Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended: Commission File
March 31, 1997 Number: 33-67746
Virginia First Financial Corporation
(Exact Name of Registrant as Specified in its Charter)
Virginia 54-1678497
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Franklin and Adams Streets, Petersburg, Virginia 23804-2009
(Address of Principal Executive Office) (Zip Code)
804-733-0333 or 804-748-5847
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
At May 1, 1997, 5,807,608 shares of common stock of the Registrant were
outstanding.
Virginia First Financial Corporation
Quarterly Report on Form 10-Q
March 31, 1997
Index
Part I. Financial Information Page No.
Item 1 Consolidated Statements of Condition as of
March 31, 1997, June 30, 1996, and March 31, 1996 3
Consolidated Statements of Operations for the
three-month and nine-month periods ended
March 31, 1997 and March 31, 1996 4
Consolidated Statements of Cash Flows for the
three-month and nine-month periods ended
March 31, 1997 and March 31, 1996 5
Selected Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 4 Submission of Matters to a Vote of Security Holders 43
Item 6 Exhibits and Reports on Form 8-K 43
Signatures 44
2
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
March 31, June 30, March 31,
(In thousands, except share data) 1997 1996 1996
----------- ---------- -----------
(Unaudited) (Note) (Unaudited)
Assets
Cash and cash equivalents $ 26,195 $ 24,575 $ 22,067
Investment securities, net 12,627 12,663 11,550
Mortgage-backed securities and collateralized
mortgage obligations, net 12,532 15,694 12,613
Loans receivable held for investment, net 666,908 615,554 592,882
Loans receivable held for sale 64,132 46,481 44,972
Real estate owned, net 5,671 5,353 5,831
Accrued interest receivable, net 5,774 5,292 4,952
Federal Home Loan Bank stock, at cost 7,828 6,998 5,728
Office properties and equipment, net 9,598 8,780 8,759
Other assets 6,048 5,477 4,577
========= ========= =========
Total assets $ 817,313 $ 746,867 $ 713,931
========= ========= =========
Liabilities and Stockholders' Equity
Deposits $ 595,126 $ 573,536 $ 575,942
Notes payable and other borrowings 648 639 598
Advances from Federal Home Loan Bank 146,552 102,052 74,552
Advance payments by borrowers for taxes and insurance 3,417 2,169 3,103
Accrued interest payable 768 716 494
Accrued expenses and other liabilities 4,911 6,759 4,128
--------- --------- ---------
Total liabilities 751,422 685,871 658,817
--------- --------- ---------
Stockholders' equity:
Preferred stock of $1 par value. Authorized 5,000,000 shares;
none issued -- -- --
Common stock of $1 par value. Authorized 20,000,000 shares;
issued and outstanding 5,804,661 shares at March 31, 1997,
5,740,503 at June 30, 1996 and 5,615,450 at March 31, 1996 5,805 5,740 5,615
Additional paid-in capital 9,032 8,439 8,341
Retained earnings - substantially restricted 51,098 46,943 41,143
Net unrealized gain (loss) on securities available for sale, net of taxes (44) (126) 15
--------- --------- ---------
Total stockholders' equity 65,891 60,996 55,114
--------- --------- ---------
Total liabilities and stockholders' equity $ 817,313 $ 746,867 $ 713,931
========= ========= =========
NOTE: The Consolidated Statements of Condition for June 30, 1996, has been
taken from the Audited Financial Statements.
The accompanying notes are an integral part of these unaudited
Consolidated Financial Statements.
3
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ----------------------
(In thousands, except per share data) 1997 1996 1997 1996
---------- --------- --------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest Income
Loans receivable $15,773 $ 13,880 $ 46,061 $ 41,797
Mortgage-backed securities and collateralized
mortgage obligations 260 105 1,019 304
Investment securities 319 276 980 1,107
Other interest-earning assets 251 220 711 507
------- -------- -------- --------
Total interest income 16,603 14,481 48,771 43,715
------- -------- -------- --------
Interest Expense
Deposits 6,889 6,697 20,556 19,620
Borrowings 1,975 1,207 5,718 4,610
------- -------- -------- --------
Total interest expense 8,864 7,904 26,274 24,230
------- -------- -------- --------
Net interest income 7,739 6,577 22,497 19,485
Provision for loan losses 609 413 1,751 1,344
------- -------- -------- --------
Net interest income after provision for loan losses 7,130 6,164 20,746 18,141
------- -------- -------- --------
Noninterest Income
Gain on sale of loans and securitized loans, net 1,723 1,083 3,676 2,010
Loan servicing income 548 805 1,206 2,520
Financial service fees 679 546 2,004 1,677
Gain on sale of real estate owned 27 66 124 136
Loss on revaluation of real estate owned 0 (77) (214) (444)
Other 72 90 216 186
------- -------- -------- --------
Total noninterest income 3,049 2,513 7,012 6,085
------- -------- -------- --------
Noninterest Expense
Personnel 3,614 2,548 9,188 7,127
Occupancy, net 451 447 1,290 1,202
Equipment 400 347 1,069 943
Advertising 319 87 519 267
Federal deposit insurance premiums 92 301 3,819 862
Data processing 416 438 1,350 1,286
Amortization of intangibles 71 61 194 185
Other 1,366 1,026 3,281 2,538
------- -------- -------- --------
Total noninterest expenses 6,729 5,255 20,710 14,410
------- -------- -------- --------
Earnings before income tax expense 3,450 3,422 7,048 9,816
Income tax expense 1,236 1,231 2,460 3,617
======= ======== ======== ========
Net earnings $ 2,214 $ 2,191 $ 4,588 $ 6,199
======= ======== ======== ========
Net earnings per share $ 0.38 $ 0.38 $ 0.78 $ 1.07
======= ======== ======== ========
The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements.
4
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
(In thousands) 1997 1996 1997 1996
-------------------------- --------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating Activities:
Net earnings $ 2,214 $ 2,191 $ 4,588 $ 6,199
Adjustment to reconcile net earnings to net cash
provided by operating activities:
Depreciation 232 261 664 755
Provision for loan losses and losses on real estate owned 609 490 1,965 1,789
Loans and securitized loans held for sale:
Originations and purchases (105,854) (100,683) (339,856) (310,697)
Gains on sales (1,469) (842) (3,614) (1,994)
Proceeds from sales 102,592 92,565 313,019 289,275
Gains (losses) on securities (29) 0 (20) 0
(Increase) decrease in other assets (391) 285 (1,883) 1,021
Increase in accrued expenses and other liabilities 1,400 431 (1,796) 981
--------- --------- --------- ---------
Net cash used in operating activities (696) (5,302) (26,933) (12,671)
--------- --------- --------- ---------
Investing Activities:
Net decrease (increase) in loans receivable held for investment (8,312) 4,544 (43,827) (6,002)
Mortgage-backed securities:
Purchases 2 (6,112) (10,241) (6,112)
Proceeds from sales, net 8,997 0 11,280 0
Principal collected 528 566 2,188 2,866
Investment securities:
Purchases 0 0 (2,500) (11,000)
Principal collected 26 5,026 2,578 22,516
Proceeds from sale of real estate owned 1,658 684 2,571 3,248
Office properties and equipment
Purchases (471) (158) (1,069) (556)
Proceeds from sales 1 1 2 2
--------- --------- --------- ---------
Net cash provided by (used in) investing activities 2,429 4,551 (39,018) 4,962
--------- --------- --------- ---------
Financing Activities:
Net increase (decrease) in savings, checking and
money market deposit accounts 4,797 13,464 (2,232) 20,989
Net increase in certificates of deposit 10,346 12,677 23,822 51,286
Borrowings resulting from:
Securities sold under agreements to repurchase 0 0 18,544 0
Advances from Federal Home Loan Bank 76,500 70,144 293,900 134,644
Other 4,086 3,621 12,537 10,030
Repayments of borrowings attributable to:
Securities sold under agreements to repurchase (9,021) 0 (18,544) 0
Advances from Federal Home Loan Bank (79,000) (106,500) (249,400) (194,750)
Other (4,075) (3,053) (12,528) (9,993)
Net increase in mortgage escrow funds 1,312 1,120 1,248 849
Proceeds from issuance of common stock 392 0 656 285
Cash dividends paid (144) (22) (432) (202)
--------- --------- --------- ---------
Net cash provided by financing activities 5,193 (8,549) 67,571 13,138
--------- --------- --------- ---------
Net increase in cash and due from banks 6,926 (9,300) 1,620 5,429
Cash and due from banks at beginning of period 19,269 31,367 24,575 16,638
========= ========= ========= =========
Cash and due from banks at end of period $ 26,195 $ 22,067 $ 26,195 $ 22,067
========= ========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash payments of interest $ 9,060 $ 8,550 $ 26,222 $ 24,669
========= ========= ========= =========
Cash payments of income taxes $ 14 $ 1,131 $ 5,565 $ 2,664
========= ========= ========= =========
The accompanying notes are an integral part of these unaudited Consolidated
Financial Statements.
5
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Selected Notes to Consolidated Financial Statements
Note 1: The interim condensed consolidated financial statements are
unaudited but, in the opinion of management, reflect all
adjustments necessary for a fair presentation of results for
such periods. All such adjustments are of a normal,
recurring nature. The results of operations for any interim
period are not necessarily indicative of results for the
full year. These consolidated financial statements should be
read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's
Annual Report for the year ended June 30, 1996 ("fiscal year
1996"). The accompanying consolidated financial statements
for prior periods reflect certain reclassifications in order
to conform to the fiscal year 1997 presentation.
Note 2: For purposes of computing net earnings per share, the
weighted average number of shares outstanding for the quarters
ended March 31, 1997 and 1996 were 5,858,851 and 5,805,881
respectively. During the quarters ended March 31, 1997 and
1996, the Company paid cash dividends of 2.5 cents and 1.5
cents per share, respectively.
Note 3: Regulatory Capital of Virginia First Savings Bank:
Excess
Over
Actual Required Requirement
Amount Percent Amount Percent Amount Percent
------ ------- -------------- ------ -------
(In thousands)
March 31, 1997
- --------------
Tangible capital $ 62,175 7.64% $ 12,212 1.50% $ 49,963 6.14%
Core capital 62,328 7.65 32,572 4.00 29,756 3.65
Risk-based capital 69,734 11.77 47,400 8.00 22,334 3.77
.
March 31, 1996
- --------------
Tangible capital $52,488 7.38% $ 10,669 1.50% $ 41,819 5.88%
Core capital 52,764 7.42 28,463 4.00 24,301 3.42
Risk-based capital 58,626 11.45 40,953 8.00 17,673 3.45
See Page 36 for a reconciliation of GAAP capital to regulatory capital as of
March 31, 1997.
