SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
Transition Period: To
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Commission File Number: 0-19398
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
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(Exact name of Registrant as Specified in its Charter)
Virginia 54-1534067
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(State or other jurisdiction of incorporation (IRS Employer ID No.)
or organization)
2101 Parks Avenue, Virginia Beach, Virginia 23451
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (757) 428-9331
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate value of the Common Stock held by nonaffiliates of the
registrant as of March 14, 1997, computed by reference to the closing price of
such stock on the Nasdaq Stock Market on that date, was $42,742,355. Solely for
purposes of this calculation, the term "affiliate" is deemed to include all
executive officers and directors of the registrant. As of March 14, 1997, there
were issued and outstanding 4,971,399 shares of the Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for 1997 Annual Meeting of Stockholders.
(Part III)
PART I
Item 1. Business
General.
The Company. Virginia Beach Federal Financial Corporation (the
"Company") was incorporated under the laws of the Commonwealth of Virginia in
February 1989, for the purpose of becoming a savings and loan holding company
and owning all of the issued and outstanding Common Stock of First Coastal Bank
("the Bank"), which was chartered as Virginia Beach Federal Savings Bank at that
time. On June 28, 1991, the Company acquired all of the outstanding Common Stock
of the Bank pursuant to the Amended and Restated Agreement and Plan of
Reorganization of the Bank in connection with the reorganization of the Bank
into a savings and loan holding company structure (the "Reorganization"). The
Reorganization had originally been approved by the stockholders of the Bank in
1989. Because the Reorganization was not consummated within one year from the
date of such approval, however, the Reorganization was reauthorized at the April
24, 1991, annual meeting of the Bank's stockholders.
Prior to the Reorganization, the Company had no assets or liabilities
and engaged in no significant business activities. Subsequent to the
Reorganization, the Company has engaged in no significant activities other than
the ownership of the Common Stock of the Bank and operating as a savings and
loan holding company for the Bank. Accordingly, the information presented
herein, including financial statements and related data, relates primarily to
the Bank and its subsidiaries. References throughout this Report to the Company
include the Bank and its subsidiaries, unless the context otherwise requires.
The Company's principal executive offices are located at 2101 Parks
Avenue, Virginia Beach, Virginia 23451, and its telephone number at that address
is (757) 428-9331.
The Bank. First Coastal Bank was originally chartered in 1935 as a
federal mutual savings and loan association. Since that time, it has been a
member of the Federal Home Loan Bank ("FHLB") System, and its deposits have been
federally insured up to applicable limits. On August 29, 1980, the Bank
converted from mutual to stock form. In November, 1996, the Bank changed its
name from Virginia Beach Federal Savings Bank to First Coastal Bank. The
principal executive offices of the Bank are located at 2101 Parks Avenue,
Virginia Beach, Virginia 23451 and its telephone number at that address is (757)
428-9331.
Lending Activities
General. The Bank originates loans directly and through its mortgage
banking subsidiary, First Coastal Mortgage Corp ("First Coastal Mortgage"),
which was previously known as Beach Fed Mortgage Corp.
The types and amounts of loans which may be made by First Coastal Bank
are prescribed by federal law. The Bank is authorized to make loans secured by
first liens on residential property and by junior liens on residential real
estate. Subject to certain limits, the Bank also engages in secured and
unsecured consumer, commercial, corporate and business lending activities.
1
Loans Receivable Held for Investment. Set forth below is information
concerning loans receivable held for investment at the specified periods. This
information does not include mortgage-backed securities. Other than as disclosed
below, there were no concentrations of loans at December 31, 1996, which
exceeded 10% of total loans.
