EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
At December 31,
-----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In Thousands)
Selected financial data:
Total assets .......................... $365,018 $379,585 $440,603 $497,290 $533,826
Loans receivable, net ................. 263,330 261,469 268,532 291,215 321,528
Mortgage-backed securities ............ 41,305 40,109 64,865 114,790 131,469
Investment securities ................. 43,207 49,010 80,309 71,113 61,210
Cash and cash equivalents ............. 8,154 17,393 16,387 7,683 6,634
Deposits .............................. 333,295 335,976 337,256 377,975 397,435
Other borrowings ...................... 6,500 12,500 11,250 29,250 60,000
Equity capital/stockholders' equity.... 23,772 29,753 90,859 88,059 74,481
For the Year Ended December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(In Thousands)
Selected operating data:
Interest income ............... $29,962 $28,430 $29,380 $37,683 $40,993
Interest expense .............. 17,742 14,726 14,783 19,212 21,182
------- ------- ------- ------- -------
Net interest income ......... 12,220 13,704 14,597 18,471 19,811
Provision for credit losses ... 726 900 600 255 60
------- ------- ------- ------- -------
Net interest income after
provision for credit losses 11,494 12,804 13,997 18,216 19,751
------- ------- ------- ------- -------
Noninterest income ............ 1,699 1,700 896 1,054 1,321
------- ------- ------- ------- -------
Noninterest expense ........... 6,974 7,134 7,496 9,084 12,569 (3)
------- ------- ------- ------- -------
Income before income taxes and
extraordinary item ........... 6,219 7,370 7,397 10,186 8,503
Income tax expense ............ 2,303 2,702 2,694 3,712 3,040
------- ------- ------- ------- -------
Net income before
extraordinary item ......... 3,916 4,668 4,703 6,474 5,463
Cumulative effect at January 1,
1993 of change in accounting
for income taxes ............. -- 679 -- -- --
------- ------- ------- ------- -------
Net income .................. $ 3,916 $ 5,347 $ 4,703 $ 6,474 $ 5,463
======= ======= ======= ======= =======
Per Share Data:
Net income per share(1) ..... -- -- $0.79(2) $ 1.11(2) $ 1.06
Dividends per share ......... -- -- -- $ 0.30(2) $ 0.375
- ------------------------------
(1) Based on the weighted average number of shares of common stock and common
stock equivalents outstanding.
(2) Restated for two for one stock split paid June 5, 1996.
(3) Includes a $2,230 one-time assessment to recapitalize SAIF.
3
SELECTED CONSOLIDATED FINANCIAL RATIOS AND OTHER DATA
At or For the Year Ended December 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- --------- -------- --------
Performance Ratios:
Return on average assets (net income
divided by average total assets) ....... 1.09% 1.43% 1.17% 1.35% 1.05%
Return on average equity (net income
divided by average equity) ............. 18.03 20.05 10.63 7.15 6.68
Interest rate spread during period (1).... 3.33 3.62 3.40 3.12 3.30
Net interest margin (2) .................. 3.51 3.81 3.75 3.97 3.94
Net yield on average interest-earning
assets ................................. 8.61 7.91 7.56 8.10 8.16
Net interest income after provision for
credit losses, to total noninterest
expenses ................................. 164.81 179.48 186.73 200.53 157.14
Noninterest expense to average assets..... 1.93 1.91 1.86 1.89 2.41
Asset Quality Ratios:
Non-performing loans to total assets...... 1.72 1.20 .79 .52 .33
Non-performing loans to total loans ...... 2.33 1.68 1.28 .88 .54
Non-performing assets to total assets..... 1.79 1.30 .81 .52 .36
Allowance for credit losses to
non-performing assets .................. 36.14 52.06 85.35 123.83 172.94
Capital Ratios:
Average equity to average assets ratio
(average equity divided by average total
assets) ................................ 6.02 7.15 10.99 18.88 15.68
Capital to assets at period end .......... 6.51 7.84 20.62 17.71 13.95
Average interest-earning assets to average
interest-bearing liabilities ........... 103.65 104.72 109.40 120.62 115.23
Other data:
Number of:
Real estate loans outstanding(3) ....... 5,873 5,470 5,172 5,104 4,982
Deposit accounts ....................... 36,398 35,546 37,189 42,839 43,311
Full service offices ................... 10 10 10 11 12
- ---------------------------------
(1) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin is net interest income before provision for credit
losses divided by average interest-earning assets.
(3) Does not include open-end lines of credit.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business of the Company
- -----------------------
FFVA Financial Corporation (the "Company") is a Virginia corporation
organized in May 1994. On October 12, 1994, the Company acquired all the capital
stock of First Federal Savings Bank of Lynchburg (the "Bank") in the conversion
of the Bank from a federal mutual savings bank to a federal stock savings bank.
The Company, as a unitary savings and loan holding company, under existing laws,
generally is not restricted in the types of business activities in which it may
engage provided that the Bank retains a specified amount of its assets in
housing-related investments.
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies.
The Company's business activities to date have been limited to its
investment in the Bank, other equity investments, and loans made to the Bank for
use in the normal course of its business, and to the First Federal Savings Bank
Employee Stock Ownership Plan (the "ESOP") which enabled the ESOP to purchase
shares of the Company's common stock in the initial public offering. The loans
bear interest rates and have terms and conditions which prevailed in the market
place at the time they were originated. During the year ended December 31, 1996,
the Company repurchased and retired 1,013,712 shares of its common stock through
open market transactions.
Business of the Bank
- --------------------
The business of the Bank consists principally of attracting deposits from
the general public and using such deposits to originate mortgage loans secured
by one- to four-family residences and to purchase U.S. Government and federal
agency securities, mortgage-backed and related securities and other investment
securities. To a lesser extent, the Bank also originates multi-family,
commercial real estate, construction, land and land development and consumer and
other loans. The Bank's profitability depends primarily on its net interest
income which is the difference between the income it receives on its loan and
investment portfolios and its cost of funds, which consists of interest paid on
deposits and borrowed funds. To a lesser extent, the Bank's profitability is
also affected by the level of other noninterest income and expenses. Other
noninterest income consists of fees of loans, customer service charges, gains
from sale of investments and other miscellaneous income. Other noninterest
expenses consist of personnel, occupancy related expenses, federal deposit
insurance premiums, data processing, advertising and other operating expenses.
The operations of the Bank are influenced significantly by local economic
conditions and by policies of financial institution regulatory agencies,
including the OTS and the FDIC. The Bank's cost of funds is influenced by
interest rates on competing investments and by rates offered on similar
investments by competing financial institutions in the Bank's market area, as
well as general market interest rates. Lending activities are affected by the
demand for financing of real estate and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered.
5
Asset/Liability Management
- --------------------------
The Company's earnings depend to a significant extent on its net interest
income, which is the difference between (i) the interest income on loans,
mortgage-backed securities and investments, and (ii) the interest expense on
deposits and borrowings. The Company is subject to interest rate risk and
corresponding fluctuations in its net interest income, to the extent that its
interest-bearing liabilities and interest-earning assets do not mature or
reprice at the same time. Asset/liability management policies are employed in an
effort to reduce the Company's exposure to interest rate risk by matching, to
the extent deemed feasible and appropriate, the repricing periods of the
Company's interest-earning assets and interest-bearing liabilities and thereby
reducing the volatility of net interest income.
The matching of the repricing characteristics of assets and liabilities
may be analyzed by examinining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that same time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or reprice within a specific time frame and the amount of
interest-bearing liabilities anticipated, based on certain assumptions, to
mature or reprice within that same time frame. A gap is considered positive when
the amount of interest rate sensitive assets maturing or repricing within a
specific time frame exceeds the amount of interest rate sensitive liabilities
maturing or repricing within that same time frame. A gap is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
within a specific time frame exceeds the amount of interest rate sensitive
assets maturing or repricing within the same time frame. Accordingly, in a
rising interest rate environment, an institution with a positive gap would be in
a better position to invest in higher yielding assets, which would result in the
yield on its assets repricing at a pace greater than the cost of its
interest-bearing liabilities. During a period of falling interest rates, an
institution with a positive gap would tend to have its assets repricing at a
faster rate than one with a negative gap, which would tend to restrain the
growth of or reduce its net interest income.
The one year cumulative gap expressed as a percentage of earning assets
was calculated to be a negative 1.10% at December 31, 1996. The ratio of
interest-bearing assets to interest-bearing liabilities at December 31, 1996 was
114.53%. Total interest earning assets increased $35.4 million during 1996,
while interest-bearing liabilities increased by $49.6 million.
The Company seeks to limit its exposure to interest rate risk, in part,
through the origination of ARM loans and shorter-term consumer loans. Management
believes that, although investment in ARM loans may reduce short-term earnings
below amounts obtainable through investments in fixed-rate mortgage loans, an
ARM loan portfolio reduces the Company's exposure to adverse interest rate
fluctuations and enhances longer term profitability. While the Company
originates fixed-rate mortgage loans, it monitors the outstanding balances and
terms of all fixed rate mortgage loans to ensure that the addition of these
assets do not result in undue risk.
A large portion of the Company's assets have been invested in
mortgage-backed and mortgage-related securities and investment securities with
short and intermediate average lives. While the Company's mortgage-backed
securities portfolio does contain approximately $82.7 million of loans with 30
year terms, $43.2 million of these securities were collateralized by ARM loans
as of December 31, 1996. The investment policy of the Company is designed to
manage the interest rate sensitivity of its assets and liabilities, to generate
a favorable return without incurring undue interest rate risk, to supplement the
Company's lending activities, and to provide and maintain liquidity.
6
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
anticipated by the Company, based upon certain assumptions described below, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual terms of the asset or liability. Prepayment
rates for mortgage loans, mortgage-backed securities and other loans are based
upon national prepayment estimates published by major Wall Street investment
banking firms, depending upon the coupon rate of the asset. Deposit decay rate
assumptions supplied by the Federal Home Loan Bank of Atlanta have been applied
to demand deposit accounts, savings accounts and money market deposit accounts.
Management believes that these assumptions are appropriate and reasonable.
At December 31, 1996
-------------------------------------------------------------------------------------
Over
Less Three Over One Three
Than Months to Six to Through Through Over
Three Six Twelve Three Five Five
Months Months Months Years Years Years Total
------ ------ ------ ------ ----- ----- -----
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans and mortgage-backed
and related securities(1)(2).............. $ 70,482 $ 35,427 $ 112,006 $ 67,180 $ 48,205 $88,230 $ 421,530
Consumer and other loans(1)............... 17,894 1,112 2,026 5,942 5,348 -- 32,322
Investments and interest-earning
deposits(2)(3) ......................... 6,542 3,500 12,001 21,972 8,314 9,965 62,294
--------- -------- --------- -------- -------- --------- ---------
Total interest-earning assets......... 94,918 40,039 126,033 95,094 61,867 98,195 516,146
--------- -------- --------- -------- -------- --------- ---------
Interest-bearing liabilities:
NOW and Super NOW accounts ................. 3,620 3,225 5,433 11,239 3,007 6,437 32,961
Savings accounts ........................... 1,571 1,500 2,797 8,913 5,810 13,929 34,520
Money market deposit accounts............... 14,129 9,564 10,858 4,812 2,290 2,078 43,731
Certificates of deposit .................... 47,126 37,010 74,021 86,647 34,629 -- 279,433
--------- -------- --------- -------- -------- --------- ---------
Total interest-bearing deposits(4).... 66,446 51,299 93,109 111,611 45,736 22,444 390,645
--------- --------- --------- --------- --------- --------- ---------
FHLB-Atlanta advances and other
borrowed funds ............................ 49,000 2,000 5,000 2,000 2,000 -- 60,000
--------- -------- --------- -------- -------- --------- ---------
Total interest-bearing liabilities ... 115,446 53,299 98,109 113,611 47,736 22,444 450,645
--------- -------- --------- -------- -------- --------- ---------
Interest sensitivity gap.................... $ (20,528) $(13,260) $ 27,924 $(18,517) $ 14,131 75,751 $ 65,501
========= ========= ========= ========= ========= ========= =========
Cumulative interest sensitivity gap......... $ (20,528) $(33,788) $ (5,864) $(24,381) $(10,250) $ 65,501
========= ======== ========= ======== ======== =========
Cumulative interest sensitivity gap
as a percentage of total assets........... (3.85)% (6.33)% (1.10)% (4.57)% (1.92)% 12.27% 12.27%
Ratio of interest-earning assets to
interest-bearing liabilities................ 82.22 % 79.98 % 97.80% 93.59 % 97.61 % 114.53% 114.53%
- -------------------------------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced by
non-performing loans, but are not reduced by the allowance for credit
losses.