6
Part I. Financial Information
Virginia First Financial Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Virginia First Financial Corporation (the "Company") was incorporated
in Virginia in 1993 to serve as the holding company of Virginia First Savings
Bank, F.S.B. (the "Savings Bank"). The Savings Bank is a federally chartered
capital stock savings bank with its principal offices in Petersburg, Virginia.
The Savings Bank, incorporated in 1888, is one of the oldest financial
institutions in the Commonwealth of Virginia.
The Company's principal business activities, which are conducted
through the Savings Bank, are attracting checking and savings deposits from the
general public through its retail banking offices and originating, servicing,
investing in and selling loans secured by first mortgage liens on single-family
dwellings, including condominium units. The Company also lends funds to retail
banking customers by means of home equity and installment loans, and originates
residential construction loans and loans secured by commercial property,
multi-family dwellings and manufactured housing units. The Company invests in
certain U.S. Government and agency obligations and other investments permitted
by applicable laws and regulations. The operating results of the Company are
highly dependent on net interest income, the difference between interest income
earned on loans and investments and the cost of checking and savings deposits
and borrowed funds.
Deposit accounts up to $100,000 are insured by the Savings Association
Insurance Fund administered by the Federal Deposit Insurance Corporation (the
"FDIC"). The Savings Bank is a member of the Federal Home Loan Bank (the "FHLB")
of Atlanta. The Company and the Savings Bank are subject to the supervision,
regulation and examination of the Office of Thrift Supervision (the "OTS") and
the FDIC. The Savings Bank is also subject to the regulations of the Board of
Governors of the Federal Reserve System governing reserves required to be
maintained against deposits.
The Company's only direct subsidiary is the Savings Bank and the
Company has no material assets or liabilities, except for the stock of the
Savings Bank. The Savings Bank has three active subsidiaries; one is engaged in
real estate development and another is a title insurance agency. The third,
American Finance and Investment, Inc., is a mortgage banking company, the assets
of which were acquired December 19, 1996. (See discussion on page 23).
7
The following commentary discusses major components of the Company's
business and presents an overview of the Company's consolidated results of
operations during the three-month and nine-month periods ended March 31, 1997
and 1996, and its consolidated financial position at March 31, 1997, June 30,
1996 and March 31, 1996. This discussion should be reviewed in conjunction with
the consolidated financial statements and accompanying notes and other
statistical information presented in the Company's Annual Report for the fiscal
year ended June 30, 1996.
Results of Operations
Results of operations for the three-month periods ended March 31, 1997
(the third quarter of the fiscal year ending June 30, 1997, or "fiscal year
1997") and March 31, 1996 (the third quarter of the fiscal year ended June 30,
1996, or "fiscal year 1996") reflect the Company's focus on expanding its
community banking and mortgage banking operations.
The Company's results of operations for the first nine months of fiscal
year 1997 reflect several differences from the same period in fiscal year 1996.
First, net earnings for the first quarter of fiscal year 1997 reflect a one-time
pre-tax charge of $3,149,000 to pay for a special assessment to recapitalize the
Savings Association Insurance Fund (the "SAIF") maintained by the Federal
Deposit Insurance Corporation (the "FDIC"). The FDIC's authority to assess this
special assessment is contained in the omnibus appropriations bill passed by the
Congress and signed into law by President Clinton on September 30, 1996.
Second, the Company's income from servicing loans declined by 52.1%
during the first three quarters of fiscal year 1997 compared to the same period
in fiscal year 1996. This decline is due to the Company's sale of substantially
all of its servicing rights related to mortgage loans serviced for others in a
transaction effective as of April 1, 1996. The Company's decision to exit the
mortgage loan servicing business was driven by the increasing "critical mass"
necessary to generate acceptable returns on loan servicing activities. The
after-tax proceeds of the sale of $4,148,000 have been deployed in other areas,
including the $1,954,000 after-tax funding of the FDIC special assessment, and
are providing additional capital to enhance the Company's core business
activities.
Third, as a result of rising market interest rates, originations of
residential mortgage loans declined dramatically during the first nine months of
fiscal year 1996 compared to fiscal year 1995, which resulted in a significant
decrease in gains on sales of mortgage loans in the first nine months of fiscal
year 1996. This situation turned around in fiscal year 1997, as market interest
rates had moderated and the Company realized higher loan originations, sales and
gains than in the first nine-months of fiscal year 1996. The addition of four
mortgage loan origination offices in August 1996 also contributed to the
increase in loan originations, sales, and gains.
8
Net interest income increased by 15.5% in the first nine months of
fiscal year 1997, compared to the same period of fiscal year 1996 after posting
a 0.6% decrease in the first nine-months of fiscal year 1996, compared to the
same period in fiscal year 1995. Increases in capital in recent years have
permitted the Company to increase both its assets and liabilities. Most of the
net increases in interest income in the first nine months of fiscal year 1997
were attributable to increases in the size of the balance sheet. When compared
to the first quarter of fiscal year 1995, the rates paid on interest-bearing
liabilities in the first half of fiscal year 1996 increased at faster rates than
yields earned on interest-earning assets. While the Company's balance sheet was
larger in the first half of fiscal year 1997, market rates on both
interest-earning assets and interest-bearing liabilities moderated and declined
slightly, when compared to the same period in fiscal year 1996, and the Company
continued to experience a migration by depositors from lower-yielding checking
and savings deposits to higher-yielding certificates of deposit.
Net Earnings. The Company's net earnings for the third quarter of
fiscal year 1997 were $2,214,000, an increase of 1.0% over the $2,191,000 for
the third quarter of fiscal year 1996. On a per share basis, earnings for the
third quarter of fiscal year 1997 were $.38 remaining the same as the third
quarter of fiscal year 1996.
The Company's net earnings for the first nine months of fiscal year
1997 were $4,588,000, a decrease of 26.0% versus the $6,199,000 for the first
nine months of fiscal year 1996. On a per share basis, earnings for the first
nine months of fiscal year 1997 were $.78, a decrease of 27.1% versus $1.07 for
the first three quarters of fiscal year 1996.
As described earlier, the Company's net earnings for the first half of
fiscal year 1997 reflect a one-time, after-tax charge of $1,954,000, or $.34 per
share, to recapitalize the SAIF fund administered by the FDIC. Without the FDIC
charge, the Company's net earnings for the first nine months of fiscal year 1997
would have been $6,542,000, or $1.12 per share, an increase of 4.7%, or $.05 per
share, from the same nine month period in fiscal year 1996.
The new law also authorizes the FDIC to reduce insurance premiums after
December 31, 1996 to reflect the recapitalized insurance fund. The Company
expects that beginning January 1, 1997, its annualized insurance premiums will
be approximately $940,000 lower on a pre-tax basis than they would have been
without the special assessment law. In addition, future growth in deposits will
be subject to the lower statutory premiums.
9
The following table shows changes in earnings per share:
Fiscal Year Fiscal Year
1997 1996
Versus 1996 Versus 1995
----------- -----------
Net earnings per share for the
first nine months of fiscal years
1996 and 1995, respectively $ 1.07 $ .96
Increase (decrease) attributable to:
Net interest income .51 (.02)
FDIC SAIF Assessment (.54) -
Provision for loan losses (.07) (.07)
Noninterest income .16 .28
Noninterest expense (.54) (.08)
Income taxes .20 .02
Average shares outstanding (.01) (.02)
----- ----
Net increase (decrease) (.29) .11
----- ----
Net earnings per share for the
first nine months of fiscal years
1997 and 1996, respectively $ .78 $1.07
===== =====
Net Interest Income. Net interest income before the provision for loan
losses for the third quarter of fiscal year 1997 was $7,739,000, an increase of
$1,162,000, or 17.7%, compared to the third quarter of fiscal year 1996. For the
third quarter of fiscal year 1996, net interest income before the provision for
loan losses was $6,577,000, an increase of $2,000, or 0.1%, compared to the
third quarter of fiscal year 1995.
Net interest income before the provision for loan losses for the first
nine months of fiscal year 1997 was $22,497,000, an increase of $3,012,000, or
15.5 %, compared to the first nine months of fiscal year 1996. For the first
nine months of fiscal year 1996, net interest income before the provision for
loan losses was $19,485,000, an increase of $109,000, or 0.6%, compared to the
first nine months of fiscal year 1995.
The Company's net earnings are highly dependent on the difference, or
"spread", between the income it receives from its loan and investment portfolios
and its cost of funds, consisting principally of the interest paid on checking
and savings accounts and borrowings.
The average yield received on the Company's loan portfolio may not
change at the same pace as the interest rates it must pay on its deposits and
borrowings. As a result, in times of rising interest rates, decreases in the
difference between the yield received on loans and other investments and the
rate paid on deposits and borrowings usually occur. However, interest
10
received on short-term investments and adjustable rate mortgage loans and
construction loans also increase as a result of upward trends in short-term
interest rates, which enables the Company to partially compensate for increased
deposit and borrowing costs.
The following tables reflect the average yields earned and rates paid
by the Company during the three-month and nine-month periods ended March 31,
1997 and 1996. In computing the average yields and rates, the accretion of loan
fees are considered an adjustment to yield.
11
(In thousands)
Three-Month Periods
- -------------------
Ended March 31 1997 1996
- -------------- -------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest-earning assets;
Loans receivable (1)(2) $715,724 $15,773 8.94% $631,769 $13,880 8.91%
Mortgage-backed securities and
collateralized mortgage obligations 15,759 260 6.69 7,090 105 6.01
Investments 19,922 319 6.49 19,504 276 5.74
Other interest-earning assets 19,777 251 5.15 17,697 220 5.04
-------- ------ ---- ------- ------- ----
Total interest-earning assets 771,182 16,603 8.73 676,060 14,481 8.69
-------- ------ ---- ------- ------- ----
Noninterest-earning assets:
Cash and cash equivalents 9,791 8,183
Office properties and equipment, net 9,359 8,832
Other assets 18,101 14,821
Allowance for loan losses (8,802) (6,253)
-------- -------
Total assets $799,631 $701,643
======== ========
Interest-bearing liabilities:
Checking and money market
deposit accounts $103,474 948 3.71% $ 88,703 828 3.79%
Savings deposits 67,411 565 3.40 67,823 577 3.45
Certificates 385,775 5,376 5.65 360,784 5,292 5.95
Federal Home Loan Bank advances 140,280 1,930 5.58 89,733 1,202 5.43
Other borrowings 3,347 45 5.45 425 5 4.77
-------- ------ ---- ------- ------- ----
Total interest-bearing liabilities 700,287 8,864 5.13 607,468 7,904 5.28
-------- ------ ---- ------- ------- ----
Noninterest-bearing liabilities:
Deposits 24,928 30,558
Other 9,260 8,790
-------
Total liabilities 734,475 646,816
Stockholders' equity 65,156 54,827
-------- -------
Total liabilities and
stockholders' equity $ 799,631 $701,643
--------- ========
Average dollar difference between
interest-earning assets
and interest-bearing liabilities $ 70,895 $ 68,592
========= ========
Net interest income $ 7,739 $6,577
========= ======
Interest rate spread (3) 3.60% 3.41%
===== ====
Net yield on average interest-earning assets (4) 4.07% 3.95%
===== ====
Notes on Page 12.