At December 31,
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1996 1995 1994 1993 1992
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
===================================================================================================
Type of Loan (Dollars in Thousands)
Conventional real estate loans
Interim construction loans... $ 58,834 13.22% $ 43,246 9.97% $ 25,427 5.99% $ 15,233 3.93% $ 29,755 8.39%
Loans on existing
property (1) (2)........... 398,219 89.48 395,917 91.32 413,920 97.52 370,637 95.73 324,191 91.37
Commercial...................... 10,731 2.41 4,343 1.00 1,059 0.25 1,826 0.47 --- ---
Consumer loans
Deposit account loans........ 725 .16 1,030 0.24 878 0.21 1,484 0.38 2,012 0.57
Home improvement and
consumer loans............. 12,698 2.85 8,864 2.04 4,966 1.17 7,790 2.02 10,229 2.88
Equity line of credit........ 3,232 .73 2,572 0.59 1,726 0.41 1,424 0.37 1,111 0.30
Less
Loans in process............. 33,460 7.52 16,422 3.79 16,632 3.92 4,825 1.25 5,195 1.46
Discounts and other.......... 1,534 .34 2,020 0.47 2,581 0.61 2,225 0.57 2,642 0.74
Loan loss reserve............ 4,390 .99 3,968 0.90 4,328 1.02 4,173 1.08 4,651 1.31
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Total...................... $ 445,055 100.00% $ 433,562 100.00% $424,435 100.00% $387,171 100.00% $354,810 100.00%
===================================================================================================
Type of Security
Residential real estate
1-to-4 family................ $ 347,779 78.15% $ 348,780 80.45%$353,434 83.27% $302,658 78.17% $272,377 76.77%
Other dwelling units......... 27,723 6.23 5,797 1.33 13,116 3.09 10,010 2.59 5,129 1.45
Commercial or industrial
real estate.................. 84,783 19.05 87,158 20.10 74,523 17.56 74,626 19.28 76,464 21.55
Commercial...................... 10,731 2.41 4,343 1.00 1,059 0.25 1,826 0.47 --- ---
Deposits........................ 725 .16 1,030 0.24 878 0.21 1,484 0.38 2,012 0.57
Other........................... 12,698 2.85 8,864 2.04 4,966 1.17 7,790 2.01 11,316 3.17
Less
Loans in process............. 33,460 7.52 16,422 3.79 16,632 3.92 4,825 1.25 5,195 1.46
Discounts and other.......... 1,534 .34 2,020 0.47 2,581 0.61 2,225 0.57 2,642 0.74
Loan loss reserve............ 4,390 .99 3,968 0.90 4,328 1.02 4,173 1.08 4,651 1.31
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Total...................... $ 445,055 100.00% $ 433,562 100.00%$424,435 100.00% $387,171 100.00% $354,810 100.00%
===================================================================================================
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(1) Includes construction loans converted to permanent loans.
(2) Excludes $433,000 in net loans that were in-substance foreclosed at
December 31, 1992 that would have been reclassified from foreclosed
real estate to loans receivable as a result of the Company's adoption
of FAS114.
2
Out of Area Lending. The following table summarizes certain information
concerning those loans and commitments made by the Bank outside of its primary
market area of Virginia. Residential single family loans, including wrap loans,
are primarily located in Texas, Massachusetts, Georgia, New Mexico, Kentucky,
Nevada, Michigan and Maryland. Commercial/industrial real estate loans are
primarily located in Illinois, Texas, Utah and Washington. The information does
not include mortgage-backed securities. The Company presently does not actively
solicit new loans from outside its primary market area.
At December 31,
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1996 1995 1994 1993 1992
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Amount No. Amount No. Amount No. Amount No. Amount No.
======================================================================================================
(Dollars in Thousands)
Type of Loan (1)
Conventional loans
Residential-Single-family $ 43,360 947 $ 60,779 1,202 $ 76,820 1,458 $106,705 1,926 $142,871 3,180
Other dwelling units .... 18 6 18 10 46 33 106 113 62 1
Commercial or industrial 10,041 39 10,053 43 13,687 55 20,981 72 14,906 82
Wrap loans--residential-
Single-family ............ 5,402 435 7,108 534 9,294 655 8,156 547 9,450 572
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total .............. $ 58,821 1,427 $ 77,958 1,789 $ 99,987 2,201 $135,948 2,658 $167,289 3,835
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Percentage of out-of-area
loans to total loans
receivable, net........... 13.2% 18.0% 23.4% 35.1% 47.1%
==== ==== ==== ==== ====
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(1) Excludes $770,000 in gross loans that were in-substance foreclosed at
December 31, 1992 that would have been reclassified from foreclosed
real estate to loans receivable as a result of the Company's adoption
of FAS 114.