(2) Includes assets available for sale, but does not include mark to market
adjustments reflected in unrealized holding gain (loss).
(3) Includes interest-bearing cash equivalents.
(4) Does not include noninterest-bearing deposits totalling $6,790.
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 in different
degrees 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 ARM loans, have features
which restrict changes in interest rates 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 would likely deviate significantly from those
assumed in calculating the table. As a result of these limitations, it is
difficult to correlate changes in net interest income to changes in the level of
interest rates.
7
Analysis of Net Interest Income
- -------------------------------
The following table sets forth certain information relating to the
Company's statements of financial condition and statements of income for the
years ended December 31, 1994, 1995, and 1996 and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets and liabilities, respectively, for the periods shown. Average balances
are derived from month end balances. Management does not believe that the use of
month end balances instead of average daily balances has caused any material
difference in the information presented. The average balances of loans
receivable include loans on which the Company has discontinued accruing
interest. The yields and costs include fees which are considered adjustments to
yields. Market value adjustments recorded in compliance with SFAS 115 are not
considered when computing the yields and costs of securities.
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- ------------------------------ -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- -------- -------- ---------- ------- -------- ----------
(In Thousands)
Assets:
Interest-earning assets:
Mortgage loans, net............ $251,935 $20,717 8.22% $266,097 $23,437 8.81% $279,433 $24,714 8.84%
Consumer and other loans,
net .......................... 10,888 1,018 9.35 16,224 1,703 10.50 25,911 2,487 9.60
Mortgage-backed and related
securities(1) ................ 51,526 3,333 6.47 99,829 6,884 6.90 123,959 8,662 6.99
Overnight and short term
deposits .................... 12,470 488 3.91 5,945 422 7.10 4,361 283 6.49
Investment securities(1)(2).... 61,939 3,824 6.17 76,903 5,237 6.81 68,561 4,847 7.07
-------- ------- -------- ------- -------- -------
Total interest-earning
assets ................... 388,758 29,380 7.56 464,998 37,683 8.10 502,225 40,993 8.16
------- ------- -------
Noninterest-earning assets....... 13,739 14,664 19,162
-------- -------- --------
Total assets .............. $402,497 $479,662 $521,387
======== ======== ========
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Deposits:
Transaction accounts.......... $ 89,728 2,684 2.99 $ 80,140 2,555 3.19 $ 82,527 $ 2,319 2.81
Savings and certificates...... 252,438 11,210 4.44 274,675 14,705 5.35 303,085 16,063 5.30
-------- ------- -------- ------- -------- -------
Total deposits ............ 342,166 13,894 4.06 354,815 17,260 4.86 385,612 18,382 4.77
FHLB advances and other
borrowings ................... 13,199 889 6.74 30,702 1,952 6.36 50,236 2,800 5.57
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities .............. 355,365 14,783 4.16 385,517 19,212 4.98 435,848 21,182 4.86
------- ------- -------
Other liabilities ............... 2,890 3,604 3,801
-------- -------- --------
Total liabilities.......... 358,255 389,121 439,649
-------- -------- --------
Stockholders' equity ............ 44,242 90,541 81,738
-------- -------- --------
Total liabilities and
stockholders' equity...... $402,497 $479,662 $521,387
======== ======== ========
Net interest income/interest
rate spread(3) ................. $ 14,597 3.40% $18,471 3.12% $19,811 3.30%
======== ======= =======
Net earning assets/net interest
margin(4) ...................... $ 33,393 3.75% $79,481 3.97% $66,377 3.94%
======== ======= =======
Ratio of interest-earning assets
to interest-bearing liabilities. 109.40% 120.62% 115.23%
======= ======= =======
- -----------------------------------
(1) Includes assets available for sale.
(2) Includes FHLB-Atlanta stock.
(3) Interest-rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income before the provision for
credit losses divided by average interest-earning assets.
8
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 the Company'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
proportionately to the changes due to volume and the changes due to rate.
Year Ended December 31,
---------------------------------------------------------------
1995 vs. 1994 1996 vs. 1995
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- ------ --------- -------
(In Thousands)
Interest-earning assets:
Mortgage loans, net ............. $ 1,201 $ 1,519 $ 2,720 $ 1,179 $ 98 $ 1,277
Consumer and other loans ........ 548 137 685 941 (157) 784
Mortgage-backed and related
securities(1) ................. 3,317 234 3,551 1,685 93 1,778
Overnight and short term deposits (337) 271 (66) (105) (34) (139)
Investment securities(1)(2) ..... 991 422 1,413 (584) 194 (390)
------- ------- ------- ------- ------- -------
Total ....................... 5,720 2,583 8,303 3,116 194 3,310
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Transaction accounts ............ (298) 169 (129) 74 (310) (236)
Savings and certificate accounts 1,048 2,447 3,495 1,507 (149) 1,358
------- ------- ------- ------- ------- -------
Total deposits .............. 750 2,616 3,366 1,581 (459) 1,122
Borrowings ...................... 1,115 (52) 1,063 1,114 (266) 848
------- ------- ------- ------- ------- -------
Total ....................... 1,865 2,564 4,429 2,695 (725) 1,970
------- ------- ------- ------- ------- -------
Net change in net interest income $ 3,855 $ 19 $ 3,874 $ 421 $ 919 $ 1,340
======= ======= ======= ======= ======= =======
- ---------------------------------
(1) Includes assets available for sale.
(2) Investment securities include FHLB-Atlanta stock.
Financial Condition and Results of Operation
Comparison of Financial Condition at December 31, 1995 and 1996
General. Total assets increased $36.5 million or 7.34%, to $533.8 million
at December 31, 1996 from $497.3 million at December 31, 1995, reflecting
increases in the Company's loan and mortgage-backed securities portfolio.
Loans Receivable, Net. The Company's loans receivable, net increased $30.3
million or 10.41% to $321.5 million at December 31, 1996 from $291.2 million at
December 31, 1995. The loan categories experiencing the most significant growth
during 1996 were the residential, one to four family category which increased by
$11.8 million, the consumer loan category which increased by $11.6 million, and
the commercial loan category which increased by $4.6 million.
9
Mortgage-backed Securities. The Company's mortgage-backed securities
portfolio increased $16.7 million, or 14.55%, to $131.5 million at December 31,
1996 from $114.8 million at December 31, 1995. The Company's portfolio
encompasses a variety of both fixed rate and adjustable rate products. A total
of $84.9 million mortgage-backed securities are designated as "available for
sale," while $46.6 million are classified as "held to maturity" at December 31,
1996.
Investment Securities. The Company's investment securities decreased $9.9
million or 13.92% to $61.2 million at December 31, 1996 from $71.1 million at
December 31, 1995 as the Company concentrated its asset growth in the loan and
mortgage-backed securities portfolios during 1996.
Deposits. The Company's deposits increased $19.4 million or 5.13% to
$397.4 million at December 31, 1996 from $378.0 million at December 31, 1995.
Advances from FHLB and Other Borrowed Money. Advances from the Federal
Home Loan Bank of Atlanta increased by $11.7 million to $41.0 million at
December 31, 1996 from $29.3 million at December 31, 1995. During 1996, the
Company also entered into reverse repurchase agreements with a regional bank.
The balance outstanding under reverse repurchase agreements at December 31, 1996
was $19.0 million. Funds from the additional borrowings were used to fund the
purchase of mortgage backed securities and collateralized mortgage obligations
and to fund the growth of the Company's loan portfolio.
Stockholders' Equity. Stockholders' equity decreased $13.6 million from
$88.1 million at December 31, 1995 to $74.5 million at December 31, 1996. The
decrease in stockholders' equity was a result of the Company's repurchase of
1,013,712 shares of common stock at a cost of $18.0 million during 1996. The
decrease in stockholders' equity which occurred as a result of the stock
repurchases was partially offset by income from operations. Other factors
contributing to the decrease was a decrease in the value of the Company's
"available for sale" portfolio as reflected in the value of the unrealized
holding gain component of stockholders' equity and the payment of cash dividends
totalling $1.9 million. At December 31, 1996, the ratio of capital to total
assets was 13.95%.
Comparison of Operating Results for the Years Ended December 31, 1995 and 1996
Net Income. Net income decreased $1.0 million to $5.5 million for the year
ended December 31, 1996 from $6.5 million for the year ended December 31, 1995.
This decrease was primarily due to a special FDIC assessment to recapitalize the
SAIF portion of the insurance fund. The Company's portion of this assessment
totalled $2.2 million. Excluding the special assessment, non interest expense
increased a total of $1.3 million. This was partially offset by an increase of
$1.3 million in the Company's net interest income to $19.8 million from $18.5
million in the prior year. Income tax expense also decreased $670,000 as a
result.
Interest Income. Interest income increased approximately $3.3 million, or
8.8%, from $37.7 million for the 1995 period to $41.0 million for the 1996
period. This increase was primarily due to a $37.2 million, or 8.0%, increase in
the average balance of total interest earning assets from $465.0 million at
December 31, 1995 to $502.2 million at December 31, 1996. The average yield on
interest earning assets was 8.10% for the year ended December 31, 1995 and 8.16%
for the year ended December 31, 1996.
Interest Expense. Interest expense increased $2.0 million, or 10.42% from
$19.2 million for the 1995 period to $21.2 million for the 1996 period, as a
result of an increase in deposits and other interest-bearing liabilities.
Average interest-bearing liabilities increased $50.3 million or 13.05%, from
10
$385.5 million in the 1995 period to $435.8 million in the 1996 period. The
average cost of interest-bearing liabilities decreased 12 basis points from
4.98% in the 1995 period to 4.86% in the 1996 period.
Net Interest Income. Net interest income for the 1996 period increased $1.3
million or 7.03% from $18.5 million for the 1995 period to $19.8 million for the
1996 period. There was an increase in the average interest rate spread from
3.12% for the 1995 period to 3.30% for the 1996 period which was partially
offset by a 5.39% decrease in the ratio of interest-earning assets to interest
bearing liabilities. The decrease in the ratio of interest-earning assets to
interest-bearing liabilities can be attributed to the Company's decision to
repurchase over one million shares of common stock at a cost of $18.0 million
during 1996.
Provision for Credit Losses. The provision for credit losses decreased by
$195,000 from $255,000 for the 1995 period to $60,000 for the 1996 period. At
December 31, 1996, allowances for credit losses were $3.3 million, representing
1.01% of total loans and 188.07% of non-performing loans. The Company maintains
an allowance for credit losses at a level considered adequate to absorb credit
losses. The determination of the adequacy of the valuation allowance is based on
a detailed analysis 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 outstanding. The Company maintains a loan review
system which allows for a periodic review of its loan portfolio and the early
identification of potential problem loans. Such system takes into consideration,
among other things, delinquency status, size of loans, type of collateral and
financial condition of the borrowers. Specific credit loss allowances are
established for identified loans based on a review of such information and/or
appraisals of the underlying collateral. General credit loss allowances are
based upon a combination of factors including, but not limited to, actual credit
loss experience, composition of the loan portfolio and current economic
conditions. Although management believes that adequate general allowances for
losses have been established, actual losses are dependent upon future events
and, as such, further additions to the level of the general credit loss
allowance may be necessary.