12
(In thousands)
Nine-Month Periods
- ------------------
Ended March 31 1997 1996
- -------------- --------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Interest-earning assets;
Loans receivable (1)(2) $694,886 $46,061 8.83% $622,720 $41,797 8.94%
Mortgage-backed securities and
collateralized mortgage obligations 20,934 1,018 6.48 7,918 304 5.11
Investments 20,641 980 6.32 24,794 1,107 5.95
Other interest-earning assets 18,108 712 5.24 13,254 507 5.10
------- ------- ---- ------- ------ ----
Total interest-earning assets 754,569 48,771 8.61 668,686 43,715 8.71
------- ------ ---- ------- ------ ----
Noninterest-earning assets:
Cash and cash equivalents 8,557 8,671
Office properties and equipment, net 9,018 8,859
Other assets 17,516 11,214
Allowance for loan losses (8,245) (6,086)
------- ------
Total assets $ 781,415 $691,344
========= ========
Interest-bearing liabilities:
Checking and money market
deposit accounts $ 101,011 2,820 3.72% $ 85,942 2,504 3.88%
Savings deposits 67,896 1,731 3.40 68,382 1,764 3.44
Certificates 375,962 16,005 5.67 342,749 15,352 5.97
Federal Home Loan Bank advances 130,943 5,430 5.52 102,326 4,594 5.98
Other borrowings 7,092 288 5.41 372 16 5.73
------- ----- ---- ------- ------ ----
Total interest-bearing liabilities 682,904 26,274 5.13 599,771 24,230 5.38
------- ------ ---- ------- ------- ----
Noninterest-bearing liabilities:
Deposits 24,230 29,827
Other 10,648 8,821
------ -------
Total liabilities 717,782 638,419
Stockholders' equity 63,633 52,925
------ -------
Total liabilities and
stockholders' equity $781,415 $691,344
======== ========
Average dollar difference between
interest-earning assets
and interest-bearing liabilities $ 71,665 $ 68,915
======== =========
Net interest income $22,497 $ 19,485
======= ========
Interest rate spread (3) 3.48% 3.33%
===== ====
Net yield on average interest-earning assets (4) 3.97% 3.88%
===== ====
(1) Loans receivable shown gross of allowance for loan losses, gross of
premiums/discounts.
(2) Nonaccrual loans are included in the average loan balances and income
on such loans is recognized on a cash basis.
(3) Average yield on total interest-earning assets during the period less
the average rate paid on total interest-bearing liabilities.
(4) Net interest income divided by average interest-earning assets.
13
The Company's net interest income is affected by changes in both
average interest rates and the average volumes of interest-earning assets and
interest-bearing liabilities. Total interest income increased by $5,056,000 in
the first nine months of fiscal year 1997 and increased by $4,429,000 in the
first nine months of fiscal year 1996, as compared to the same periods in the
previous fiscal years. Total interest expense increased by $2,044,000 in the
first nine months of fiscal year 1997 and increased by $4,538,000 in the first
nine months of fiscal year 1996, as compared to the same periods in the previous
fiscal years. The fiscal year 1997 and fiscal year 1996 increases in both
interest income and interest expense are due primarily to increases in average
interest-earning assets and interest-bearing liabilities.
The following tables show the amounts of the changes in interest
income and expense which can be attributed to rate (change in rate multiplied by
old volume) and volume (change in volume multiplied by old rate) for the
three-month and nine-month periods ended March 31, 1997 and 1996. The changes in
net interest income due to both volume and rate changes have been allocated to
volume and rate in proportion to the relationship of absolute dollar amounts of
the change of each. The table demonstrates that the $3,012,000 increase in net
interest income in the first nine months of fiscal year 1997 was the result of a
growing balance sheet and falling deposit rates, while the $109,000 decline in
net interest income in the first nine months of fiscal year 1996 was the net
result of a growing balance sheet adversely affected by rising deposit rates.
(In thousands)
Three-Month Periods
Ended March 31 Fiscal Year 1997 Versus 1996 Fiscal Year 1996 Versus 1995
- -------------- ---------------------------- ----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Loans receivable $1,846 $47 $1,893 $1,216 $ (365) $ 851
Mortgage-backed securities and
collateralized mortgage obligations 142 13 155 (48) (5) (53)
Investments 6 37 43 (181) 11 (170)
Other interest-earning assets 26 5 31 135 (17) 118
------ ---- ------ ------- ------ ------
Total interest-earning assets 2,020 102 2,122 1,122 (376) 746
------ ---- ------ ------- ------ ------
Checking and money market
deposit accounts 137 (17) 120 54 (11) 43
Savings deposits (4) (8) (12) (142) (2) (144)
Certificates 305 (221) 84 1,171 323 1,494
Federal Home Loan Bank advances 698 30 728 (272) (230) (502)
Other borrowings 39 1 40 (118) (29) (147)
------ ---- ------ ------- ------ ------
Total interest-bearing liabilities 1,175 (215) 960 693 51 744
------ ---- ------ ------- ------ ------
Net interest income $ 845 $ 317 $1,162 $ 429 $ (427) $ 2
===== ===== ====== ====== ======== ========
14
(In thousands)
Nine-Month Periods
Ended March 31 Fiscal Year 1997 Versus 1996 Fiscal Year 1996 Versus 1995
- -------------- ---------------------------- ----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Loans receivable $ 4,770 $ (506) $ 4,264 $ 4,558 $ 30 $ 4,588
Mortgage-backed securities and
collateralized mortgage obligations 614 100 714 (120) (80) (200)
Investments (202) 75 (127) (201) (3) (204)
Other interest-earning assets 191 14 205 237 8 245
------- ------- ------- ------- ------- -------
Total interest-earning assets 5,373 (317) 5,056 4,474 (45) 4,429
------- ------- ------- ------- ------- -------
Checking and money market
deposit accounts 413 (97) 316 (31) 254 223
Savings deposits (13) (20) (33) (671) (10) (681)
Certificates 1,356 (703) 653 3,813 1,484 5,297
Federal Home Loan Bank advances 1,153 (317) 836 75 37 112
Other borrowings 273 (1) 272 (397) (16) (413)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 3,183 (1,139) 2,044 2,789 1,749 4,538
------- ------- ------- ------- ------- -------
Net interest income $ 2,190 $ 822 $ 3,012 $ 1,685 $(1,794) $ (109)
======= ======= ======= ======= ======= =======
Asset/Liability Management. Management strives to manage the maturity
or repricing match between assets and liabilities. The degree to which the
Company is "mismatched" in its maturities is a primary measure of interest rate
risk. In periods of stable interest rates, net interest income can be increased
by financing higher yielding long-term mortgage loan assets with lower cost
short-term deposits and borrowings. Although such a strategy may increase
profits in the short run, it increases the risk of exposure to rising interest
rates and can result in funding costs rising faster than asset yields. The
Company attempts to limit its interest rate risk by selling a majority of the
fixed rate mortgage loans that it originates.
The following tables summarize the contractual repayment terms of the
total loans receivable of the Company as of March 31, 1997, as well as the
amount of fixed rate and variable rate loans due after March 31, 1998. The
tables have not been adjusted for estimates of prepayments and do not reflect
periodic repricing of adjustable rate loans. The tables do include $49,526,000
of fixed rate loans receivable held for sale and $14,606,000 of adjustable rate
loans held for sale as of March 31, 1997.
15
Balance Principal Repayment Contractually Due in
Outstanding 12-Month Period Ending December 31,
-----------------------------------------------------------------
March 31, 2001- 2003- 2008 and
(In thousands) 1997 1998 1999 2000 2002 2007 Thereafter
--------- -------- -------- ------- ------- ------- ----------
Residential and commercial real estate (1) $538,574 $ 38,767 $ 27,106 $17,989 $38,965 $94,025 $321,722
Construction 130,998 109,661 16,148 4,848 341 -- --
Consumer and other loans 61,468 16,222 13,178 10,270 11,568 4,483 5,747
-------- -------- -------- ------- ------- ------- --------
$731,040 $164,650 $56,432 $33,107 $50,874 $98,508 $329,469
======== ======== ======== ======= ======= ======= ========
(1) Includes loans held for sale.
Fixed Variable
(In thousands) Rate Rate Total
---- ---- -----
Residential and commercial real estate (2) $161,343 $338,464 $ 499,807
Construction 0 21,337 21,337
Consumer and other loans 42,067 3,179 45,246
-------- -------- --------
Total due after December 31, 1997 $203,410 $362,980 $566,390
======== ======== ========
(2) Includes loans held for sale.
Contractual principal repayments of loans do not necessarily reflect
the actual term of the Company's loan portfolio. The average lives of mortgage
loans are substantially less than their contractual terms because of loan
prepayments and because of enforcement of due-on-sale clauses, which gives the
Company the right to declare a loan immediately due and payable in the event,
among other things, the borrower sells the real property subject to the mortgage
and the loan is not repaid. In addition, certain borrowers increase their equity
in the security property by making payments in excess of those required under
the terms of the mortgage.
Asset and liability management strategies impact the one year maturity
"gap", which is the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing in one year or less. The
Company's one year gap was a positive 7.62% of total assets at March 31, 1997 as
follows:
16
1 Year 1 - 3 3 - 5 Over 5
(In thousands) Total or Less Years Years Years
- -------------- ----- ------- ----- ----- -----
Interest-earning assets:
Loans receivable (1) $ 739,880 $502,716 $111,083 $37,532 $ 88,549
Mortgage-backed securities and
collateralized mortgage obligations 12,532 212 0 0 12,320
Investments 20,455 7,828 0 4,000 8,627
Other interest-earning assets 16,829 16,829 0 0 0
--------- -------- -------- ------- --------
Total interest-earning assets 789,696 $527,585 $111,083 $41,532 $109,496
======== ======== ======= ========
Noninterest-earning assets 36,457
Allowance for loan losses (8,840)
Total assets $ 817,313
Interest-bearing liabilities:
Checking and money-market
deposit accounts (2) $ 99,310 $ 37,260 $ 0 $ 0 $ 62,050
Savings deposits (3) 69,275 17,319 9,699 8,313 33,945
Certificates 391,409 278,058 77,802 33,985 1,564
FHLB advances 146,552 132,000 6,500 7,500 552
Other borrowings 648 648 0 0 0
--------- -------- -------- ------- --------
Total interest-bearing liabilities 707,194 $465,285 $ 94,001 $49,798 $ 98,111
======== ======== ======= ========
Noninterest-bearing liabilities 44,228
--------
Total liabilities 751,422
Stockholders' equity 65,891
Total liabilities and
stockholders' equity $ 817,313
aturity/repricing gap $ 62,301 $ 17,083 $(8,266) $ 11,385
Cumulative gap $ 62,301 $ 79,383 $71,117 $ 82,502
As percent of total assets 7.62% 9.71% 8.70% 10.09%
- -------------------------
(1) Loans receivable shown gross of allowance for loan losses, net of
premiums/discounts.