3
Loan Activity. The following table shows the Bank's lending activities
during the periods indicated. The information includes loans originated and sold
into the secondary market but does not include mortgage-backed securities or
loans exchanged for mortgage-backed securities.
Year Ended December 31,
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1996 1995 1994 1993 1992
======================================================================================
(In Thousands)
Loans Originated
Conventional single-family residential
Construction loans....................... $ 72,193 $ 42,966 $ 41,613 $ 18,600 $ 28,191
Loans on existing property............... 127,250 258,596 237,258 313,708 243,781
Other loans................................ 18,746 16,668 6,385 7,754 4,486
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Total loans originated................... $ 218,189 $ 318,230 $285,256 $340,062 $276,458
======================================================================================
Loans Purchased
Loans on existing property
Individual loans from $ -- $ 339 $ 47,866 $ 41,397 $ 63,222
correspondents........................
Bulk purchases.......................... -- -- 3,881 18,273 41,544
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Total loans purchased................... $ -- $ 339 $ 51,747 $ 59,670 $104,766
======================================================================================
Loans Sold
Loans on existing property................. $ 81,114 $ 236,299 $318,560 $341,119 $256,830
======================================================================================
During fiscal year 1996, the Bank originated approximately $118,400,000
single-family first mortgage loans and sold approximately $71,500,000 of such
loans. While the Bank's single family residential loan originations are
generally underwritten for sale into the secondary market, $46,900,000 of such
loans made during 1996 were retained for the Bank's loan portfolio. It is the
Bank's policy to retain those loans, generally loans with adjustable interest
rates and/or reset or call provisions within five years of origination date,
which facilitate the attainment of the Bank's interest rate risk management
objectives. Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information regarding
asset/liability management. For further discussion of First Coastal Mortgage's
activities, see "Subsidiary Activities."
Residential Mortgages. The Bank offers various types of residential
mortgage loans in addition to traditional long-term, fixed-rate loans. Such
loans include 30 and 15-year amortizing mortgage loans with fixed rates of
interest, fixed-rate mortgage loans with terms of 30 years but subject to call
after five, seven or ten years at the option of the Bank and several types of
adjustable-rate mortgage loans.
Adjustable-rate mortgage loans vary with respect to maturity, interest
rate adjustment periods and basis for adjustment. These loans generally have a
fixed rate for an initial one or three year period and then have interest rate
adjustments based on the yield on United States Treasury securities, adjusted to
a constant one-year maturity. The adjustment rates have been generally 2.75% to
3.50% above the index. The loans have annual and lifetime limits on rate
increases of 1 to 2 and 3 to 6 percentage points, respectively.
4
Commercial Real Estate, Construction, Acquisition and Development Loans.
The Bank's permanent loans secured by commercial real estate have customarily
been 15-year to 20-year amortizing loans with principal and interest due
monthly. Such loans are ordinarily callable after three, five or seven years at
the option of the Bank. Currently, the Bank is offering adjustable rate
commercial real estate loans with interest rates that typically adjust every
one, three or five years based on the one-year, three-year or five-year United
States Treasury note rate. The initial interest rate is a market rate. The
Bank's policies permit loans to be made for up to 75% of the appraised value of
the commercial real estate securing the loans. The Bank's commercial real estate
loans are secured primarily by office buildings, strip shopping centers, motels,
warehouses and apartment buildings. As of December 31, 1996, the Bank's
commercial real estate loans ranged in size up to $3.7 million.
The Bank makes construction loans for residential properties to
individuals and builders. Loans to individuals are made for six to nine months
at a fixed interest rate of up to two percentage points above the Bank's prime
rate at the time of the loan. Loans to builders are made up to two percentage
points above the Bank's prime rate, adjusted monthly. Residential construction
loans are made at up to 80% loan-to-value ratios. Construction loans on
commercial real estate are made generally for a term of one year at a rate
generally at one to two percentage points above the Bank's prime rate, adjusted
monthly. Such loans are made with loan-to-value ratios of up to 75%.
The Bank makes land acquisition and development loans on properties
intended for future development. The Bank lends up to 75% of the appraised value
of the property. Such loans are made for specified periods on an interest only
basis. These periods may be extended, subject to negotiation and the payment of
an extension fee. The Bank's current policy is to make such loans generally at
one to two percentage points above the Bank's prevailing prime rate at the time
the loan is made with interest rates adjusted monthly thereafter.