Noninterest Income. Noninterest income increased 18.18% from $1.1 million
for the 1995 period to $1.3 million for the 1996 period primarily as a result of
a $182,000 increase from $431,000 to $613,000 in other income.
Noninterest Expense. Noninterest expense increased $3.5 million or 38.46%
from $9.1 million for the 1995 period to $12.6 million for the 1996 period. The
Company recorded an expense of $2.2 million for a one-time special FDIC
assessment to recapitalize the SAIF portion of the insurance fund which
accounted for 62.86% of the increase. The Company also experienced a $900,000
increase in compensation and employee benefit plan expense. A significant
portion of this increase can be attributed to increased staff requirements as a
result of growth experienced by the Company, partially due to the opening of a
new branch office in 1996 and increased benefit plan costs as a result of
growth. Office occupancy and equipment costs and data processing costs also
increased as a result of the additional branches and new accounts.
Income Taxes. The provision for income taxes decreased from $3.7 million
in 1995 to $3.0 million in 1996 as a result of the Company's decreased net
income for 1996.
Comparison of Financial Condition at December 31, 1994 and 1995
General. Total assets increased $56.7 million or 12.87%, to $497.3 million
at December 31, 1995 from $440.6 million at December 31, 1994, reflecting
increases in the Company's loan and mortgage-backed securities portfolio.
11
Loans Receivable, Net. The Company's loans receivable, net increased $22.7
million or 8.45% to $291.2 million at December 31, 1995 from $268.5 million at
December 31, 1994. Growth in the loan portfolio during 1995 was concentrated in
the residential, one to four family category which increased by $7.6 million and
the consumer loan category which increased by $7.9 million.
Mortgage-backed Securities. The Company's mortgage-backed securities
portfolio increased $49.9 million, or 76.89%, to $114.8 million at December 31,
1995 from $64.9 million at December 31, 1994. The Company's portfolio
encompasses a variety of both fixed rate and adjustable rate products. The
Company's purchases during 1995 were concentrated in adjustable rate
mortgage-backed securities which comprise approximately 54% of the total
mortgage-backed securities portfolio as of December 31, 1995. A total of $78.8
million mortgage-backed securities were designated as "available for sale,"
while $35.9 million were classified as "held to maturity" at December 31, 1995.
Investment Securities. The Company's investment securities decreased $9.2
million or 11.46% to $71.1 million at December 31, 1995 from $80.3 million at
December 31, 1994 as the Company concentrated its asset growth in the loan and
mortgage-backed securities portfolios during 1995.
Deposits. The Company's deposits increased $40.7 million or 12.07% to
$378.0 million at December 31, 1995 from $337.3 million at December 31, 1994.
The acquisition of the Keysville Branch of Crestar Financial Corporation
resulted in deposit growth of approximately $22.0 million, while the remaining
deposit growth was generated in the normal course of business.
Advances from FHLB. Advances from the Federal Home Loan Bank of Atlanta
increased by $18.0 million to $29.3 million at December 31, 1995 from $11.3
million at December 31, 1994. During March 1995, the Company borrowed $25.0
million from the Federal Home Loan Bank under a variable rate advance. These
proceeds were used to fund the purchase of adjustable rate mortgage-backed
securities. A portion of the advance was repaid prior to year end.
Stockholders' Equity. Stockholders' equity decreased $2.8 million from
$90.9 million at December 31, 1994 to $88.1 million at December 31, 1995. The
decrease in stockholders' equity was a direct result of the Company's repurchase
of 300,000 shares of common stock at a cost of $8.5 million during 1995. The
decrease in stockholders' equity which occurred as a result of the stock
repurchases was partially offset by income from operations and an increase in
the value of the Company's "available for sale" portfolio as reflected in the
value of the unrealized holding gain component of stockholders' equity. Other
factors contributing to the decrease was the Company's purchase of 80,000 shares
of common stock to be held in the Management Stock Bonus Plan and the payment of
cash dividends totalling $1.8 million. At December 31, 1995, the ratio of
capital to total assets was 17.71%.
Comparison of Operating Results for the Years Ended December 31, 1994 and 1995
Net Income. Net income increased $1.8 million to $6.5 million for the year
ended December 31, 1995 from $4.7 million for the year ended December 31, 1994.
This increase was primarily due to an increase of $3.9 million in the Company's
net interest income to $18.5 million from $14.6 million in the prior year. This
increase in net interest income was partially offset by a $1.6 million increase
in noninterest expense and a $1.0 million increase in income tax expense.
12
Interest Income. Interest income increased approximately $8.3 million, or
28.2%, from $29.4 million for the 1994 period to $37.7 million for the 1995
period. This increase was primarily due to an increase in the average balance of
total interest earning assets during 1995 coupled with an increase in their
average yield. Average interest earning assets increased $76.2 million, or
19.60% from $388.8 million at December 31, 1994 to $465.0 million at December
31, 1995. The average yield on interest earning assets increased .54% from 7.56%
for the year ended December 31, 1994 to 8.10% for the year ended December 31,
1995.
Interest Expense. Interest expense increased $4.4 million, or 29.73% from
$14.8 million for the 1994 period to $19.2 million for the 1995 period, as a
result of an increase in deposits and other interest-bearing liabilities, and an
increase in the average cost paid on those interest-bearing liabilities. Average
interest-bearing liabilities increased $30.1 million or 8.47%, from $355.4
million in the 1994 period to $385.5 million in the 1995 period. At the same
time, the average cost of interest-bearing liabilities increased 82 basis points
from 4.16% in the 1994 period to 4.98% in the 1995 period.
Net Interest Income. Net interest income for the 1995 period increased
$3.9 million or 26.71% from $14.6 million for the 1994 period to $18.5 million
for the 1995 period. The increase in net interest income was primarily due to
increased earnings as a result of the investment of net conversion proceeds.
There was an 11.22% increase in the ratio of interest-earning assets to
interest-bearing liabilities which was partially offset by a reduction in the
average interest rate spread from 3.40% for the 1994 period to 3.12% for the
1995 period.
Provision for Credit Losses. The provision for credit losses decreased by
$345,000 from $600,000 for the 1994 period to $255,000 for the 1995 period. At
December 31, 1995, allowances for credit losses were $3.2 million, representing
1.08% of total loans and 123.83% of non-performing loans.
Noninterest Income. Noninterest income increased $158,000 from $896,000
for the 1994 period to $1,054,000 for the 1995 period primarily as a result of a
$191,000 increase from $18,000 to $209,000 in income recognized from the sale of
investment securities.
Noninterest Expense. Noninterest expense increased $1.6 million or 21.33%
from $7.5 million for the 1994 period to $9.1 million for the 1994 period. The
increase resulted primarily from a $1.1 million increase in compensation and
employee benefit plan expense.
A significant portion of the increase can be attributed to increased staff
requirements as a result of growth experienced by the company, partially due to
the purchase of a new branch in 1995. The Company experienced increased benefit
plan costs as a result of this growth and the implementation of a Management
Stock Bonus Plan. The Company also adopted an Employee Stock Ownership Plan in
conjunction with the Bank's conversion to stock form. Other operating expenses
including professional fees, printing and supplies, and various registration
fees and charges also increased as a result of the Company's conversion to a
publicly held company.
Income Taxes. The provision for income taxes increased from $2.7 million
in 1994 to $3.7 million in 1995 as a result of the Company's increased net
income for 1995.
13
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity is a product of its operating, investing and
financing activities. The Company's primary sources of funds are deposits,
borrowings, amortization, prepayments and maturities of outstanding loans and
mortgage-backed securities, maturities of investment securities and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Company invests excess funds in overnight deposits
to fund cash requirements experienced in the normal course of business. The
Company has been able to generate sufficient cash through its deposits as well
as borrowings (consisting of advances from the FHLB of Atlanta and reverse
repurchase agreements). At December 31, 1996, the Company had $41.0 million of
outstanding advances from the FHLB of Atlanta and $19.0 million outstanding with
a regional bank under reverse repurchase agreements.
Liquidity management is both a daily and long-term function of business
management. Excess cash is generally invested in overnight deposits. On a
longer-term basis, the Company maintains a strategy of purchasing investment
securities and mortgage-backed securities. The Company attempts to ladder the
maturities of its investment portfolio to provide an ongoing source of
liquidity. The Company uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain a portfolio of mortgage-backed and investment
securities. At December 31, 1996, the total approved loan commitments
outstanding amounted to $4.0 million. At the same date, commitments under unused
lines of credit amounted to $20.0 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1996 totaled $158.2 million.
Management believes that a significant portion of maturing deposits will remain
with the Company. The Bank had an average liquidity ratio of 12.00% during the
quarter ended December 31, 1996, which exceeded the required minimum liquid
asset ratio of 5.0%.
The bank's deposits are insured up to the legal maximum by the Savings
Associations Insurance Fund ("SAIF") as administered by the FDIC. In the past,
First Federal and most other SAIF members have paid an annual insurance premium
between .23% and .31% of total deposits held. Effective January 1, 1996, the
FDIC lowered the annual insurance premium for most members of the Bank Insurance
Fund ("BIF"), primarily commercial banks, to $2,000. Recent federal legislation
required the FDIC to impose a one-time assessment on all members of SAIF in
order to recapitalize the SAIF to the federally mandated level of 1.25%. The
assessment equalled .65% of an institutions domestic deposits as of March 31,
1995 and was approximately $2.2 million for First Federal Savings Bank. SAIF
premiums have been lowered which will reduce somewhat the competitive advantage
commercial banks have had regarding deposit insurance premiums.
On August 20, 1996, The Small Business Job Protection Act of 1996 was
signed into law. Under this law, the tax bad debt reserve method that had been
available to thrift institutions was repealed for tax years beginning after
1995. According to the legislation, applicable excess reserves must be
recaptured as income over five years beginning with fiscal 1997. The amount to
be recaptured is the excess of the accumulated reserves since fiscal 1987 over
the amount allowed by use of the actual charge-off method for those years.
Thrifts can delay those payments by two years if they meet a residential lending
requirement. Since the Bank has provided deferred taxes on those bad debt
reserves accumulated since 1987, management believes that the enactment of these
proposals will have no material effect on the earnings of the Bank or the
Company.
14
At December 31, 1996, the Bank had regulatory capital which was well in
excess of applicable limits. At December 31, 1996, the Bank was required to
maintain tangible capital of 1.5% of adjusted total assets, core capital of 3.0%
of adjusted total assets, and risk-based capital of 8.0% of adjusted risk-
weighted assets. At December 31, 1996, the Bank's tangible capital was $53.0
million, or 9.95% of adjusted total assets, core capital was $53.0 million, or
9.95% of adjusted total assets and risk-based capital was $56.3 million, or
20.60% of adjusted risk-weighted assets, exceeding the requirements by $45.0
million, $37.0 million, and $34.4 million, respectively.
The following table sets forth the Bank's capital position at December 31,
1996, as compared to the minimum regulatory capital requirements imposed by the
OTS at that date.