(2) The Company has found that interest checking accounts are generally not
sensitive to changes in interest rates and therefore has placed such
deposits in the "over 5 years" category.
(3) In accordance with standard industry practice, decay factors have been
applied to savings deposits.
The preceding table does not reflect the degree to which adjustment of
rate sensitive assets may be restricted by contractual or other limitations
(such as loan rate ceilings) to applicable asset repricing mechanisms. Included
in rate sensitive assets maturing or repricing in one year or less are $224.0
million of adjustable rate mortgage loans with rates tied to U.S. Treasury
securities with a constant maturity of one year and a 2.00% annual interest rate
increase or decrease cap. The movement of interest rates on these loans may not
precisely correspond with the upward or downward movement in loan market rates
or deposit and borrowing rates.
17
The Company's portfolio of loans held for investment totaled
$666,908,000 at March 31, 1997, representing 81.6% of total assets. The
following table sets forth information at the dates indicated concerning the
composition of the Company's loan portfolio, by type:
March 31, 1997 June 30, 1996 March 31, 1996
----------------- ----------------- -----------------
Percent Percent Percent
of of of
Gross Gross Gross
(In thousands) Amount Loans Amount Loans Amount Loans
--------- ----- --------- ----- -------- -----
First mortgage loans:
Residential - fixed rate $ 68,945 10.2% $ 77,266 12.3% $ 74,387 12.3%
Residential - adjustable rate 291,186 42.9 270,374 43.2 257,543 42.8
------- ---- ------- ---- -------- -----
Total residential 360,131 53.1 347,640 55.5 331,930 55.1
------- ---- ------- ---- -------- -----
Commercial - fixed rate 17,938 2.6 16,633 2.7 17,769 3.0
Commercial - adjustable rate 29,851 4.4 32,089 5.1 36,132 6.0
------- ---- ------- ---- -------- -----
Total commercial 47,789 7.0 48,722 7.8 53,901 9.0
------- ---- ------- ---- -------- -----
Construction - fixed rate 16,274 2.4 20,185 3.2 15,194 2.5
Construction - adjustable rate 118,818 17.5 101,190 16.2 104,325 17.3
------- ---- ------- ---- -------- -----
Total construction (1) 135,092 19.9 121,375 19.4 119,519 19.8
------- ---- ------- ---- -------- -----
Total first mortgage loans 543,012 80.0 517,737 82.7 505,350 83.1
------- ---- ------- ---- -------- -----
Second mortgage loans (2):
Fixed rate 20,917 3.1 18,201 2.9 16,403 2.7
Adjustable rate 30,918 4.6 29,233 4.7 28,167 4.7
------- ---- ------- ---- -------- -----
Total second mortgage loans 51,835 7.7 47,434 7.6 44,570 7.4
------- ---- ------- ---- -------- -----
Loans on savings accounts 1,964 0.3 1,691 0.3 1,339 0.2
------- ---- ------- ---- -------- -----
Installment loans:
Fixed rate 78,422 11.6 55,910 8.9 47,904 8.0
Adjustable rate 2,953 0.4 3,275 0.5 3,333 0.5
------- ---- ------- ---- -------- -----
Total installment loans 81,375 12.0 59,185 9.4 51,237 8.5
------- ---- ------- ---- -------- -----
Gross Loans 678,186 100.0% 626,047 100.0% 602,496 100.0%
====== ====== ======
Less:
Unearned discount 76 301 429
Deferred income 2,362 2,665 2,703
Allowance for loan losses 8,840 7,527 6,482
------ ----- ---------
11,278 10,493 9,614
------ ------ ---------
Total net loans held for investment $666,908 $615,554 $592,882
======== ======== ========
(1) Construction loans are shown net of undisbursed loan funds.
(2) Includes home equity lines of credit.
18
Provision for Loan Losses. The Company provided $609,000 during the
third quarter of fiscal year 1997 as additions to the allowance for loan losses,
compared to $413,000 in the third quarter of fiscal year 1996. The Company
provided $1,751,000 during the first nine months of fiscal year 1997 as
additions to the allowance for loan losses, compared to $1,344,000 in the first
nine months of fiscal year 1996. In establishing the level of the allowance for
loan losses, the Company considers many factors, including general economic
conditions, loan loss experience, historical trends and other circumstances,
both internal and external. The amount of the provision for loan losses is
established based on evaluations of the adequacy of the allowance for loan
losses. The Company considers the size and risk exposure of each segment of the
loan portfolio. For secured loans, management considers estimates of the fair
value of the collateral, considering the current and currently anticipated
future operating or sales conditions. Such estimates are particularly
susceptible to changes that could result in a material adjustment to future
results of operations. Factors such as independent appraisals, current economic
conditions and the financial condition of borrowers are continuously evaluated
to determine whether the Company's investment in such assets does not exceed
their estimated values. The Company's policy is to establish both general and
specific allowances for loan losses.
19
The following table presents the activity in the Company's allowance
for loan losses and selected loan loss data for the first nine months of fiscal
years 1997 and 1996:
(In thousands)
Nine-Month Periods
Ended March 31 1997 1996
- -------------- ---- ----
Balance at beginning of period $ 7,527 $ 6,373
Provision charged to expense 1,751 1,344
Loans charged off:
Residential real estate - 3
Commercial real estate 156 1,056
Construction - -
Consumer and other loans 326 219
-------- --------
Total charge-offs 482 1,278
-------- --------
Recoveries of loans previously charged off:
Residential real estate - -
Commercial real estate - -
Construction - -
Consumer and other loans 44 43
-------- -------
Total recoveries 44 43
-------- -------
Net charge-offs 438 1,235
------- -------
Balance at end of period $ 8,840 $ 6,482
======= =======
Average loans held for investment 648,505 $591,441
Loans held for investment at period end (1) 675,748 599,364
Ratio of provision for loan losses to
average loans held for investment 0.27% 0.23%
Ratio of net charge-offs to average
loans held for investment .07% 0.21%
Ratio of allowance for loan losses to loans
held for investment at period end 1.31% 1.08%
- -------------------------------
(1) Loans receivable shown gross of allowance for loan losses, net of
premium/discount.
While the Company's management believes that its present allowance for
loan losses is adequate, future adjustments may be necessary.
The allowance for loan losses is a general allowance applicable to all
loan categories; however, management has allocated the allowance to the various
portfolios to provide an indication of the relative risk characteristics of the
total loan portfolio. The allocation is based on the same judgmental criteria
discussed earlier in determining the level of the allowance and should not be
interpreted as an indication that chargeoffs for the balance of fiscal year 1997
will occur
20
in these amounts, or proportions, or that the allocation indicates future
trends. The allocation of the allowance at March 31, 1997, June 30, 1996 and
March 31, 1996 and the ratio of the related outstanding loan balances to total
loans held for investment are as follows:
(In thousands) March 31, 1997 June 30, 1996 March 31, 1996
----------------- ---------------------- --------------------
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Loans Total Loans Total Loans
Held for Held for Held for
Allowance Investment Allowance Investment Allowance Investment
--------- ---------- --------- ---------- --------- ----------
Residential real estate $1,605 60.8% $1,425 63.1% $1,280 62.5%
Commercial real estate 2,760 7.0 2,552 7.8 2,127 9.0
Construction 3,100 19.9 2,200 19.4 1,825 19.8
Consumer and other loans 1,375 12.3 1,350 9.7 1,250 8.7
------ ------- ------ ------- ------ -----
$8,840 100.0% $7,527 100.0% $6,482 100.0%
====== ======= ====== ======= ====== =====
Retail Banking Operations. The Company's retail banking activities
consist of attracting checking and savings deposits from the general public
through its retail banking offices and lending funds to retail banking customers
by means of home equity and installment loans.
As of March 31, 1997, the Company operated twenty-four full service
retail facilities throughout Virginia. The Company opened a twenty fourth
full-service retail banking branch on January 27, 1997.
The Company opened a branch on September 11, 1995. The branch is
located at the intersection of Old Bridge Road and Hedges Run Drive, at the
"Lake Ridge Commons Shopping Center" in Woodbridge, Virginia. The Woodbridge
branch was the Company's first retail banking presence in the Northern Virginia
market. The Company's Mortgage Banking Division is also headquartered in
Woodbridge.
The Company originated $3,360,000 of residential equity lines of credit
and fixed-rate second mortgages during the third quarter of fiscal year 1997,
compared to $3,489,000 in the third quarter of fiscal year 1996. The Company
originated $13,812,000 of residential equity lines of credit and fixed-rate
second mortgages during the first nine months of fiscal year 1997, compared to
$16,609,000 in the first nine months of fiscal year 1996.
In addition to originating consumer-type loans, the Company
occasionally purchases loans to obtain geographic diversity and yields not
obtainable in the Company's normal lending areas. The Company purchased
$5,194,000 of fixed rate equity and mobile home loans during the third quarter,
and $16,556,000 during the first nine months of fiscal 1997. The Company had
purchased $976,000 in the third quarter of the prior fiscal year. This
represented the balance year-to-date as well in 1996.
21
The Company originated in aggregate $20,057,000 of consumer and
installment loans during the third quarter of fiscal year 1997, compared to
$10,721,000 in the second quarter of fiscal year 1996. The Company originated
$60,144,000 of consumer and installment loans during the first three quarters of
fiscal year 1997, compared to $34,698,000 in the first three quarters of fiscal
year 1996.
Within the figures above, the Company began originating commercial
loans in its new commercial lending division. Commercial loans originated in
this new retail division aggregated $3,140,000 during the quarter and are
detailed in the chart below.
The Company has placed emphasis on making these forms of credit
available to its retail customers. The Company's success in promoting these loan
products is attributed to enhanced training of retail branch personnel, the
centralization of credit decision-making, and marketing campaigns that target
these products.