Commercial real estate and commercial land acquisition and construction
lending are generally considered to involve a higher level of credit risk than
one-to four-family residential lending due to the concentration of principal in
a limited number of loans and borrowers and the effects of general economic
conditions on real estate developers and managers. The Bank's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's sell-out value upon completion of the project, the estimated
cost of the project and the time to complete and/or sell the project. If the
estimated cost of construction or development proves to be inaccurate, the Bank
may be compelled to advance funds beyond the amount originally committed to
permit completion of the project. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project the value of which may appear to be insufficient to assure full
repayment. When loan payments become due, borrowers may experience cash flow
from the project which is not adequate to service total debt. This cash flow
shortage may result in the failure to make loan payments. In such cases, the
Bank may be compelled to modify the terms of the loan. In addition, the nature
of these loans is such that they are generally less predictable and more
difficult to evaluate and monitor.
Commercial Loans. The Bank makes fixed and variable rate commercial
loans to individuals and corporations on either a secured or unsecured basis.
Fixed rate loans bear interest rates generally between 250 and 350 basis points
above the like term United States Treasury securities and have maturities of up
to 5 years. Variable rate loans are originated at market rate with adjustments
based on the Bank's prime rate plus 100 to 250 basis points.
Consumer Loans. The Bank is permitted to invest up to 35% of its assets
in consumer loans. The Bank originates property improvement loans through
contacts with contractors and through its branches. It also makes loans secured
by deposits. The Bank also offers home equity lines of credit, automobile loans,
boat loans and unsecured personal loans. Such loans vary as to rate and term.
5
Loan Maturity and Repricing Information. The following table sets forth
certain information at December 31, 1996, regarding the dollar amount of loans
maturing or repricing in the Bank's loan and mortgage-backed securities
portfolio based on their maturity or repricing date. Demand loans, loans having
no stated schedule of repayments and no stated maturity, overdrafts and
delinquent loans maturing prior to December 31, 1996, are reported as due in one
year or less. At December 31, 1996, scheduled payments of principal, and
expected prepayments of principal which are based on consensus expected
prepayment speeds obtained from dealers or other sources which management
believes to be reliable, are shown in the period during which such principal
reduction is expected to occur.
Due 1/1/97 Due 1/1/98 - Due After
- 12/31/97 12/31/2001 12/31/2001
============================================================
(In Thousands)
Held or Available-for-sale
Real estate mortgage loans................... $ 268 $ 195 $ 4,322
Mortgage-backed securities................... 56,583 16,190 3,616
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56,851 16,385 7,938
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Held-for-investment
Real estate mortgage loans................... 196,407 141,871 58,212
Real estate construction loans............... 26,214 765 --
Mortgage-backed securities................... 4,843 12,739 11,890
Commercial................................... 7,506 3,220 --
Consumer loans............................... 5,995 7,252 3,406
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240,965 165,847 73,508
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Total............................................ $ 297,816 $ 182,232 $ 81,446
============================================================
6
The table below sets forth the dollar amount of all loans and
mortgage-backed securities at December 31, 1996, that mature or reprice after
December 31, 1997 which have predetermined interest rates and have floating or
adjustable interest rates.
Predetermined Floating or
Rates Adjustable Rate
=====================================================
(In Thousands)
Held or Available-for-sale
Real estate mortgage loans.............................. $ 195 $ 4,322
Mortgage-backed securities.............................. 19,806 --
-----------------------------------------------------
20,001 4,322
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Held-for-investment
Real estate mortgage loans.............................. 143,059 57,789
Mortgage-backed securities.............................. 24,629 --
Commercial.............................................. 3,220 --
Consumer loans.......................................... 10,658 --
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181,566 57,789
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Total.................................................... $ 201,567 $ 62,111
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Loan Commitments. The Bank issues commitments to prospective borrowers
to originate loans. At December 31, 1996, the Bank had committed to originate
$15,788,000 in loans, not including loans in process, the majority of which are
secured by property located in its local market area. Making relatively
long-term commitments involves the risk that the interest rate to be received
will be below the market rate at the time the loan is originated or purchased.