December 31, 1996
-----------------------
Percent of
Adjusted
Amount Assets
-------- ---------
(Dollars in Thousands)
First Federal Savings Bank
- --------------------------
Tangible Capital:
Regulatory capital................................... $52,973 9.95%
Regulatory requirement............................... $ 7,984 1.50%
------- -----
Excess.......................................... $44,989 8.45%
====== =====
Core Capital:
Regulatory capital .................................. $52,973 9.95%
Regulatory requirement............................... $15,967 3.00%
------- -----
Excess.......................................... $37,006 6.95%
====== =====
Risk-Based Capital:
Regulatory capital................................... $56,254 20.60%
Regulatory requirement............................... $21,846 8.00%
------- -----
Excess......................................... $34,408 12.60%
====== =====
Impact of new accounting standards:
In April 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Statement 121
establishes standards for recognizing and measuring the impairment of long-lived
assets, certain identifiable intangibles, and goodwill, when an entity is unable
to recover the carrying amount of those assets. This statement was effective for
fiscal years beginning after December 15, 1995. SFAS 121 has not had a material
effect on the Company's financial statements.
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights". This Statement amends SFAS 65, "Accounting for Certain Mortgage Banking
Activities", to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. This Statement requires that a mortgage banking enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. SFAS 122 was effective for fiscal years beginning
after December 15, 1995. SFAS 122 was to be applied prospectively and has not
had a material effect on the Company's financial statements.
15
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which became effective for the Company beginning January 1, 1996.
SFAS No. 123 requires increased disclosure of compensation expense arising from
both fixed and performance stock compensation plans. Such expense is measured as
the fair value of the award at the date it is granted using an option-pricing
model that takes into account the exercise price and expected volatility,
expected dividends on the stock and the expected risk-free rate of return during
the term of the option. The compensation cost would be recognized over the
service period, usually the period from the grant date to the vesting date. SFAS
No. 123 encourages, rather than requires, companies to adopt a new method that
accounts for stock compensation awards based on their estimated fair value at
the date they are granted. Companies are permitted, however, to continue
accounting under Accounting Principles Board ("APB") Opinion No. 25. The Company
will continue to apply APB Opinion No. 25 in their financial statements and has
disclosed pro forma net income and earnings per share in a footnote, determined
as if the Company had applied the new method.
In June, 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. After a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished. In
addition, a transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996 and is to be applied prospectively. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the company.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering 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 the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary. As a result, interest rates have a
greater impact on the Company'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 price of goods and services.
16
[GRAPHIC OMITTED]
Report of Independent Auditors
The Board of Directors and Stockholders
FFVA Financial Corporation
Lynchburg, Virginia
We have audited the accompanying consolidated statements of financial condition
of FFVA Financial Corporation and Subsidiary as of December 31, 1995 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FFVA Financial
Corporation and Subsidiary as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
January 31, 1997
17
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31
-------------------
1995 1996
-------- --------
(Dollars in thousands)
Assets
Cash and cash equivalents $ 7,683 $ 6,634
Investment securities, held to maturity (estimated market
of $34,045 and $36,498 in 1995 and 1996, respectively) 33,314 36,290
Investment securities, available for sale, at market 34,724 21,652
Investment securities, restricted, at cost 3,075 3,268
Mortgage-backed securities, held to maturity (estimated market
of $36,471 and $46,738 in 1995 and 1996, respectively) 35,946 46,570
Mortgage-backed securities, available for sale, at market 78,844 84,899
Loans receivable, net 291,215 321,528
Foreclosed real estate -- 154
Property and equipment, net 5,665 6,283
Accrued interest receivable 4,092 4,054
Prepaid expenses and other assets 1,004 886
Goodwill 1,728 1,608
-------- --------
Total assets $497,290 $533,826
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $377,975 $397,435
Advances from Federal Home Loan Bank and other borrowed funds 29,250 60,000
Advances from borrowers for taxes and insurance 1,071 917
Other liabilities 935 993
-------- --------
Total liabilities 409,231 459,345
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.10. Authorized 500,000 shares, none issued -- --
Common stock, par value $.10. Authorized 11,500,000 shares, 2,851,832
and 4,692,552 shares outstanding for 1995 and 1996, respectively 285 469
Additional paid-in capital 55,057 45,336
Less unearned ESOP and MSBP shares (4,615) (3,726)
Retained earnings, substantially restricted 35,824 31,220
Unrealized holding gain on securities, available for sale 1,508 1,182
-------- --------
Total stockholders' equity 88,059 74,481
-------- --------
Total liabilities and stockholders' equity $497,290 $533,826
======== ========
See notes to consolidated financial statements.
18
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Unrealized
Gain (Loss)
Common Stock on Assets
-------------------- Additional Available Unearned Unearned
Shares Paid-in Retained For ESOP MSBP
Outstanding Amount Capital Earnings Sale, Net Shares Shares Total
----------- ------ ------- -------- --------- ------ ------ -----
(Dollars in thousands, except per-share data)
Balance at December 31, 1993 -- $ -- $ -- $ 29,119 $ 634 $ -- $ -- $ 29,753
Net income -- -- -- 4,703 -- -- -- 4,703
Change in unrealized gain (loss)
on assets, available for sale, net -- -- -- -- ( 1,954) -- -- (1,954)
Sale of stock 3,151,832 315 60,761 -- -- (3,149) -- 57,927
Allocated/earned ESOP shares -- -- (47) -- -- 477 -- 430
--------- --- ------ -------- ------- -------- ------- --------
Balance at December 31, 1994 3,151,832 315 60,714 33,822 (1,320) (2,672) -- 90,859
Net income -- -- -- 6,474 -- -- -- 6,474
Change in unrealized gain (loss)
on assets, available for sale, net -- -- -- -- 2,828 -- -- 2,828
Purchase of unearned MSBP
shares -- -- -- -- -- -- (2,276) (2,276)
Repurchase of common stock (300,000) (30) (5,784) (2,706) -- -- -- (8,520)
Cash dividends paid ($.60 per
pre-split share) -- -- -- (1,766) -- -- -- (1,766)
Allocated/earned ESOP shares -- -- 127 -- -- 333 -- 460
--------- --- ------ -------- ------- -------- ------- --------
Balance at December 31, 1995 2,851,832 285 55,057 35,824 1,508 (2,339) (2,276) 88,059
Net income -- -- -- 5,463 -- -- -- 5,463
Change in unrealized gain (loss)
on assets, available for sale, net -- -- -- -- (326) -- -- (326)
Allocation of unearned MSBP
shares -- -- (97) -- -- -- 550 453
Repurchase of common stock,
pre-split (139,000) (14) (2,680) (1,564) -- -- -- (4,258)
Two-for-one stock split 2,713,832 271 (271) -- -- -- -- --
Repurchase of common stock,
post-split (735,712) (73) (7,055) (6,600) -- -- -- (13,728)
Cash dividends paid ($.375 per
share) -- -- -- (1,903) -- -- -- (1,903)
Allocated/earned ESOP shares -- -- 351 -- -- 339 -- 690
Exercise of stock options 1,600 -- 31 -- -- -- -- 31
--------- --- ------ -------- ------- -------- ------- --------
Balance at December 31, 1996 4,692,552 $469 $45,336 $ 31,220 $ 1,182 $ (2,000) $(1,726) $ 74,481
========= === ====== ======== ======= ======== ======= ========
See notes to consolidated financial statements.
19
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Year Ended December 31
----------------------------
1994 1995 1996
--------- -------- --------
(Dollars in thousands, except per-share data)
Interest income
Loans $21,735 $25,140 $27,201
Mortgage-backed securities 3,282 6,884 8,662
U.S. Government obligations, agencies, and other investments
including overnight deposits 4,363 5,659 5,130
------- ------- -------
Total interest income 29,380 37,683 40,993
------- ------- -------
Interest expense
Deposits 13,894 17,260 18,382
Borrowed money 889 1,952 2,800
------- ------- -------
Total interest expense 14,783 19,212 21,182
------- ------- -------
Net interest income 14,597 18,471 19,811
Provision for credit losses 600 255 60
------- ------- -------
Net interest income after provision for credit losses 13,997 18,216 19,751
------- ------- -------
Noninterest income
Service charges and fees on loans 496 423 456
Net gain on sale of investments 18 209 251
Net gain (loss) on sale of equipment (3) (9) 1
Other income 385 431 613
------- ------- -------
Total noninterest income 896 1,054 1,321
------- ------- -------
Noninterest expenses
Compensation and other personnel costs 4,037 5,089 5,973
Office occupancy and equipment 923 944 1,039
Federal insurance of accounts 772 780 774
SAIF premium assessment -- -- 2,230
Data processing 677 788 940
Advertising 250 325 328
Net loss on foreclosed real estate 14 11 2
Other 823 1,147 1,283
------- ------- -------
Total noninterest expense 7,496 9,084 12,569
------- ------- -------
Income before income tax expense 7,397 10,186 8,503
Income tax expense 2,694 3,712 3,040
------- ------- -------
Net income $ 4,703 $ 6,474 $ 5,463
======= ======= =======
Primary earnings per share $ .79* $ 1.11* $ 1.06
Fully diluted earnings per share $ .79* $ 1.11* $ 1.05
* Restated to reflect two-for-one stock split paid June 5, 1996
See notes to consolidated financial statements.
20
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Page 1
Year Ended December 31
----------------------------------
1994 1995 1996
-------- -------- ---------
(Dollars in thousands)
Operating activities
Net income $ 4,703 $ 6,474 $ 5,463
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for credit losses 600 255 60
(Gain) loss on disposition of equipment 3 9 (1)
Provision for depreciation and amortization 381 450 604
Amortization of premium on sale of loans 41 26 23
Deferred income taxes 89 142 130
Realized investment security gains, net (18) (209) (251)
Loss on sale of foreclosed real estate -- 9 2
(Increase) decrease in interest receivable (874) (563) 38
(Increase) decrease in other assets 2,806 (840) 139
Increase (decrease) in other liabilities (166) 778 (59)
------- ------- -------
Net cash provided by operating activities 7,565 6,531 6,148
------- ------- -------
Investing activities
Proceeds from maturities of investment securities, held to maturity 7,063 16,316 7,097
Purchases of investment securities, held to maturity, and FHLB stock (33,321) (26,932) (10,266)
Proceeds from sales of investment securities, available for sale 10,938 21,301 22,698
Purchases of investment securities, available for sale (17,564) (65) (9,842)
Proceeds from collections on mortgage-backed securities, held to maturity 13,531 6,570 6,263
Purchase of mortgage-backed securities, held to maturity (30,263) (19,766) (16,887)
Proceeds from sales of and collections on mortgage-backed
securities, available for sale 2,275 4,149 23,555
Purchases of mortgage-backed securities, available for sale (11,749) (37,622) (29,657)
Net increase in loans receivable (7,704) (22,964) (30,396)
Purchases of premises and equipment (479) (1,352) (1,101)
Purchases of foreclosed real estate (168) (120) (212)
Proceeds from sales of foreclosed real estate 483 196 56
Proceeds from sales of equipment -- 161 --
Payment of branch acquisition premiums (goodwill) -- (1,724) --
------- ------- -------
Net cash used by investing activities (66,958) (61,852) (38,692)
------- ------- -------
(continued)
21
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Page 2
Year Ended December 31
--------------------------------
1994 1995 1996
-------- -------- -------
(Dollars in thousands)
Financing activities
Net increase in deposit accounts $ 1,280 $ 19,068 $ 19,460
Acquisition of deposits -- 21,651 --
Proceeds from advances and other borrowed money 15,589 36,880 74,980
Repayments of advances and other borrowed money (16,839) (18,880) (44,230)
Proceeds from sale of stock 61,076 -- --
Purchase of stock by ESOP (3,149) -- --
Allocation of ESOP shares 430 460 690
Repurchase of common stock -- (8,520) (17,986)
Purchase MSBP shares -- (2,276) --
Payment of cash dividends -- (1,766) (1,903)
Allocation of MSBP shares -- -- 453
Proceeds from exercise of options -- -- 31
------- -------- --------
Net cash provided by financing activities 58,387 46,617 31,495
------- -------- --------
Decrease in cash and cash equivalents (1,006) (8,704) (1,049)
Cash and cash equivalents at beginning of year 17,393 16,387 7,683
------- -------- --------
Cash and cash equivalents at end of year $ 16,387 $ 7,683 $ 6,634
======== ======== ========
Supplemental disclosures
Gross unrealized gain (loss) on securities, available for sale $(2,095) $ 2,376 $ 1,861
Deferred income tax 775 (868) (679)
------- -------- --------
Net unrealized gain (loss) on securities, available for sale $(1,320) $ 1,508 $ 1,182
======= ======== ========
Cash paid for:
Interest on deposits and borrowed funds $ 14,828 $ 19,231 $ 21,056
Income taxes 2,797 3,514 2,942
See notes to consolidated financial statements.