The following table summarizes retail banking loan originations and
purchases by type of loan for the three-month and nine-month periods ended March
31, 1997 and 1996:
(In thousands)
Three-Month Periods
Ended March 31 1997 1996
-------------- ----------------- -----------------
% of % of
Amount Total Amount Total
Residential equity lines of credit (1) $ 1,816 9.0% $ 2,104 19.6%
Fixed-rate second mortgage loans 6,738 33.6 2,361 22.0
Consumer loans 8,363 41.7 6,256 58.4
Commercial loans 3,140 15.7 -- --
------- ------- ------- -----
Total originations and purchases $20,057 100.0% $10,721 100.0%
======= ======= ======= =====
22
Nine-Month Periods
Ended March 31 1997 1996
------------------ --------------- ------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
Residential equity lines of credit (1) 7,559 12.6% $ 8,107 23.4%
Fixed-rate second mortgage loans 22,809 37.9 9,478 27.3
Consumer loans 26,636 44.3 17,113 49.3
Commercial loans 3,140 5.2 - -
-------- ----- ------- -----
Total originations and purchases $ 60,144 100.0% $34,698 100.0%
======== ===== ======= =====
- ----------------
(1) Reflects loan balances prior to deduction of undisbursed loan
amounts.
Mortgage Banking Operations. The principal sources of revenue from the
Company's mortgage banking operations are loan origination fees, loan servicing
fees, revenues from sales of loans, and revenues from any sales of rights to
service loans.
During the second half of fiscal year 1996, the Company consolidated
three of its loan production centers into other offices. In August 1996, the
Company opened mortgage loan centers in the Maryland communities of Columbia,
Frederick, Timonium and Bel Air. At December 31, 1996, the Company operated
twelve mortgage loan production centers in Virginia and Maryland. The Company
will continue to evaluate the number and locations of its mortgage loan
origination centers to ensure the most efficient and cost effective allocation
of mortgage lending resources. In subsequent periods the Company may open new
centers or close or consolidate existing centers, depending on market
conditions.
The Company's present operating strategy is to originate fixed rate
loans for sale in the secondary mortgage market, while adjustable rate mortgage
loans are originated both for sale and for the Company's portfolio.
On December 19, 1996, the Company purchased a majority of the assets of
American Finance and Investments, Inc. ("AFI"), a provider of residential
mortgage loans through the Internet. AFI generates mortgage loans on an
automated basis through a computer network presently available to potential
customers in forty-four states. Headquartered in Fairfax, Virginia, AFI is in
the evolving market for electronic commerce. During the past fifteen months AFI
has expanded rapidly by means of software designed to facilitate "on line "
mortgage loan originations. The acquisition of AFI provides the Company with a
means of expansion of electronic commerce to the retail banking customer base.
The Company's introduction to the Internet as a medium of product delivery might
logically expand to other bank-related products and services.
23
See the discussion under "Mortgage Loan Servicing" regarding the
Company's sale of substantially all of its servicing rights related to mortgage
loans serviced for others, in a transaction effective as of April 1, 1996.
Origination and Purchase of Mortgage Loans. The Company originated
$152,742,000 of fixed rate conventional, Federal Housing Administration ("FHA"),
and Veterans Administration ("VA") residential loans during the third quarter of
fiscal year 1997, compared to $101,040,000 in the third quarter of fiscal year
1996 and $42,937,000 in the third quarter of fiscal year 1995. The Company
originated $415,354,000 of such loans during the first nine months of fiscal
year 1997, compared to $326,554,000 in the first nine months of fiscal year 1996
and $173,694,000 in the first nine months of fiscal year 1995. The 88.0%
increase in the first nine months of fiscal year 1996 compared to the same
period in fiscal year 1995 was due to a moderation in market interest rates and
an increase in new housing starts, primarily in the Northern Virginia and
Maryland markets. The 27.2% increase in the first nine months of 1997 compared
to the same period in 1996 is due to continuing moderate market interest rates
as well as the addition of four new loan origination centers in August 1996 and
the acquisition of American Finance and Investment, Inc. in December, 1996.
The Company originated $21,282,000 of adjustable rate residential
mortgage loans during the third quarter of fiscal year 1997, compared to
$16,816,000 in the third quarter of fiscal year 1996 and $14,731,000 in the
third quarter of fiscal year 1995. The Company originated $63,494,000 of such
loans during the first nine months of fiscal year 1997, compared to $58,342,000
in the first nine months of fiscal year 1996 and $69,149,000 in the first nine
months of fiscal year 1995. Originations in the first three quarters of fiscal
year 1996 were 15.6% less than in the same period in fiscal year 1995, as
moderating interest rates shifted consumer interest back to the fixed rate
products. This trend continued in 1997 as adjustable rate mortgage loan
originations shrank to 12.0% of total originations in the first nine months of
fiscal year 1997, compared to 13.6% in the first nine months of fiscal year
1996.
In addition to originating residential mortgage loans, the Company also
purchases loans to obtain geographic diversity and yields not obtainable in the
Company's normal lending areas. However, no ARM loans were purchased during the
first three quarters of fiscal years 1997 and 1996.
The Company originated $16,015,000 of construction loans during the
third quarter of fiscal year 1997, compared to $19,253,000 in the third quarter
of fiscal year 1996 and $14,489,000 in the third quarter of fiscal year 1995.
The Company originated $51,519,000 of construction loans during the first three
quarters of fiscal year 1997, compared to $41,774,000 in the first three
quarters of fiscal year 1996 and $53,004,000 in the first half of fiscal year
1995. Construction loans were 9.7% of total permanent mortgage loan and
construction loan originations in the first three quarters of fiscal year 1997,
compared to 9.7% in the first three quarters of fiscal year 1996. The increases
in both outstanding construction loan balances and loan commitments has been
consistent with management's goals of diversifying the Company's loan portfolio
and
24
penetrating undeserved markets. The Company believes that its construction
lending underwriting standards are conservative. Substantial builder equity is
typically required and home starts ahead of actual sales are strictly
controlled.
The Company has successfully incorporated a strategic initiative
focusing on the use of a construction loan as the integral component in
obtaining a permanent mortgage loan. The Company has successfully utilized the
integrated construction loan product, in which the homebuyer prequalifies for a
permanent mortgage loan and upon completion of the house the construction loan
automatically converts to a permanent loan without the need for a second closing
transaction.
While the Company has financed residential construction projects
throughout its business area, a substantial portion of the Company's
construction lending in the past two fiscal years has been in Northern Virginia
and Maryland. The Company utilized residential construction loan financing as an
entry mechanism into the Northern Virginia and Maryland markets at a time of
diminished competition due to savings institution failures, deflated real estate
prices and a migration by traditional lending sources away from construction and
residential mortgage lending. While the Company's market penetration of the
Northern Virginia and Maryland markets in the past two years has been
substantial, management is committed to retaining its conservative credit risk
profile, and is willing to forego market share to new or returning competitors
who may be willing to sacrifice quality to achieve volume goals. Management's
adherence to its quality standards could result in reductions in construction
loan balances and commitments in future periods. As a percentage of the
Company's loan originations, construction and development lending during fiscal
year 1997 is expected to be less than the levels seen in fiscal year 1996. The
Company continues to evaluate the feasibility of sustaining or expanding the
present construction lending levels.
25
The following tables summarize first mortgage and construction loan
originations by type of loan for the three-month and nine-month periods ended
March 31, 1997 and 1996:
(In thousands)
Three-Month Periods
Ended March 31 1997 1996
-------------- -------------------- -----------------
% of % of
Amount Total Amount Total
Permanent mortgage loans:
Fixed rate residential:
Conventional $ 110,720 58.3% $ 76,476 55.8%
FHA/VA 42,022 22.1 24,564 17.9
-------- ---- -------- -----
152,742 80.4 101,040 73.7
-------- ---- -------- -----
Adjustable rate residential:
One year 8,737 4.6 8,827 6.5
Three year 7,429 3.9 7,989 5.8
Other 5,116 2.7 - -
-------- ---- -------- -----
21,282 11.2 16,816 12.3
-------- ---- -------- -----
Construction loans (1):
Residential construction 13,710 7.2 10,876 7.9
Acquisition, development
and commercial construction 2,305 1.2 8,377 6.1
-------- ---- -------- -----
16,015 8.4 19,253 14.0
-------- ---- -------- -----
Total originations and purchases $ 190,039 100.0% $137,109 100.0%
======== ====== ======== ======
(1) Reflects loan balances prior to deduction of undisbursed loan
amounts.
26
(In thousands)
Nine-Month Periods
Ended March 31 1997 1996
-------------- ----------------------- ---------------------
% of % of
Amount Total Amount Total
Permanent mortgage loans:
Fixed rate residential:
Conventional $278,815 52.6% $243,405 56.6%
FHA/VA 136,539 25.7 83,149 19.3
------- ----- -------- ----
415,354 78.3 326,554 75.9
------- ----- -------- ----
Adjustable rate residential:
One year 31,461 5.9 36,196 8.4
Three year 26,917 5.1 22,146 5.2
Other 5,116 1.0 - -
------- ----- -------- ----
63,494 12.0 58,342 13.6
------- ----- -------- ----
Fixed rate commercial - - 3,283 0.8
------- ----- -------- ----
Construction loans (1):
Residential construction 42,086 7.9 29,297 6.8
Acquisition, development
and commercial construction 9,433 1.8 12,477 2.9
------- ----- -------- ----
51,519 9.7 41,774 9.7
------- ----- -------- ----
Total originations and purchases $ 530,367 100.0% $429,953 100.0%
========= ===== ======== =====
- ------------------------
(1) Reflects loan balances prior to deduction of undisbursed loan
amounts.
Risks Associated with Mortgage Loan "Pipeline". The Company's mortgage
banking activities involve risks of loss if secondary mortgage market interest
rates increase or decrease substantially while a loan is in the "pipeline" (the
period beginning with the application to make or the commitment to purchase a
loan and ending with the sale of the loan). In order to reduce this interest
rate risk, the Company typically enters into forward sales commitments in an
amount approximately equal to the closed loans held in inventory, plus a portion
of the unclosed loans that the Company has committed to make which are expected
to close. Additionally, the Company occasionally purchases over-the-counter
options to refine a risk management position in the event the percentage of
loans which actually closes differs from the original expectations. Such options
provide the owner with the right, but not the obligation, to deliver the
underlying commodity or financial asset to the transaction's counter party at a
specific price for a specific period of time. In this instance, the commodity or
financial asset would generally consist of mortgage-backed securities created
with securitized originated mortgage loans. The portion of the unclosed loans
which the Company commits to sell depends on numerous factors, including the
total amount of the Company's outstanding commitments to make loans, the portion
of such loans that is likely
27
to close, the timing of such closings, and anticipated changes in interest
rates. The Company continually monitors these factors and adjusts its
commitments and options positions accordingly.
