced in 1961. Mr. Davidson has also served as director of the Company since
its formation in 1994.
E.L. (Ron) Rash, Jr., has served as Executive Vice President of the Bank
since December 1995. Prior to that he served as a Senior Vice President of the
Bank. Mr. Rash has been employed by the Bank for 17 years. Mr. Rash has also
served as an executive officer of the Company since its formation in 1994.
Ronald W. Neblett, CPA, has served as Senior Vice President and Treasurer
of the Bank since January 1985. Mr. Neblett has been employed by the Bank for 25
years. Mr. Neblett has also served as an executive officer of the Company since
its formation in 1994.
Margaret C. Burnette has served as Senior Vice President and Secretary of
the Bank since January 1985. Ms. Burnette has been employed with the Bank for 33
years. Ms. Burnette has also served as an executive officer of the Company since
its formation in 1994.
Item 2. Properties
- ------------------
Properties
- ----------
The Company conducts its business through its main office and eleven
branch offices.
25
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Company holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Company's business. In the opinion of management, no material loss is expected
from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the most recent fiscal year.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information contained under the section captioned "Stock Price
Information" on page 53 of the Company's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 (the "Annual Report"), is incorporated
herein by reference.
Item 6. Selected Financial Data
- ---------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" and "Selected Consolidated Financial Ratios and Other
Data" on pages 3 and 4 of the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 5 to 16 of the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
The Registrant's financial statements listed under Item 14 are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- --------------------
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the last fiscal year.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Information With
Respect to Nominees for Director and Directors Continuing in Office" in the
Registrant's definitive proxy statement for the Registrant's Annual Meeting of
Stockholders to be held on April 22, 1997 (the "Proxy Statement") is
incorporated herein by reference.
26
Additional information concerning executive officers is included in this
report under "Part I Executive Officers of the Registrant" and included in the
Proxy Statement in the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance."
Item 11. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and Executive
Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the chart in the section captioned "Voting Securities
and Principal Holders Thereof" and to the chart in the section
captioned "Information With Respect to Nominees for Director and
Directors Continuing in Office" in the Proxy Statement.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation
of which may at a subsequent date result in a change in control of
the Registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of the Registrant included in the Annual Report are incorporated
herein by reference and also in Item 8 hereof.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of December 31, 1995 and
1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996
27
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996
Notes to Consolidated Financial Statement
2. Financial Statement Schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under the related
instructions or are inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Restated Articles of Incorporation of FFVA Financial
Corporation*
3(ii) Bylaws of FFVA Financial Corporation
11 Statement regarding computation of per share earnings
13 Portions of the Annual Report to Stockholders for the fiscal
year ended December 31, 1996
21 Subsidiaries of the Registrant**
23 Consent from Cherry, Bekaert & Holland, L.L.P. regarding the
incorporation by reference of their report into a previously
filed Registration Statement on Form S-8 originally filed by
the Registrant with the Securities and Exchange Commission
on September 28, 1995
27 Financial Data Schedule***
(b) On November 13, 1996, the Company filed a Form 8-K which
indicated its receipt of regulatory authorization to
repurchase up to 502,255 shares of the Company's outstanding
common stock.
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 33-79540) declared effective by the Commission on August 12, 1994.
** Incorporated by reference to the Form 10-K filed on March 28, 1995 with the
Commission for the fiscal year ended December 31, 1994.
*** Provided in electronic filing only.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 25, 1997.
FFVA FINANCIAL CORPORATION
By: /s/ James L. Davidson, Jr.
---------------------------
James L. Davidson, Jr.
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 25, 1997.
/s/ James L. Davidson, Jr. /s/ Ronald W. Neblett
- ----------------------------------- ----------------------------------
James L. Davidson, Jr. Ronald W. Neblett
President, Chief Executive Officer, Senior Vice President and Treasurer
and Director (Principal Financial and Accounting
(Principal Executive Officer) Officer)
/s/ John W. Ferguson, Jr. /s/ James K. Candler
- ----------------------------------- ---------------------------------
John W. Ferguson, Jr. James K. Candler
Chairman of the Board Director
/s/ James E. McCausland /s/ Thomas P. Whitten
- ----------------------------------- ---------------------------------
James E. McCausland Thomas P. Whitten
Director Director
/s/ Edward A. Hunt, Jr. /s/ V. Howard Belcher
- ----------------------------------- ---------------------------------
Edward A. Hunt, Jr. V. Howard Belcher
Director Director
/s/ Charles R. W. Schoew /s/ Thomas O. Doyle
- ----------------------------------- ---------------------------------
Charles R. W. Schoew Thomas O. Doyle
Director Director