22
FFVA FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1994, 1995 and 1996
(Columnar dollars in notes are in thousands, except per-share data)
FFVA Financial Corporation (the "Parent" or "Corporation") is a unitary thrift
holding company whose principal asset is its wholly-owned subsidiary, First
Federal Savings Bank of Lynchburg (the "Bank" or "First Federal"). First Federal
is a federally chartered savings bank, organized under the United States Home
Owner's Loan Act. 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. In these financial statements the
consolidated group is referred to collectively as the "Company."
The Office of Thrift Supervision ("OTS") is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund ("SAIF").
The accounting and reporting policies of the Company and the Bank conform with
generally accepted accounting principles ("GAAP"). A brief description of
significant accounting policies is presented below.
Note 1 - Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of FFVA Financial
Corporation and its wholly-owned subsidiary, First Federal Savings Bank of
Lynchburg. All material intercompany accounts and transactions have been
eliminated in the consolidation. Prior year amounts are reclassified when
necessary to conform with current year classifications.
Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with maturities of three months or less, when purchased,
to be cash equivalents. Cash and cash equivalents for the years presented
consisted of cash on hand, funds due from banks, and federal funds sold
(overnight deposits).
23
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Debt and equity securities
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115), as of December 31, 1993. SFAS 115 requires that
securities be designated in one of three categories; held to maturity, available
for sale, or trading. On December 13, 1995, the Bank transferred a total of
$57,700,000 investment and mortgage-backed securities from the held to maturity
category to the available for sale category in accordance with the one-time
reclassification granted by the Financial Accounting Standards Board in a
special report concerning the implementation of SFAS 115 (see Notes 3 and 4).
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 119, Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments (SFAS 119), as of January 1, 1995. SFAS 119
requires information about all derivative financial instruments, including
separate disclosures for instruments held or issued for trading and non-trading
purposes. In addition, certain amendments have been made to SFAS 105 and SFAS
107 relating to additional disclosures for derivative financial instruments and
the fair value of financial instruments.
Investment securities, held to maturity
Investment securities, held to maturity, are stated at cost, and adjusted for
amortization of premium and accretion of discount using the interest method over
the terms of the securities. This category of securities is not adjusted to
market value as management has the ability and maintains the positive intent to
hold these securities to maturity.
Mortgage-backed and related securities, held to maturity
Mortgage-backed securities, held to maturity, represent participating interests
in pools of 5 to 30-year first-mortgage loans originated and serviced by the
issuers of the securities. These securities are purchased with the positive
intent and ability of being held to their maturity and are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using the interest method over the
remaining period to contractual maturity, adjusted for prepayments.
Securities, available for sale
Securities classified as available for sale consist of U.S. Government and
agency securities, corporate obligations, and mortgage-backed securities and
other related mortgage-backed products. Securities classified as available for
sale are carried at their current market value. The difference between the
amortized cost and current market value, net of deferred income tax, is
reflected as a component of equity capital and is designated as unrealized
holding gain/loss on securities available for sale.
Investment securities, restricted
Due to the nature of, and restrictions placed upon the Company's common stock
investment in the Federal Home Loan Bank of Atlanta, these securities have been
classified as restricted equity securities and carried at cost which
approximates market. These restricted securities are not subject to the
investment security classifications of SFAS 115.
24
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Loans and allowance for credit losses
The allowance for credit losses is maintained at a level considered by
management to be adequate to absorb future loan losses currently inherent in the
loan portfolio. Management's assessment of the adequacy of the allowance is
based upon type and volume of the loan portfolio, past loan loss experience,
existing and anticipated economic conditions, and other factors which deserve
current recognition in estimating future loan losses. Additions to the allowance
are charged to operations. Loans are charged to the allowance account, partially
or wholly, at the time management determines collectibility is not probable.
Recoveries on previously charged off loans are credited to the allowance
account. Management's assessment of the adequacy of the allowance is subject to
evaluation and adjustment by the Company's regulators.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), Accounting by Creditors for Impairment of a Loan
(as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures). The effect of adopting these new accounting
standards was immaterial to the operating results of the Company for the years
ended December 31, 1995 and 1996.
Under SFAS 114, a loan is considered to be impaired when it is probable that the
Company will be unable to collect all principal and interest amounts according
to the contractual terms of the loan agreement. The allowance for credit losses
related to loans identified as impaired is primarily based on the excess of the
loan's current outstanding principal balance over the estimated fair market
value of the related collateral. For a loan that is not collateral-dependent,
the allowance is recorded at the amount by which the outstanding principal
balance exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's original effective interest rate. Prior to January 1,
1995, the allowance for credit losses for all loans which would have qualified
as impaired under the new accounting standards was primarily based upon the
estimated fair market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
Foreclosed real estate
Foreclosed real estate consists of property acquired in settlement of loans,
whether through actual foreclosure or in-substance foreclosure on delinquent
loans. Such property is stated initially at the lower of cost or fair value and
is subsequently maintained at the lower of cost or fair value less estimated
cost to sell.
Property, equipment and depreciation
The various classes of property are stated at cost and are depreciated by the
straight-line method over estimated useful lives of 20 to 40 years for buildings
and 3.5 to 10 years for furniture and equipment. Leasehold improvements are
capitalized and amortized by the straight-line method over the shorter of their
estimated useful lives or the terms of the leases. Repairs are expensed as
incurred. The cost and accumulated depreciation of property are eliminated from
the accounts upon disposal of the property, and any resulting gain or loss is
included in the determination of net income.
25
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Income taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect of a change in tax rates
upon deferred taxes is recognized in income in the period that includes the
enactment date.
Prior to 1996, savings banks that met certain definitional tests and other
conditions prescribed by the Internal Revenue Code were allowed, within
limitations, to deduct from taxable income an allowance for bad debts based on
actual loss experience, a percentage of taxable income (8%) before such
deduction, or an amount based on a percentage of eligible loans. The cumulative
bad debt reserve, upon which no taxes have been paid, was approximately
$6,330,000 as of December 31, 1996.
As a result of 1996 tax legislation, the Company will compute its tax bad debt
deduction by use of the actual charge-off method, for tax years beginning with
1996. According to the legislation, "applicable excess reserves" must be
recaptured as taxable income over five years beginning with fiscal year 1997.
Thrifts can delay those payments by two years if they meet a residential lending
requirement. The amount to be recaptured is the excess of the accumulated
reserves since 1987 over the amount allowed by use of the actual charge-off
method for those years. Since the Bank has provided deferred taxes on those bad
debt reserves accumulated since 1987, management does not believe that the
legislation will have a material effect on the Company's financial statements.
Loan origination fees, costs, discounts and premiums
Loan origination and commitment fees and certain direct loan origination costs
are deferred. Upon the expiration of unfunded commitments, the related fees are
recognized in income as loan fees. Loan origination fees on loans and funded
commitments and their related direct costs are amortized into income on loans as
yield adjustments over the contractual life of related loans using the
level-yield method.
Discounts and premiums on loans purchased are recognized as income using the
level-yield method over the average life of the loan.
Sales of foreclosed real estate
If foreclosed real estate is sold on financing terms more favorable than the
prevailing market terms for loans with similar collateral, a loss is imputed and
recognized in the financial statements for the year of the sale.
Advertising
The Company expenses advertising costs as incurred. Such expenses are shown in
the consolidated statements of income; no amounts of advertising are carried as
assets.
26
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
Earnings per share
Earnings per share of common stock for the years ended December 31, 1995 and
1996 have been determined by dividing the net income for the twelve-month period
by the calculated weighted-average number of common stock and common stock
equivalents. The December 31, 1994 calculation was computed as if the conversion
from mutual ownership to stock ownership had occurred on the first day of the
fiscal year rather than on October 12, 1994. Shares acquired by the employee
stock ownership plans (ESOP) are accounted for in accordance with AICPA
Statement of Position 93-6 and are not considered in the weighted-average shares
outstanding until the shares have been earned by the employees and/or committed
to be released. The weighted-average number of common and common equivalent
shares outstanding for the periods indicated are as follows:
Primary Fully Diluted
Shares Shares
--------- -------------
October 12, 1994 - December 31, 1994 5,994,038* 5,994,038*
January 1, 1995 - December 31, 1995 5,864,284* 5,864,284*
January 1, 1996 - December 31, 1996 5,136,962 5,220,295
*Restated to reflect two-for-one stock split paid June 5, 1996
Conversion to stock ownership
On October 12, 1994, the Corporation was formed to be the parent company of the
Bank. Net proceeds from the sale of the Corporation's common stock, after
deducting conversion expenses and underwriters' discounts of $1,960,000, were
$61,076,640 and are reflected as common stock and additional paid-in capital in
the accompanying consolidated statements of financial condition (see Note 14).
As part of the conversion to stock form, the Company formed an ESOP for the
eligible employees. The ESOP purchased common stock of the Company issued in the
conversion. The purchase was funded by a loan from the Company. In accordance
with generally accepted accounting principles, the unpaid balance of the ESOP
loan has been eliminated from the Company's consolidated statements of financial
condition. Stockholders' equity has been reduced by the aggregate purchase price
of the shares owned by the ESOP net of shares that have been released.
Contributions to the ESOP by the Company are made to fund the principal and
interest payments on the debt of the ESOP. As of December 31, 1996, 114,934
shares had been released and 200,000 shares remain unallocated.
Impact of new accounting standards
In April 1995, the Financial Accounting Standards Board ("FASB") issued
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of (SFAS 121). This statement established standards for recognizing
and measuring the impairment of long-lived assets, certain identifiable
intangibles, and goodwill, when an entity is unable to recover the carrying
amount of those assets. This statement was effective for the year beginning
January 1, 1996. SFAS 121 has not had a material effect on the Company's
financial statements.
27
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies (continued)
In May 1995, the FASB issued Accounting for Mortgage Servicing Rights (SFAS
122). This statement amended Accounting for Certain Mortgage Banking Activities
(SFAS 65), to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others however those servicing
rights are acquired. This statement requires that a mortgage banking enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. This statement was effective for the year beginning
January 1, 1996. SFAS 122 has not had a material effect on the Company's
financial statements.
In October 1995, the FASB issued Accounting for Stock-Based Compensation (SFAS
123), which became effective for the Company beginning January 1, 1996. This
statement required increased disclosure of compensation expense arising from
both fixed and performance stock compensation plans. Such expense is measured as
the fair value of the award at the date it is granted using an option-pricing
model that takes into account the exercise price and expected volatility,
expected dividends on the stock and the expected risk-free rate of return during
the term of the option. The compensation cost is recognized over the service
period, usually the period from the grant date to the vesting date. SFAS 123
encourages, rather than requires, companies to adopt a new method that accounts
for stock compensation awards based on their estimated fair value at the date
they are granted. Companies are permitted, however, to continue accounting under
Accounting Principles Board ("APB") Opinion No. 25. The Company has elected to
continue to apply APB Opinion No. 25 in their financial statements. Pro forma
net income and earnings per share are presented in accordance with the
requirements of SFAS 123 (see Note 15).