Sale of Mortgage Loans. There is an active secondary market for most
types of mortgage loans originated by the Company. By originating loans for
subsequent sale in the secondary mortgage market, the Company is able to obtain
funds which may be used for lending and investment purposes. The Company had
been selling a large portion of its loans with the Company retaining the rights
to service the loans. However, beginning January 1, 1996, the Company shifted
its business strategy with respect to mortgage loan servicing, and most of the
loan sales since that date have been on a servicing-released basis. See the
discussion under "Mortgage Loan Servicing" regarding the Company's sale of
substantially all of its servicing rights related to loans serviced for others,
in a transaction effective as of April 1, 1996.
Gains from the sales of mortgage loans and securitized loans were
$1,723,000 in the third quarter of fiscal year 1997, an increase of $640,000, or
59.1%, over the gains of $1,083,000 in the third quarter of fiscal year 1996.
Gains from such sales were $3,676,000 in the first three quarters of fiscal year
1997, an increase of $1,666,000, or 82.9%, over the gains of $2,010,000 in the
first three quarters of fiscal year 1996.
All fixed rate mortgage loans originated by the Company are
underwritten following guidelines which will qualify them for sale in the
secondary market. The Company sells its FHA and VA loans to various investors on
a servicing-released basis. The Company either sells its conventional fixed rate
residential production on an individual loan basis or securitizes loans through
the creation of Federal National Mortgage Association ("FNMA") and Federal Loan
Mortgage Corporation ("FHLMC") mortgage-backed securities. The securities
created by securitizing loans originated by the Company are immediately sold to
various investors. No portions of such securities were held by the Company at
March 31,1997, June 30, 1996, or March 31, 1996. In the event the Company were
to hold such a security as of the end of an accounting period, the security
would constitute a "trading security", and as such would be recorded on the
consolidated statement of financial condition at fair value, and unrealized
holding gains and losses would be included in earnings.
The Company sold $107,203,000 of fixed rate mortgage loans and
securitized loans during the third quarter of fiscal year 1997, compared to
$85,200,000 in the third quarter of fiscal year 1996. The Company sold
$302,639,000 of such loans during the first nine months of fiscal year 1997,
compared to $245,343,000 in the first nine months of fiscal year 1996. The sale
of fixed rate product is intended to protect the Company from precipitous
changes in the general level of interest rates as well as to create an income
stream from servicing fees on loans sold. The magnitudes of the period-to-period
changes in loan sales are consistent with and reflect the percentage changes in
fixed rate mortgage loan originations in those periods.
The valuation of adjustable rate mortgage loans is not as directly
dependent on the level of interest rates as is the value of fixed rate loans.
Decisions to hold or sell adjustable rate
28
mortgage loans are based on the need for such loans in the Company's portfolio,
which is influenced by the level of market interest rates and the Company's
asset/liability management strategy. As with other investments, the Company
regularly monitors the appropriateness of the level of adjustable rate mortgage
loans in its portfolio and may decide from time to time to sell such loans and
reinvest the proceeds in other adjustable rate investments.
The Company sold $31,422,000 of adjustable rate mortgage loans and
securitized loans during the third quarter of fiscal year 1997, compared to
$17,966,000 in the third quarter of fiscal year 1996. The Company sold
$59,635,000 of such loans during the first nine months of fiscal year 1997,
compared to $58,306,000 in the first nine months of fiscal year 1996. The
sizable proportion of adjustable rate loan and securitized loan sales to total
sales in fiscal year 1996 compared to fiscal year 1997 is due to the increased
popularity of adjustable rate mortgage loans in the rising interest rate
environment, and the corresponding demand for adjustable rate loans and
securities in the secondary market. In addition, production of adjustable rate
loans in the first, second and third quarters of both fiscal year 1997 and
fiscal year 1996 exceeded the Company's capacity to add such loans to its loan
portfolio.
The following tables summarize mortgage loan sales by type of loan for
the three-month and nine-month periods ended March 31, 1997 and 1996. The table
does not reflect commitments sold for which mortgage loans had not been
delivered and funded at period end.
(In thousands)
Three-Month Periods
Ended March 31 1997 1996
-------------- ---------------- ------------------
% of % of
Amount Total Amount Total
Fixed rate $107,203 77.3% $ 85,200 82.6%
Adjustable rate 31,422 22.7 17,996 17.4
-------- ------ -------- ------
Total mortgage loans sold $138,625 100.0% $103,196 100.0%
======== ====== ======== ======
Nine-Month Periods
Ended March 31 1997 1996
-------------- ---------------- ------------------
% of % of
Amount Total Amount Total
Fixed rate $302,639 83.5% $245,343 80.8%
Adjustable rate 59,635 16.5 58,306 19.2
-------- ----- -------- ------
Total mortgage loans sold $362,274 100.0% $303,649 100.0%
======== ====== ======== ======
Included in the figures above are mortgage loans which were securitized
into mortgage-backed securities in connection with and immediately prior to
sale. Securitized loans in the above
29
figures totaled $147,639,000 in the first nine months of fiscal year 1997 and
$75,614,000 in the first nine months of fiscal year 1996.
In an environment of stable interest rates, the Company's gains on the
sale of mortgage loans and securitized loans would generally be limited to those
gains resulting from the yield differential between retail mortgage loan
interest rates and rates required by secondary market purchasers. A loss from
the sale of a loan may occur if interest rates increase between the time the
Company establishes the interest rate on a loan and the time the loan is sold.
Because of the uncertainty of future loan origination volume and the future
level of interest rates, there can be no assurance that the Company will realize
gains on the sale of financial assets in future periods.
The Company defers fees it receives in loan origination, commitment and
purchase transactions. Loan origination fees and certain direct loan origination
costs are deferred and recognized over the lives of the related loans as an
adjustment of the loan's yield using the level- yield method. Net commitment
fees for permanent forward commitments issued to builders and/or developers for
the purpose of securing loans for their purchasers are also deferred. Deferred
income pertaining to loans held for sale is taken into income at the time of
sale of the loan.
Mortgage Loan Servicing. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, holding escrow
funds for payment of taxes and insurance, making required inspections of the
mortgage premises, contacting delinquent mortgagors, supervising foreclosures in
the event of unremedied defaults, and generally administering the loans for the
investors to whom they have been sold. The Company receives fees for servicing
mortgage loans, generally ranging from 1/4% to 1/2% per annum on the declining
principal balances of the loans. Servicing fees are collected by the Company out
of monthly mortgage payments.
The Company sold substantially all of its servicing rights related to
loans serviced for others, in a transaction effective as of April 1, 1996. The
transaction generated a pre-tax gain of $6,847,000. The amount of the gain is
net of the write-off of the remaining $14,000 of unamortized purchased mortgage
loan servicing rights and $767,000 of unamortized capitalized excess servicing.
The Company's decision to exit the mortgage loan servicing business was driven
by the increasing "critical mass" necessary to generate acceptable returns on
loan servicing activities.
As a result of the sale of the rights to service loans for others, loan
servicing income declined by $1,314,000 to $1,206,000 during the first three
quarters of fiscal year 1997. The income in the first three quarters of fiscal
year 1997 consists of late charges and other fee income related to the Company's
loan portfolio.
The Company has adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights," beginning July 1, 1996. The Statement requires that the cost
of mortgage loans originated or purchased with a definitive plan to sell the
loans and retain the servicing rights, be allocated
30
between the loans and servicing rights based on their estimated values at the
purchase or origination date. Upon the sales of the loans, additional income may
be recognized resulting from a lower adjusted cost basis on the mortgage loans
sold. The servicing rights asset is amortized over the life of the servicing
revenue stream, and thus has the effect of reducing loan servicing income in
future periods. The adoption of the new accounting standard has had no material
effect on the Company, since mortgage loan servicing rights are no longer being
accumulated, but instead are being sold concurrently with the sale of the
underlying loans.
Investments. The Company classifies a large portion of its investment
securities and mortgage-backed securities as available for sale. Such securities
are reported on a fair value basis, with unrealized gains and losses excluded
from earnings and reported as a separate component of stockholders' equity, net
of any deferred tax provision. Management believes the available for sale
classification allows the most flexibility in meeting liquidity needs, adjusting
interest rate risk and controlling balance sheet trends. The Company could
experience volatility in its capital account in future periods because of market
price fluctuation in its investment securities and mortgage-backed securities
holdings.
31
The amortized cost and fair value of the Company's investment
securities and mortgage-backed securities (including collateralized mortgage
obligations, or "CMOs") are as follows:
(In thousands) March 31, 1997 June 30, 1996 March 31, 1996
------------------- --------------------- --------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
Investment Securities
Held to maturity:
FHLB notes $ -- $ -- $ -- $ -- $ -- $ --
Municipal bonds 6,200 6,200 6,278 6,278 7,520 7,520
-------- ------- -------- ------- -------- -------
6,200 6,200 6,278 6,278 7,520 7,520
-------- ------- -------- ------- -------- -------
Available for sale:
FHLB notes 6,450 6,427 6,440 6,385 2,000 1,983
FNMA bonds -- -- -- -- 1,968 2,047
-------- ------- -------- ------- -------- -------
6,450 6,427 6,440 6,385 3,968 4,030
Net unrealized gain (loss) (23) -- (55) -- 62 --
-------- ------- -------- ------- -------- -------
6,427 6,427 6,385 6,385 4,030 4,030
-------- ------- -------- ------- -------- -------
$ 12,627 $12,627 $ 12,663 $12,663 $ 11,550 $11,550
======== ======= ======== ======= ======== =======
Mortgage-Backed Securities
Held to maturity:
FHLMC $ 370 $ 377 $ 374 $ 382 $ 375 $ 385
Other -- -- -- -- 184 184
-------- ------- -------- ------- -------- -------
370 377 374 382 559 569
-------- ------- -------- ------- -------- -------
Available for sale:
FNMA 555 541 3,066 3,051 3,189 3,189
CMOs 11,657 11,621 12,402 12,269 8,905 8,865
-------- ------- -------- ------- -------- -------
12,212 12,162 15,468 15,320 12,094 12,054
Net unrealized loss (50) -- (148) -- (40) --
-------- ------- -------- ------- -------- -------
12,162 12,162 15,320 15,320 12,054 12,054
-------- ------- -------- ------- -------- -------
$ 12,532 $12,539 $ 15,694 $15,702 $ 12,613 $12,623
======== ======= ======== ======= ======== =======
Noninterest Income. Financial service fees increased by $133,000, or
24.4% in the third quarter of fiscal 1997 and by $87,000, or 19.0%, in the third
quarter of fiscal year 1996, compared to the same periods in the respective
previous years. Such fees increased by $327,000 or 19.5% in the first three
quarters of fiscal year 1997 and by $191,000, or 12.9%, in the first three
quarters of fiscal year 1996, compared to the same periods in the respective
previous years. These three-month and nine-month period-to-period increases are
primarily attributed to the increase in the number of checking accounts
resulting from promotional campaigns targeted to the checking product.