In June 1996, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 125 (SFAS 125), Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. After a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished. In
addition, a transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the Company.
Note 2 - Interest-earning deposits
Cash and cash equivalents included interest-earning federal funds sold
(overnight deposits) totaling $4,413,000 at December 31, 1995 and $1,270,000 at
December 31, 1996.
28
Notes to Consolidated Financial Statements
Note 3 - Investment securities
Investments consisted of U.S. Government and agency securities, corporate, and
other securities as follows:
December 31, 1995
-----------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
--------- ----- ------- ------------
Held to maturity
U.S. Government and agency obligations $31,482 $ 746 $ 19 $32,209
Other asset-backed securities 1,832 13 9 1,836
------- ------- ------- -------
$33,314 $ 759 $ 28 $34,045
======= ======= ======= =======
Available for sale
U.S. Government and agency obligations $10,996 $ 308 $ 16 $11,288
Corporate obligations 20,618 225 53 20,790
FHLMC preferred stock and other corporate
equity securities 2,598 48 -- 2,646
------- ------- ------- -------
$34,212 $ 581 $ 69 $34,724
======= ======= ======= =======
December 31, 1996
------------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
--------- ----- ------ ------------
Held to maturity
U.S. Government and agency obligations $35,558 $ 315 $ 117 $35,756
Other asset-backed securities 732 10 -- 742
------- ------- ------- -------
$36,290 $ 325 $ 117 $36,498
======= ======= ======= =======
Available for sale
U.S. Government and agency obligations $ 5,999 $ 64 $ -- $ 6,063
Corporate obligations 9,985 126 3 10,108
FHLMC/FNMA preferred stock and other
corporate equity securities 5,481 -- -- 5,481
------- ------- ------- -------
$21,465 $ 190 $ 3 $21,652
======= ======= ======= =======
29
Notes to Consolidated Financial Statements
Note 3 - Investment securities (continued)
The amortized cost and estimated market value of the debt securities at December
31, 1996, are as follows in thousands. Expected maturities may differ from
contractual maturities because issuers may have the right to call some
obligations without penalty.
Held to Maturity Available for Sale
---------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Due in one year or less $ 8,000 $ 8,118 $ 7,014 $ 7,047
Due after one year through five years 22,311 22,455 7,974 8,121
Due after five years 5,979 5,925 996 1,003
------- ------- ------- -------
36,290 36,498 15,984 16,171
Other equity securities -- -- 5,481 5,481
------- ------- ------- -------
$36,290 $36,498 $21,465 $21,652
======= ======= ======= =======
Note 4 - Mortgage-backed securities
The amortized costs and estimated market values of mortgage-backed securities
are summarized as follows:
December 31, 1995
---------------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
---------- ----- ------ ------------
Mortgage-backed securities, held to maturity $ 35,946 $ 701 $ 176 $ 36,471
Mortgage-backed securities, available for sale 76,980 1,866 2 78,844
-------- -------- -------- --------
112,926 $ 2,567 $ 178 $115,315
======== ======== ======== ========
December 31, 1996
---------------------------------------------
Gross Unrealized
Amortized ---------------- Estimated
Costs Gains Losses Market Value
--------- ----- ------ -------------
Mortgage-backed securities, held to maturity $ 46,570 $ 484 $ 316 $ 46,738
Mortgage-backed securities, available for sale 83,224 1,756 81 84,899
-------- -------- -------- --------
$129,794 $ 2,240 $ 397 $131,637
======== ======== ======== ========
30
Notes to Consolidated Financial Statements
Note 4 - Mortgage-backed securities (continued)
Gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows:
1994 1995 1996
---- ---- ----
Gross realized gains
U.S. Government and agency securities $ 96 $ 215 $ 135
Mortgage-backed securities 10 -- 99
Option fees earned -- -- 42
---- ------ -----
$106 $ 215 $ 276
==== ====== =====
Gross realized losses
U.S. Government and agency securities $178 $ 6 $ 25
Mortgage-backed securities 3 -- --
Mutual funds invested in mortgage-backed securities 18 -- --
---- ------ -----
$199 $ 6 $ 25
==== ====== =====
Approximate income tax on net gain (loss) $(34) $ 76 $ 90
==== ====== =====
Note 5 - Loans receivable
Loans receivable at the end of each year were as follows:
December 31
-------------------
1995 1996
-------- ---------
Mortgage loans:
Residential, one to four family $220,433 $232,237
Residential, multi-family 15,361 15,226
Construction 9,453 12,554
Land and land development loans 2,494 1,939
Commercial 30,414 35,006
Other loans:
Consumer loans 19,514 31,097
Loans to depositors secured by savings 1,317 1,292
------- -------
Total 298,986 329,351
Less:
Undisbursed portion of loans in process (3,585) (3,533)
Deferred loan fees and costs, net (969) (980)
Allowance for credit losses (3,217) (3,310)
-------- -------
Total $291,215 $321,528
======= =======
Residential real estate loans have been pledged under a blanket floating lien to
the Federal Home Loan Bank of Atlanta as collateral for advances from that bank
(see Note 11).
31
Notes to Consolidated Financial Statements
Note 5 - Loans receivable (continued)
An analysis of the allowance for credit losses is as follows:
Year Ended December 31
------------------------
1994 1995 1996
------ ------- ------
Balance at beginning of year $2,576 $3,054 $3,217
Provision charged to operations 600 255 60
Loans charged off (198) (154) (27)
Recoveries of loans charged off 76 62 60
----- ----- -----
Balance at end of year $ 3,054 $3,217 $3,310
===== ===== =====
At December 31, 1995 and 1996, the Company had no loans that were specifically
classified as impaired. During the year ended December 31, 1995, the Company
recognized as impaired two related loans with an average aggregate balance of
approximately $1,095,000. The loans were renegotiated during 1995 to correct the
impairment.
Note 6 - Loan servicing
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these loans
are summarized as follows:
December 31
-----------------------
1994 1995 1996
------ ------ -----
FHLMC $ 8,206 $ 6,961 $ 5,821
Other investors 88 86 85
------ ------ ------
$ 8,294 $ 7,047 $ 5,906
====== ====== ======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $65,000 and $57,000 at December 31, 1995 and 1996, respectively.
Note 7 - Foreclosed real estate
Foreclosed real estate acquired in settlement of loans, at the lower of cost or
fair value, totaled $-0- at December 31, 1995 and $154,000 at December 31, 1996.
The net loss on foreclosed real estate consisted of:
Year Ended December 31
------------------------
1994 1995 1996
------ ------ ------
Maintenance, utilities, taxes and insurance $ 14 $ 2 $ -
Net loss on sale of foreclosed real estate - 9 2
------ ------ ----
Net loss $ 14 $ 11 $ 2
====== ====== ====
32
Notes to Consolidated Financial Statements
Note 8 - Property, equipment and depreciation
Property and equipment were as follows:
December 31
---------------------
1995 1996
--------- ---------
Land $ 1,474 $ 1,474
Building 4,162 4,586
Leasehold improvements 31 24
Furniture, fixtures and equipment 3,128 3,463
Autos 56 83
-------- -------
8,851 9,630
Less accumulated depreciation 3,186 3,347
-------- -------
Net property and equipment $ 5,665 $ 6,283
======== =======
Note 9 - Accrued interest receivable
Accrued interest receivable was as follows:
December 31
--------------------
1995 1996
--------- ---------
Interest on loans $ 1,968 $ 2,147
Interest and dividends on investment securities 1,361 1,065
Interest on mortgage-backed securities 763 842
------- -------
$ 4,092 $ 4,054
======= =======
Note 10 - Deposits
Savings deposits, summarized by interest rate, were as follows:
December 31
---------------------
1995 1996
---------- ---------
Negotiable order of withdrawal deposits
2.25% to 3.50% $ 76,306 $ 76,692
Non-interest bearing 6,218 6,790
--------- ---------
Total NOW deposits 82,524 83,482
Passbook and statement deposits, 3.00% 33,956 34,520
Certificates of deposit 261,495 279,433
--------- ---------
$ 377,975 $ 397,435
========= =========
33
Notes to Consolidated Financial Statements
Note 10 - Deposits (continued)
Certain large certificates of deposit, including municipal deposits, are
collateralized by mortgage-backed securities with market values at December 31,
1995 and 1996 of approximately $1,623,000 and $1,424,000, respectively.
The aggregate amounts of certificates of deposit with minimum denominations of
$100,000 were $30,865,000 and $40,589,000 at December 31, 1995 and 1996,
respectively.
At December 31, 1996, scheduled maturities of certificates of deposit by actual
maturity for fixed-rate certificates and by the next repricing date for
variable-rate certificates and the weighted-average-contract rates were as
follows:
Weighted-
Maturity in Average Rate Balance
----------------------- ---------------- --------------
One year or less 5.214% $ 158,156
One to three years 5.610% 86,648
More than three years 6.505% 34,629
-----------
$ 279,433
===========
Note 11 - Borrowed funds
At December 31, 1996, the Company had $41,000,000 in outstanding advances from
the Federal Home Loan Bank of Atlanta (FHLB - Atlanta) and $19,000,000 in
outstanding reverse repurchase agreements.
The following table sets forth certain information regarding advances and other
borrowings at the dates or for the periods indicated:
Year Ended December 31
----------------------
1995 1996
--------- ---------
Average balance outstanding $ 30,702 $50,236
Maximum amount outstanding at any month-end during the period 43,250 60,000
Balance outstanding at end of period 29,250 60,000
Weighted-average interest rate during the period 6.36% 5.57%
Weighted-average interest rate at the end of period 5.97% 5.69%
34
Notes to Consolidated Financial Statements
Note 11 - Borrowed funds (continued)
The following table sets forth the repayment schedule at December 31, 1996,
which includes interest rates and amounts due by year in thousands:
Year Due Interest Rate Amount
-------- ------------- ------
1997 5.66% $ 56,000
1998 5.51% 2,000
2000 6.16% 2,000
-----------
$ 60,000
===========
Residential real estate loans aggregating $54,667,000 at December 31, 1996, have
been pledged as collateral for advances from the FHLB - Atlanta under a blanket
floating lien agreement.
The par value of the mortgage-backed securities collateralizing the reverse
repurchase agreements was $19.5 million at December 31, 1996.
Note 12 - SAIF premium assessment
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% of insured deposits as of September 30,
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 Company
paid a special assessment of $2,230,000 on November 27, 1996 to capitalize the
SAIF. The FDIC has lowered the premium for deposit insurance to a level
necessary to maintain the SAIF at its required reserve level. The Bank's premium
for deposit insurance for 1997 is currently .0648% of assessable deposits.
Note 13 - Income taxes
The provision for income taxes, in thousands, is summarized as follows:
Year Ended December 31
-----------------------
1994 1995 1996
------ ------- ------
Federal $2,379 $3,293 $2,565
State 226 277 345
----- ----- -----
2,605 3,570 2,910
Deferred tax expense 89 142 130
----- ----- -----
Total provision for income taxes $2,694 $3,712 $3,040
===== ===== =====
35
Notes to Consolidated Financial Statements
Note 13 - Income taxes (continued)
The provision for income tax expense differs from that computed at the statutory
tax rate as follows:
Year Ended December 31
--------------------------------------------------
Amount Percent of Pretax Income
------------------------ ------------------------
1994 1995 1996 1994 1995 1996
------ ------ ------ ------ ------ -------
Tax at statutory rate $2,515 $3,463 $2,891 34.0 34.0 34.0
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 149 183 228 2.0 1.8 2.7
Other 30 66 (79) .4 .6 (.9)
------ ------ ------ ---- ---- ----
Income tax expense $2,694 $3,712 $3,040 36.4 36.4 35.8
====== ====== ====== ==== ==== ====
The significant components of the net deferred tax (liability) asset are listed
as follows:
December 31
--------------------
1995 1996
--------- ---------
Components of the deferred tax asset
Tax bad debt reserves $ 700 $ 727
Deferred income 240 150
Stock bonus plan 166 163
------- ------
1,106 1,040
Valuation allowance - -
------- ------
Total deferred tax asset 1,106 1,040
------- ------
Components of the deferred tax liability
Accelerated depreciation (230) (281)
Loan sale imputed gain (13) (8)
Pension expense (33) (51)
Unrealized appreciation on securities, available for sale (868) (679)
-------- -------
Total deferred tax liability (1,144) (1,019)
-------- -------
Net deferred tax (liability) asset $ (38) $ 21
======== ======
The Company's federal income tax returns have been examined by tax authorities
through 1992.
36
Notes to Consolidated Financial Statements
Note 14 - Restricted retained earnings
In accordance with the current regulations concerning conversion from a mutual
to a stock organization, the Bank was required to establish a liquidation
account equal to its net worth as of the latest statement of financial condition
contained in the final offering circular. Such liquidation account is to be
maintained, as of the eligibility record date December 31, 1992, for the benefit
of depositors who continue to maintain their deposits in the Bank after the
conversion, in the event of a complete liquidation of the Bank. If, however, on
any annual closing date of the Bank subsequent to December 31, 1992, the amount
in any deposit account is less than the amount in such deposit account on
December 31, 1992, then the interest in the liquidation account relating to such
deposit account would be reduced by the amount of such reduction, and such
interest will cease to exist if such deposit account is closed. The Bank may not
declare or pay a cash dividend, or repurchase any of its capital stock if the
effect thereof would cause the net worth of the Bank to be reduced below either
the amount required for the liquidation account or the minimum regulatory
capital requirements. At December 31, 1996, the unadjusted liquidation account
totaled $30,017,000, and minimum regulatory capital was $21,846,000.
Note 15 - Retirement plans and employee benefit programs
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's compensation during the last five years of employment. The
Company's funding policy is to contribute annually the maximum amount allowed by
law. Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
Net periodic pension cost for 1994, 1995 and 1996 include the following
components based on the actuaries' report in thousands:
Year Ended December 31
------------------------------
1994 1995 1996
------- -------- ---------
Service cost, benefits earned during the period $ 219 $ 203 $ 245
Interest cost on projected benefit obligation 305 324 375
Actual return on plan assets (245) (257) (327)
Net amortization and deferral 58 58 58
------ ------- ------
Net periodic pension cost $ 337 $ 328 $ 351
====== ======= ======
37
Notes to Consolidated Financial Statements
Note 15 - Retirement plans and employee benefit programs (continued)
The following table sets forth the funded status of the plan and the amounts
recognized in the Company's statements of financial condition:
December 31
----------------------------
1994 1995 1996
-------- ------- -------
Accumulated benefit obligation including $2,637,000,
$2,995,000, and $3,489,000 in vested benefits $2,747 $3,124 $3,641
Additional benefits due to projected future compensation levels 1,635 1,700 1,921
------ ------ ------
Projected benefit obligation 4,382 4,824 5,562
------ ------ ------
Plan assets at fair value 3,452 4,398 5,078*
------ ------ ------
Projected benefit obligation in excess of plan assets (930) (426) (484)
Unrecognized prior service cost 807 742 676
Unrecognized net (gain) loss 272 (129) 34
Unrecognized transitional asset (99) (92) (84)
------ ------ ------
Prepaid pension cost $ 50 $ 95 $ 142
====== ====== ======
* Includes $294,000 of savings deposits in the Bank at December 31, 1996.
Assumptions used in determining the net periodic pension cost were:
1994 1995 1996
---- ---- -----
Discount rate 7.5% 7.5% 7.5%
Rate of increase in compensation levels 6.0% 6.0% 6.0%
Expected long-term rate of return on assets 7.5% 7.5% 7.5%
Employee stock ownership plan
The Company has an ESOP covering all full-time employees, over the age of 21,
with at least one year of service. The ESOP borrowed funds from the Company to
purchase 314,934 (157,467 pre-split) shares of the Company's common stock, the
loan being collateralized by the common stock. Contributions by the Company,
along with dividends received on unallocated shares, are used to repay the loan
with shares being released from the Company's lien proportional to the loan
repayments. Annually on December 31, the released shares are allocated to the
participants in the same proportion that their wages bear to the total
compensation of all the participants. A total of 33,304 (16,652 pre-split) and
33,852 shares of the Company's common stock were released for allocation to the
Plan Participants during the years ended December 31, 1995 and 1996,
respectively.
38
Notes to Consolidated Financial Statements
Note 15 - Retirement plans and employee benefit programs (continued)
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as a reduction of
stockholders' equity in the consolidated statements of financial condition. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt. The total amount
charged to expense for the years ended December 31, 1995 and 1996, based on SOP
No. 93-6, was $460,000 and $690,000, respectively. The fair value of the 200,000
unearned ESOP shares at December 31, 1996 was $4,100,000. There were no
commitments to repurchase ESOP shares.
Recognition and retention plan
The stockholders approved the establishment of a Management Stock Bonus Plan
(MSBP) and Trust (the plan) on April 27, 1995. The plan states that the Trust
shall not purchase more than 4% of the aggregate shares of common stock issued
by the Company in the mutual-to-stock conversion of the Bank (252,146 post-split
shares). During 1995, the Bank purchased 160,000 post-split shares of the
Company's common stock at an average adjusted price of $14.25 per share to be
awarded to directors, officers and employees in accordance with the provision of
the plan. The costs of the shares held by the plan are recorded as unearned
compensation, a contra equity account, and are recognized as an expense in
accordance with the vesting requirements under the plan. For the years ended
December 31, 1995 and 1996, the amounts included in compensation expense were
$453,000 and $628,000, respectively. The status of the shares in this plan at
December 31, 1996 is shown as follows:
Unawarded Awarded
Shares Shares
--------- --------
Total established by plan 126,073 -
Granted (123,552) 123,552
Vested - -
-------- --------
Balance at December 31, 1995 2,521 123,552
Granted - -
Vested - (24,714)
Forfeiture 838 (838)
Two-for-one stock split 3,359 98,000
-------- --------
Balance at December 31, 1996 6,718 196,000
======== ========
39
Notes to Consolidated Financial Statements
Note 15 - Retirement plans and employee benefit programs (continued)
Stock option plans
The stockholders also approved the establishment of a stock option plan on April
27, 1995 for directors, officers and employees. The exercise price under the
plan is $12.50 per share, the fair market price, adjusted for the stock split,
on the date of the grant. Both non-incentive stock options, and incentive stock
options may be granted under the plan. Rights to exercise options granted vest
at the rate of 20% per year, beginning on the first anniversary of the grant. A
summary of the stock option activity is as follows:
Available Options Vested and
for Grant Outstanding Exercisable
--------- ----------- -----------
At inception 315,183 -- --
Granted (308,884) 308,884 --
Vested -- -- --
-------- ------- ------
Balance at December 31, 1995 6,299 308,884 --
Granted -- -- --
Vested -- (61,777) 61,777
Exercised -- -- (4,333)
Forfeiture 2,096 (2,096) --
Two-for-one stock split 8,395 245,011 60,777
-------- ------- ------
Balance at December 31, 1996 16,790 490,022 118,221
======== ======= =======
The Company applies APB Opinion 25 in accounting for employee stock option
plans. Accordingly, no compensation cost has been recognized in 1995 and 1996.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.89%; dividend yields of 3.20%; volatility factor of 27%; and
a weighted-average expected life of the option of 6.76 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1995 1996
------- -------
Pro forma net income $ 5,908 $ 4,865
Pro forma earnings per share
Primary $ 1.01 $ .95
Fully diluted $ 1.01 $ .93
40
Notes to Consolidated Financial Statements
Note 16 - Commitments and contingencies
The Company had outstanding commitments to purchase mortgage-backed securities
having a face value of $9,669,000 for $9,889,000 as of December 31, 1995.
Additionally, the Company was contingently liable for the possible purchase of
$5,000,000 of 7% FHLMC participations as a result of the sale of a "put" option
expiring in February 1996.
There were no outstanding commitments to purchase or sell securities at December
31, 1996.
The Company is lessee under a ten-year lease, effective January 1991, for its
branch bank space in River Ridge Mall, Lynchburg, Virginia. Base rent is due
monthly in advance. Rent may be increased due to increases in real estate taxes
and insurance. In addition to rent, monthly charges for the marketing fund and
pro rata utilities are billed to the Company. The minimum annual rental
commitment under the above noncancelable lease is $34,200 through December 31,
2000. Total rent expense in 1994, 1995 and 1996 for all cancelable and
non-cancelable leases was $54,000, $55,000 and $59,000, respectively.
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist primarily of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statements of financial condition. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments as follows.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Contract or Notional Amount
---------------------------
December 31
---------------------------
1995 1996
--------- --------
Financial instruments whose contract amounts represent credit risk
Commitments to finance real estate acquisitions and construction $ 3,818 $ 3,962
Unfunded lines-of-credit 21,037 19,955
------- -------
$24,855 $23,917
======= =======
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counter-party.
Collateral normally consists of real property.
Fixed rate loan commitments totaled $3,027,000, and adjustable rate loan
commitments totaled $935,000 at December 31, 1996. All present outstanding
commitments expire in 90 days or less.
The Company had issued $1,520,000 and $791,000 in standby letters of credit as
of December 31, 1995 and 1996, respectively; a portion of which is
collateralized by cash on deposit with the Company. A standby letter of credit
represents a potential liability of the Company in the event that certain
contractual obligations of the Company's loan customers are not met, but the
Company does not expect to fund these letters of credit.
41
Notes to Consolidated Financial Statements
Note 17 - Financial instruments with off-balance-sheet risk
During 1996, the Company entered into interest rate swap agreements ("swaps")
for purposes of managing its interest rate sensitivity. The Company designates
swaps to on-balance-sheet instruments to alter the interest rate characteristics
of such instruments and to modify interest rate sensitivity. Swaps involve the
periodic exchange of payments over the life of the agreements. Amounts received
or paid on swaps are used to manage interest rate sensitivity. At December 31,
1996, the Company had two swap agreements outstanding, the net effect of which
is to effectively convert $7.0 million of variable rate FHLB advances to a fixed
rate of 5.20% until January 1998 and $8.0 million of variable rate FHLB advances
to a fixed rate of 5.27% until February 1999. Changes in the fair value of swaps
are not reflected in the accompanying financial statements. The estimated fair
value of these instruments at December 31, 1996 was $245,000. There were no
interest rate swaps outstanding at December 31, 1995.
The Company's credit exposure on swaps is limited to the value of the swaps that
have become favorable to the Company in the event of nonperformance by the
counterparties. The Company does not require collateral from counterparties on
its existing agreements. The Company actively monitors the credit ratings of
counterparties and does not anticipate nonperformance by the counterparties with
which it transacts its swaps.
Note 18 - Significant group concentrations of credit risk
The Company grants residential, commercial, and installment loans to customers
mainly in the Central and Southside regions of Virginia. The Company has a loan
portfolio, consisting principally of residential mortgage loans and is not
dependent upon any particular economic sector although the portfolio as a whole
may be affected by general economic factors of the Central and Southside
Virginia regions.
The Company maintains cash balances at several financial institutions located
within its market area. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. Uninsured balances aggregated
$3,063,000 at December 31, 1995 and $3,342,000 at December 31, 1996. The Company
has invested in bonds issued by major national corporations. Such bond
investments, with par values aggregating $20,500,000 at December 31, 1995 and
$9,000,000 at December 31, 1996, have been limited to $3,000,000 par value in
any one issuer.