32
In addition, financial service fees in the first nine months of fiscal
year 1997 include $67,000 earned from the Company's relationship with CoreLink
Financial, Inc. ("CoreLink"). The Company earned $52,000 in the first nine
months of fiscal year 1996 under a previous arrangement. Pursuant to a
contractual arrangement, CoreLink leases office space in certain of the
Company's facilities through which stocks, bonds, mutual funds and investment
counseling are provided. Such fees were lower in the first half of fiscal year
1997, as compared to the same period in fiscal year 1996, since the CoreLink
relationship is in a start-up mode. Effective as of April 1, 1996, the Company
engaged CoreLink to replace INVEST Financial Services, Inc. as its broker-dealer
for providing mutual funds and other securities products to the Company's
customers.
Sales of real estate owned yielded net gains of $27,000 and $66,000 in
the third quarters of fiscal years 1997 and 1996, respectively, and yielded
gains of $124,000 and $136,000, respectively, for the first nine months of such
fiscal years. The Company recorded losses on the revaluation of real estate
owned of $0 and $77,000 in the third quarters of fiscal years 1997 and 1996,
respectively, and recorded losses of $214,000 and $444,000, respectively, for
the first nine months of such fiscal years. It is the Company's policy to record
allowances for estimated losses on real estate owned when, based upon its
evaluation of various factors such as independent appraisals and current
economic conditions, it determines that the investment in such assets is greater
than their fair values less cost to dispose.
Century Title Insurance Agency, Inc. was incorporated in December 1994
as a subsidiary of the Savings Bank. This new business unit offers a full range
of title insurance products to the general public and enhances the
diversification of products to both existing and prospective mortgage loan
customers. It is based at the headquarters of the Virginia First Mortgage
Division in Woodbridge, Virginia. Century Title generated $46,000 of net title
fee income in the third quarter of fiscal year 1997 and $157,000 in the first
nine months of fiscal year 1997.
Noninterest Expenses. Personnel and related employee benefits expense
is the Company's largest non-interest expense. Personnel expense for the third
quarter of fiscal year 1997 was $3,614,000, compared to $2,548,000 in the third
quarter of fiscal year 1996 and $2,309,000 in the third quarter of fiscal year
1995. Such expense for the first three quarters of fiscal year 1997 was
$9,188,000, compared to $7,127,000 in the first three quarters of fiscal year
1996 and $7,639,000 in the first three quarters of fiscal year 1995. The 6.7%
decrease in personnel expense in the first three quarters of fiscal year 1996,
as compared to the same period in fiscal year 1995, reflects the consolidation
of back office operations of the Companies mortgage banking divisions. The
consolidation eliminated duplicate support structures and provided for more
efficient and uniform delivery of mortgage services. Also, commissions paid to
mortgage loan originators, which is a substantial component of personnel
expense, declined proportionately to the reduction in the volume of loans
closed. The 28.9% increase in personnel expense in the first three quarters of
fiscal year 1997, as compared to the same period in fiscal year 1996, reflects
the Company's expansion, (the addition of four loan origination offices in
August 1996, the acquisition of American Finance and Investment, Inc. in
December 1996, and the opening of our
33
Garrisonville retail office in January, 1997). The increase in personnel expense
also reflects the impact of personnel hired to meet the Company initiatives in
marketing, consumer finance, commercial lending, deposits, and the commission
expenses related to our increase in loan originations.
Occupancy expense for the third quarters of fiscal years 1997 and 1996
was $451,000 and $447,000, respectively. Such expense was $1,290,000 and
$1,202,000, respectively, for the first nine months of those fiscal years. The
7.3% increase for the first three quarters of fiscal year 1997 is attributable
to the opening of one retail banking branch, the opening of four mortgage
offices, and the acquisition of American Finance & Investment, Inc.
Data processing expense for the third quarters of fiscal years 1997 and
1996 was $416,000 and $438,000, respectively. Such expense was $1,350,000 and
$1,286,000, respectively, for the first nine months of those fiscal years. The
fiscal year 1997 of 4.9% was due to increased loan and deposit account volume
and local area networking.
Income Taxes. Income tax expense for the third quarter of fiscal year
1997 was $1,236,000, resulting in an effective tax rate of 35.8%. By comparison,
the Company had income tax expense of $1,231,000 for an effective tax rate of
36.0% in the third quarter of fiscal year 1996. The income tax expense and
effective tax rate of the first nine months of fiscal year 1997 were $2,460,000
and 34.9%, compared to $3,617,000 and 36.8% in the same period in fiscal year
1996.
The effective tax rates differ from the statutory federal rates. The
prohibition against claiming amortization for certain purchase accounting
adjustments (goodwill) for income tax purposes tends to increase the effective
tax rate, while the effective tax rate tends to be lower due to tax-exempt
interest income. The effective rate also provides for state income taxes.
Financial Condition
Liquidity and Capital Resources. The primary sources of funds for the
Company consist of checking and savings deposits, loan sale fundings, loan
repayments, borrowings from the FHLB and others, and funds provided from
operations. Deposits totaled $595,126,000 at March 31, 1997, an increase of
$21,590,000, or 3.8%, over the $573,536,000 at June 30, 1996. Certificates of
deposit grew by $23,827,000 in the first nine months of fiscal year 1997, while
savings deposits increased by $451,000 and checking and money market deposit
accounts decreased by a total of $2,688,000. Higher market interest rates in the
first nine months of fiscal year 1997 increased the attractiveness of
certificates compared to savings and checking products, on which interest rates
have risen more slowly. Approximately $278.0 million in certificate accounts
will mature in the twelve-month period ending March 31, 1998. The Company's
management believes that most of the maturing liabilities will be reinvested
with the Company.
34
Advances from the FHLB increased by $44,500,000 to $146,552,000 at
March 31, 1997, compared to $102,052,000 at June 30, 1996. The Company has
access to advances from the FHLB generally secured by pledging mortgage loans
and its stock in the FHLB.
The Company will sometimes borrow from several sources using
mortgage-backed securities as collateral. However, no such borrowings were
outstanding at March 31, 1997. The Company's management will use this method of
financing to the extent that it is less expensive than alternative sources and
is within regulatory guidelines. The Company's borrowings, including FHLB
advances, at March 31, 1997 were 18.0% of assets, compared to 13.7% of assets at
June 30, 1996.
The Company sells mortgage loans and securitized loans in the secondary
market and redeploys the sales proceeds in its lending operations. To a lesser
extent, the proceeds of periodic loan payments and loan payoffs provide funds
for lending operations.
The primary use of funds by the Company is loan originations. The
Company's loan portfolio, including loans held for sale, totaled $666,908,000 at
March 31, 1997 compared to $615,554,000 at June 30, 1996, an increase of
$51,354,000, or 8.3%. The Company's loans held for investment and for sale
represented 89.4% of assets at March 31, 1997, compared to 88.6% of assets at
June 30, 1996.
The Company had outstanding fixed rate loan origination commitments of
$2,878,000 and outstanding adjustable rate loan commitments of $774,000 at March
31, 1997.
The Company had no outstanding loan purchase commitments at March 31,
1997. The Company had outstanding commitments to fund $35,650,000 of
construction loans at March 31, 1997. In addition, the Company had $30,664,000
outstanding in lines of credit extended to its customers at March 31, 1997. The
Company's management does not anticipate any difficulties in satisfying these
commitments.
Due to the relative size of the Company's loan portfolio, purchases and
sales of investments have a limited impact on the Company's funding
requirements. Investments and mortgage-backed securities (classified as either
held to maturity or available for sale), excluding FHLB stock, totaled
$25,159,000 at March 31, 1997 and $28,357,000 at June 30, 1996. Such balances
represented 3.1% and 3.8%, respectively, of total assets at those dates.
Liquidity is the ability to meet present and future financial
obligations, either through the acquisition of additional liabilities or from
the sale or maturity of existing assets, with minimal loss. Regulations of the
OTS require thrift associations and/or savings banks to maintain liquid assets
at certain levels. At present, the required ratio of liquid assets to
withdrawable savings and borrowings due in one year or less is 5.0%. In fiscal
year 1997 the Company is maintaining liquidity in excess of the required amount.
At March 31, 1997 and June 30, 1996, the Company had liquidity ratios of 5.3%
and 5.2%, respectively. The Company's management anticipates that
35
it will be able to maintain its current level of regulatory liquidity during the
balance of fiscal year 1997.
At March 31, 1997, the Savings Bank's net worth under generally
accepted accounting principles ("GAAP") was $65,904,000. OTS Regulations require
that savings institutions maintain the following capital levels: (1) tangible
capital of at least 1.5% of total adjusted assets, (2) core capital of 4.0% of
total adjusted assets, and (3) overall risk-based capital of 8.0% of total
risk-weighted assets. As of March 31, 1997, the Savings Bank satisfied all of
the regulatory capital requirements, as shown in the following table reconciling
the Savings Bank's GAAP capital to regulatory capital:
Risk -
Tangible Core Based
(In thousands) Capital Capital Capital
-------------- ------- ------- -------
GAAP capital $65,904 $65,904 $65,904
Non-allowable assets:
Goodwill (2,133) (2,133) (2,133)
Other intangible assets (153) - -
Equity in subsidiaries (1,487) (1,487) (1,487)
Other - - -
Additional capital items:
Unrealized gain on
debt securities, net 44 44 44
General loss allowances - - 7,406
-------- -------- --------
Regulatory capital - computed 62,175 62,328 69,734
Minimum capital requirement 12,212 32,572 47,400
-------- -------- --------
Excess regulatory capital $49,963 $29,756 $22,334
======= ======= =======
Ratios:
Regulatory capital - computed 7.64% 7.65% 11.77%
Minimum capital requirement 1.50 4.00 8.00
----- ----- ------
Excess regulatory capital 6.14% 3.65% 3.77%
===== ===== ======
The Company has addressed the phase-in of higher capital requirements
and the phase-out from capital of certain assets. Management believes that there
are sufficient alternatives available to enable the Company to remain in
compliance with its capital requirements.