Note 19 - Related-party transactions
The Company has made loans in the ordinary course of business to various
officers and directors generally collateralized by the individuals' personal
residences or by savings accounts in the Savings Bank. The aggregate balances of
such loans which exceed $60,000 in aggregate outstanding amount to any executive
officer or director, in thousands, is summarized as follows:
1995 1996
-------- --------
Beginning balance $ 295 $ 272
Additions - -
Repayments (23) (25)
--------- --------
Ending balance $ 272 $ 247
======== ========
42
Notes to Consolidated Financial Statements
Note 20 - Reduced income
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received.
This activity resulted in lost income shown as follows:
Year Ended December 31
----------------------
1994 1995 1996
------- ---- --------
Interest removed on non-accrued loans or not accrued on
loans under foreclosure $ 23 $151 $ 35
Net interest reserved (recovered) on delinquent loans (55) (89) (92)
---- ---- ----
Reduced (recovered) income $(32) $ 62 $(57)
==== ==== ====
Note 21 - Regulatory capital
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 additional 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
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
As of December 31, 1996, the most recent notification from the Office of Thrift
Supervision categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Bank is required by the Office of Thrift Supervision to maintain capital at
least sufficient to meet three requirements: tangible capital, core capital, and
risk-based capital. Management has determined that the Bank's capital meets and
exceeds all three capital requirements shown as follows as of December 31, 1995
and 1996.
43
Notes to Consolidated Financial Statements
Note 21 - Regulatory capital (continued)
Tangible and core capital levels are shown as a percentage of adjusted total
assets. Risk-based capital levels are shown as a percentage of risk-weighted
assets.
First Federal Savings Bank
--------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
------------------------ -------------------- -----------------------
December 31, 1995
GAAP Capital $ 69,518 $69,518 $ 69,518
Goodwill and other intangible assets (1,728) (1,728) (1,728)
Qualifying general loan allowance -- -- 3,193
---------- ------- --------
Regulatory capital computed 67,790 13.66% 67,790 13.66% 70,983 26.76%
Minimum capital requirement 7,444 1.50 14,888 3.00 21,222 8.00
---------- ----- ------- ----- -------- -----
Regulatory capital excess 60,346 12.16% $52,902 10.66% $ 49,761 18.76%
========== ===== ======= ===== ======== =====
First Federal Savings Bank
--------------------------------------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
------------------------ -------------------- -----------------------
December 31, 1996
GAAP Capital $ 55,763 $ 55,763 $ 55,763
Unrealized gain on securities,
available for sale (1,182) (1,182) (1,182)
Goodwill and other intangible assets (1,608) (1,608) (1,608)
Qualifying general loan allowance -- -- 3,281
-------- -------- --------
Regulatory capital computed 52,973 9.95% 52,973 9.95% 56,254 20.60%
Minimum capital requirement 7,984 1.50 15,967 3.00 21,846 8.00
-------- ------ -------- ----- -------- -----
Regulatory capital excess 44,989 8.45% $ 37,006 6.95% $ 34,408 12.60%
======== ====== ======== ===== ======== =====
Note 22 - Disclosures about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For cash and short-term investments, the carrying amount is a reasonable
estimate of fair value.
Investment securities and mortgage-backed securities
The fair value of investment securities and mortgage-backed securities is
determined by reference to exchange or dealer- quoted market prices. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
44
Notes to Consolidated Financial Statements
Note 22 - Disclosures about fair value of financial instruments (continued)
Loans receivable
For certain homogeneous categories of loans, such as some residential mortgages
and consumer loans, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Long-term debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to extend credit, standby letters of credit, and financial
guarantees written
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 credit-worthiness of the counter-parties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counter-parties at the reporting date.
The estimated fair values of the Company's financial instruments are as follows:
December 31, 1995 December 31, 1996
------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- --------- -------
Financial assets
Cash and cash equivalents $ 7,683 $ 7,683 $ 6,634 $ 6,634
Investment securities 71,113 71,844 61,210 61,418
Mortgage-backed securities 114,790 115,315 131,469 131,637
Loans receivable, net 291,215 298,056 321,528 326,366
Financial liabilities
Deposits 377,975 381,270 397,435 397,640
Advances from Federal Home Loan Bank
and other borrowed funds 29,250 29,383 60,000 60,017
Unrecognized financial instruments
Commitments to purchase securities 9,889 9,959 - -
Standby letters of credit issued 1,520 1,520 791 791
Interest rate swaps - - - 245
45
Notes to Consolidated Financial Statements
Note 23 - Condensed parent company information
The following shows FFVA Financial Corporation's condensed financial condition
as of and for the years ended December 31, 1995 and 1996 and operations and cash
flows for the years 1994, 1995 and 1996:
Balance Sheets
1995 1996
---- ----
Assets
Cash $ 1,084 $ 443
Investments 65 490
Investment in bank subsidiary 66,411 52,037
Loan to bank subsidiary's ESOP 2,339 2,000
Note receivable from bank subsidiary 18,000 19,000
Other assets 160 511
-------- -------
Total assets $ 88,059 $ 74,481
======== =======
Liabilities and stockholders' equity
Liabilities $ - $ -
Stockholders' equity 88,059 74,481
-------- -------
Total liabilities and stockholders' equity $ 88,059 $ 74,481
======== =======
Statements of Income
1994 1995 1996
------ ------ --------
Dividends from bank subsidiary $ -- $ -- $ 20,000
Interest income 519 1,750 803
Other income -- -- 6
------ ------ --------
519 1,750 20,809
Noninterest expense 5 141 163
------ ------ --------
Income before income tax expense and equity
in undistributed earnings of subsidiary 514 1,609 20,646
Income tax expense 194 612 246
------ ------ --------
Income before equity in undistributed earnings of
subsidiary 320 997 20,400
Equity in undistributed earnings of subsidiary 4,383 5,477 5,063
Distribution of subsidiary retained earnings -- -- (20,000)
------ ------ --------
Net income $4,703 $6,474 $ 5,463
====== ====== ========
46
Notes to Consolidated Financial Statements
Note 23 - Condensed parent company information (continued)
Statements of Cash Flows
1994 1995 1996
-------- -------- --------
Cash flows from operating activities
Net income $ 4,703 $ 6,474 $ 5,463
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiary (4,383) (5,477) (5,063)
Dividend from subsidiary -- -- 20,000
Increase (decrease) in other liabilities 73 (73) --
Increase in other assets -- (33) (97)
-------- -------- --------
Net cash provided by operations 393 891 20,303
-------- -------- --------
Cash flows from investing activities
Net (increase) decrease in loans receivable (26,570) 9,333 (661)
Purchase of subsidiary stock (30,538) -- --
Purchase of investment securities -- (65) (425)
-------- -------- --------
Net cash provided by (used in) investing activities (57,108) 9,268 (1,086)
-------- -------- --------
Cash flows from financing activities
Proceeds from exercise of stock options -- -- 31
Proceeds from sale of stock 57,926 -- --
Repurchase of common stock -- (8,520) (17,986)
Payment of cash dividends -- (1,766) (1,903)
-------- -------- --------
Net cash provided by (used in) financing activities 57,926 (10,286) (19,858)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,211 (127) (641)
Cash and cash equivalents at beginning of year -- 1,211 1,084
-------- -------- --------
Cash and cash equivalents at end of year $ 1,211 $ 1,084 $ 443
======== ======== ========
47
Notes to Consolidated Financial Statements
Note 24 - Quarterly condensed consolidated statements of income - unaudited
1995
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 8,608 $ 9,421 $ 9,724 $ 9,930
Interest expense 4,103 4,808 5,085 5,216
------- ------- ------- -------
Net interest income 4,505 4,613 4,639 4,714
Provision for credit losses 75 75 75 30
------- ------- ------- -------
Net interest income after provision for credit losses 4,430 4,538 4,564 4,684
Net gain on sale of investments 46 52 100 11
Noninterest income 184 173 240 248
Noninterest expense 2,093 2,220 2,391 2,380
------- ------- ------- -------
Income before income tax expense 2,567 2,543 2,513 2,563
Income tax expense 935 940 923 914
------- ------- ------- -------
Net income $ 1,632 $ 1,603 $ 1,590 1,649
======= ======= ======= =====
Earnings per share, primary .270* .270* .280* .300*
Earnings per share, fully diluted .270* .270* .280* .300*
Dividends paid per share .075* .075* .075* .075*
1996
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 9,986 $10,155 $10,407 $10,445
Interest expense 5,199 5,215 5,361 5,407
------- ------- ------- -------
Net interest income 4,787 4,940 5,046 5,038
Provision for credit losses 60 -- -- --
------- ------- ------- -------
Net interest income after provision for credit losses 4,727 4,940 5,046 5,038
Net gain on sale of investments 91 -- 9 151
Noninterest income 242 290 262 276
Noninterest expense 2,569 2,631 4,753 2,616
------- ------- ------- -------
Income before income tax expense 2,491 2,599 564 2,849
Income tax expense 882 889 206 1,063
------- ------- ------- -------
Net income $ 1,609 $ 1,710 $ 358 $ 1,786
======= ======= ======= =======
Earnings per share, primary .300* .320 .070 .370
Earnings per share, fully diluted .300* .320 .070 .370
Dividends paid per share .075* .100 .100 .100
*Restated to reflect two-for-one stock split paid June 5, 1996
48
Notes to Consolidated Financial Statements
Note 25 - Branch acquisition
On August 18, 1995, pursuant to a Branch Sale Agreement between Crestar Bank and
the Company's subsidiary, the Bank acquired selected assets and assumed all
deposits of Crestar's Keysville, Virginia branch office. The Bank received net
funds of approximately $17.8 million in cash, $1.6 million in selected loans,
and $451,000 in office premises and equipment in exchange for assuming deposit
liabilities of $21.7 million.
The acquisition was accounted for under the purchase method of accounting
whereby the purchase price was allocated to the underlying assets acquired and
liabilities assumed based on their value at the date of acquisition. The excess
purchase price over the value of net assets acquired was recorded as goodwill of
$1.7 million which is being amortized over 15 years. The results of operations
of the acquired branch have been included with those of the Bank, and therefore
of the Company, since the acquisition date.
Note 26 - Capital stock
On April 25, 1996, the Company's Board of Directors approved a two-for-one split
of the Company's common stock in the form of a 100% stock dividend payable June
5, 1996 to stockholders of record as of May 15, 1996. A total of 2,713,832
shares of common stock was issued in connection with the split. The stated par
value per share was not changed from $0.10. A total of $271,383 was reclassified
from the Company's additional paid-in capital account to the Company's common
stock account. Appropriate share and per-share amounts have been restated to
retroactively reflect the stock split.
49
Stock Price Information - There were 4,642,552 shares of common stock of
FFVA Financial Corporation outstanding on March 1, 1997, held by approximately
1,600 stockholders of record (not including the number of persons or entities
holding the stock in nominee or street name through various brokerage firms).
The graph and table reflect the stock price as published by the Nasdaq National
Market and the dividends paid for the respective periods.
Quarter Div./Share
Ended High Low Paid
----- ---- --- ----
March 1995(1) $11.50 $9.32 $0.075
June 1995(1) $14.13 $11.25 $0.075
September 1995(1) $14.63 $13.38 $0.075
December 1995(1) $14.63 $13.38 $0.075
March 1996(1) $16.13 $13.50 $0.075
June 1996 $18.50 $14.63 $0.100
September 1996 $18.50 $15.75 $0.100
December 1996 $22.00 $17.75 $0.100
- -----------------------------
(1) Restated to reflect two-for-one stock split paid June 5, 1996.
Federal regulations may limit dividend amounts.
53