As a result of federal legislation, the Company has been subject to
higher federal deposit insurance premiums and supervisory examination expenses.
The Company is not aware of any other trends, events or uncertainties
which will have or that are likely to have a material effect on the Company's or
the Savings Bank's liquidity, capital resources or operations. The Company is
not aware of any current recommendations by regulatory authorities which if they
were implemented would have such an effect.
36
Asset Quality. When a borrower fails to make a required loan payment,
the Company contacts the borrower and attempts to cause the default to be cured.
In general, first attempts at contact are made immediately following the
assessment of late charges 15 days following the due date. Defaults are cured
promptly in most cases. If the borrower has not paid by the 45th day of
delinquency a letter is sent giving the borrower 7 days in which to cure the
default. If the default is not cured by the expiration date the loan is
accelerated. If the delinquency on a mortgage loan exceeds 90 days and is not
cured through the Company's normal collection procedures, or an acceptable
arrangement is not worked out with the borrower, the Company will institute
measures to remedy the default, including commencing a foreclosure action or, in
special circumstances, accepting from the mortgagor a voluntary deed of the
secured property in lieu of foreclosure.
Loans are placed on non-accrual status when, in the judgement of the
Company's management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. Generally, all loans more than 90 days
delinquent are placed on non-accrual status. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's real
estate owned account until it is sold. The Company is permitted under federal
regulations to finance sales of real estate owned by "loans to facilitate,"
which may involve more favorable interest rates and terms than generally would
be granted under the Company's underwriting guidelines.
37
The following table sets forth information regarding non-accrual loans and real
estate owned held by the Company at the dates indicated:
(In thousands) March 31, June 30, March 31,
1997 1996 1996
---- ---- ----
Non-accrual loans:
Residential mortgage 6,463 $ 5,029 $ 4,427
Commercial mortgage 1,901 1,827 4,215
Construction 3,052 2,747 4,703
Consumer non-mortgage 1,607 1,342 1,226
-------- -------- --------
Total non-accrual loans 13,023 10,945 14,571
Specific loss allowances (576) (646) (596)
-------- -------- --------
Total non-accrual loans, net 12,447 10,299 13,975
-------- -------- --------
Real estate acquired through foreclosure:
One to four family
residential units 2,945 2,319 2,818
Residential land/lots 1,424 2,004 2,489
Shopping/retail centers 1,650 1,727 1,020
Office buildings -- -- --
Commercial land 192 192 192
-------- -------- --------
Total real estate acquired
through foreclosure 6,211 6,242 6,519
Specific and general
allowances for losses (540) (889) (688)
-------- -------- --------
Total real estate acquired through
foreclosure, net 5,671 5,353 5,831
-------- -------- --------
Total non-performing assets $ 18,118 $ 15,652 $ 19,806
======== ======== ========
Non-accrual loans to gross loans 1.84% 1.63% 2.26%
Total non-performing assets to sum of
gross loans and real estate acquired
through foreclosure 2.65% 2.32% 3.05%
Total non-performing assets to total assets 2.22% 2.10% 2.77%
The net amount of interest income foregone during the third quarters of
fiscal years 1997 and 1996 on loans classified as non-performing was $104,000
and $265,000, respectively. The amount foregone in the first nine months of
fiscal year 1997 was $438,000, compared to $507,000 in the first nine months of
fiscal year 1996.
38
As of March 31, 1997, the Company had no restructured loans subject to special
reporting rules.
The following table summarizes all non-accrual loans, by loan type, at
March 31, 1997:
Number
of Principal Specific Net
(Dollars in thousands) Loans Balance Allowances Investment
---------------------- ----- ------- ---------- ----------
Residential mortgage 68 $ 6,463 $ - $ 6,463
Commercial mortgage 6 1,901 - 1,901
Construction 7 3,052 - 3,052
Consumer non-mortgage 182 1,607 (576) 1,031
---- ------- ------ -----
263 $13,023 $ (576) $12,447
=== ======= ======== =======
Impaired loans are measured based on the present value of expected
future cash flows discounted at the effective interest rate of the loan, or at
fair value of the loan's collateral for "collateral dependent" loans. A loan is
considered impaired when it is probable that a creditor will be unable to
collect all interest and principal payments as scheduled in the loan agreement.
A loan is not considered impaired during a period of delay in payment if the
ultimate collectibility of all amounts due is expected. A valuation allowance is
required to the extent that the measure of the impaired loans is less than the
recorded investment. These rules do not apply to larger groups of homogeneous
loans such as consumer installment and real estate mortgage loans, which are
collectively evaluated for impairment. Impaired loans are therefore primarily
business loans, which include commercial loans and income property and
construction real estate loans. The Company's impaired loans are nonaccrual
loans, as generally loans are placed on nonaccrual status on the earlier of the
date that principal or interest amounts are 90 days or more past due or the date
that collection of such amounts is judged uncertain based on an evaluation of
the net realizable value of the collateral and the financial strength of the
borrower.
Impaired loans and the applicable valuation allowance at March 31, 1997
were as follows:
(In thousands) Related
Loan Valuation
Balance Allowance
Impaired with specific valuation allowance - -
Impaired without specific valuation allowance 5,076 -
------ ------
Total impaired loans 5,076 -
====== ======
Collateral dependent loans, which are measured at the fair value of the
collateral, constituted 100% of impaired loans at March 31, 1997.
39
Consistent with the Company's method for nonaccrual loans, interest
receipts for impaired loans are applied to principal when the ultimate
collectibility of principal is in doubt. The average recorded investment in
impaired loans, the amount of interest income recognized, and the amount of
interest income recognized on a cash basis during the periods ended March 31,
1997 were as follows:
Three Months Ended Nine Months Ended
(In thousands) March 31, 1997 March 31, 1997
--------------------- -----------------
Average recorded investment in impaired loans 4,426 5,092
Interest income recognized during impairment 84 233
Interest income recognized on a cash basis during impairment 84 233
The following table summarizes all real estate acquired through
foreclosure, by property type, at March 31, 1997:
Number
of Original Net
(Dollars in thousands) Units Basis Allowances Investment
---------------------- ----- ----- ---------- ----------
One to four family residential units 23 $ 2,945 $ 0 $ 2,945
Residential land/lots 5 1,424 (200) 1,224
Shopping/retail centers 2 1,650 (200) 1,450
Commercial land 1 192 0 192
------ ------- ------- -------
31 $ 6,211 $ (400) $ 5,811
====== ======= ======= =======
General loss allowance -- -- (140) (140)
------ ------- ------- -------
31 $ 6,211 $ (540) $ 5,671
====== ======= ======= =======
Potential problem loans consist of loans that are currently performing
in accordance with contractual terms but for which potential operating or
financial concerns of the obligors have caused management to have serious doubts
regarding the ability of such obligors to continue to comply with present
repayment terms. At March 31, 1997, such potential problem loans that are not
included in the above tables as nonperforming amounted to approximately
$7,948,000. Depending on the changes in the economy and other future events,
these loans and others not presently identified could be classified as
non-performing assets in the future. There are no loans classified for
regulatory purposes as loss, doubtful, substandard or special mention that have
not been disclosed above, that either (a) represent or result from trends or
uncertainties that management reasonable expects will materially impact future
operating results, liquidity or capital resources or (b) represent material
credits about which management is aware of any information that causes
management to have serious doubts as to the ability of such borrowers to comply
with loan repayment terms.
40
During the quarter ended September 30, 1995, the Company modified the
financing for a strip shopping center located in Marietta, Georgia. Prior to
June 30, 1995, Management was advised by the owners of the shopping center that
they were interested in selling the property. The Company had previously
acquired the shopping center though foreclosure in March 1990 and subsequently
sold the property to new owners in October 1990. The resulting "loan to
facilitate" was made at a below-market rate of interest and was the Company's
largest individual outstanding loan balance at June 30, 1995. Although the loan
was performing in accordance with its terms, the owners had minimal equity in
the project, and the loan was classified for regulatory purposes since its
inception. Management added to the allowance for commercial mortgage loan losses
in the past few years due to its concerns for this specific loan.
Management subsequently reached a agreement with the owners to accept
the net sales proceeds from the sale of the project to a third party. The
transaction was concluded in August 1995 and resulted in a chargeoff of
$1,056,000 against the allowance for commercial mortgage loan losses. An
arms-length loan was made by the Company to the acquiring entity at market
terms, including a substantial equity contribution. The new loan is being held
in the Company's commercial mortgage loan portfolio and is classified as a
performing credit. Management believes that the $2,760,000 in the allowance for
commercial mortgage loans at March 31, 1997, is adequate to cover potential
problems in the portfolio.
New Accounting Standards
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. SFAS 123 prescribes accounting and reporting
standards for all stock-based compensation plans. The new standard allows
companies to continue to follow present accounting rules which often result in
no compensation expense being recorded or to adopt the SFAS 123 fair-value-based
method. The fair-value-based method will generally result in higher compensation
expense based on the estimated fair value of stock-based awards on the grant
date. Companies electing to continue following present accounting rules will be
required to provide pro-forma disclosures of net earnings and earnings per share
as if the fair-value-based method had been adopted. The Company intends to
continue to follow present accounting rules and to implement the new disclosure
requirements in fiscal year 1997 as required. The adoption of SFAS 123,
therefore, will not impact the financial condition and results of operations of
the Company.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," was issued. The new
standard is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Specific transition provisions apply to servicing contracts in existence before
January 1, 1997 and certain financial assets subject to prepayment. SFAS 125
provides accounting and reporting standards
41
based on consistent application of the "financial components" approach that
focuses on control. Under the approach, after a transfer of 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. It provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Implementation guidance is provided for assessing
isolation of transferred assets and for accounting for transfers of partial
interests, servicing of financial assets, securitizations, transfers of
sales-type and direct financing lease receivables, securities lending
transactions, repurchase agreements, including "dollar rolls," "wash sales,"
loan syndications and participations, risk recourse, and extinguishments of
liabilities. The Company's adoption of SFAS 125 is not expected to have a
material adverse effect on the financial condition and results of operations of
the Company.
Impact of Inflation and Changing Prices. The consolidated financial
statements and related data presented in this quarterly report have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of the financial position and operating results of the
Company in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Virtually all of the assets of the Company are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services.
42
Part II. Other Information
Virginia First Financial Corporation and Subsidiaries
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the
three months ended March 31, 1997.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Virginia First Financial Corporation
------------------------------------
(Registrant)
Date: May 13, 1997 /s/ Charles A. Patton
------------------------
Charles A. Patton
President and
Chief Executive Officer
Date: May 13, 1997 /s/ William J. Vogt
----------------------
William J. Vogt
Senior Vice President and
Chief Financial Officer
44