The Bank finances loans its originates for sale until such time as the loans can
be sold. The period of time between issuance of a loan commitment and closing
and sale of the loan generally ranges from 60 to 120 days. In the event that
interest rates rise between the time of a loan commitment and closing and the
sale of the loan, the Bank may be unable to sell the loans without incurring a
loss. The Bank attempts to protect itself from changes in interest rates through
the use of best efforts forward delivery commitments, whereby the Bank commits
to sell a loan at the time the borrower commits to an interest rate with the
intent that interest rate risk on the loan has been assumed by the buyer. See
Note 17 of Notes to Consolidated Financial Statements.
Collection Procedures and Loan Quality. Collection procedures on
delinquent loans serviced by the Bank provide that when a loan payment is 30
days overdue, the borrower will be contacted by mail and payment requested. If
the delinquency continues, subsequent efforts are made to contact the delinquent
borrower. In certain instances after considering the ability of the borrower to
repay, the nature of the property and the proposed interest rate, the Bank may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his or her financial affairs. If the loan continues in a
delinquent status for 90 days, the Bank generally will initiate foreclosure
proceedings. Any property acquired by the Bank as a result of foreclosure or by
deed in lieu of foreclosure is listed for sale to attempt to recover all or part
of the Bank's investment and is classified as real estate owned until such time
as it is sold. When such property is acquired, it is recorded on the books of
the Bank at the lower of the unpaid principal balance of the related loan or its
fair value less its estimated costs of sale. Any further write-down of the
property is charged to the allowance for losses on foreclosed real estate. With
respect to loans subserviced for the Bank, the subservicer follows the same
procedures as the Bank and is contacted by the Bank when any loan is 60 days
delinquent in order to determine the status of action being taken.
7
Impaired Loans. The Company has adopted Statement of Financial
Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for Impairment
of a Loan," and Statement of Financial Accounting Standards No. 118 (FAS 118),
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Management periodically reviews its entire loan portfolio,
particularly each of its classified assets, which includes all non-performing
and loans contractually delinquent 90 days or more, to determine whether such
loans are impaired in accordance with FAS 114. Each of the Company's impaired
loans has been measured based on the value of the loan's collateral. An
allowance for possible loan losses has been established for any shortfall
between the Company's investment in impaired loans and the impaired loans'
collateral values.
8
The following table sets forth information with respect to the Bank's
non-performing assets at the periods indicated.
At December 31,
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1996 1995 1994 1993 1992
============================================================================================
(Dollars in Thousands)
Loans accounted for on a non-accrual
basis (1) (4):
Commercial real estate.............. $ 95 $ 99 $ 2,076 $ 3,817 $ --
Consumer............................ -- 125 250 -- --
--------------------------------------------------------------------------------------------
95 224 2,326 3,817 770
--------------------------------------------------------------------------------------------
Accruing loans which are contractually
past due 90 days or more (2):
Real Estate:
Residential........................ 4,009 3,553 3,507 4,460 4,674
Commercial......................... -- -- 194 267 6,364
Construction....................... -- -- -- -- --
Consumer........................... 22 18 77 -- --
--------------------------------------------------------------------------------------------
4,031 3,571 3,778 4,727 11,038
--------------------------------------------------------------------------------------------
Total of non-accrual and
90-days past due loans............. $ 4,126 $ 3,795 $ 6,104 $ 8,544 $11,038
============================================================================================
Non-accrual and 90-days past
due loans as a percentage
of total loans receivable, net....... 0.93% 0.88% 1.44% 2.21% 3.11%
============================================================================================
Other non-performing assets (3)........ $ 2,047 $ 5,767 $ 6,828 $ 9,798 $17,585
============================================================================================
- ----------------------
(1) Non-accrual status denotes loans on which, in the opinion of management, the
collection of additional interest is unlikely. Payments received on a
non-accrual loan are either applied to the outstanding principal balance or
the allowance for delinquent interest, depending on an assessment of the
collectibility of the loan.
(2) The Bank fully reserves against the interest on all accruing loans 90 days
past due and those loans that are identified by management as impaired.
(3) Other non-performing assets represents property acquired by the Bank through
foreclosure or repossession or reclassified as an in substance foreclosure.
This property is initially carried at the lower of its estimated fair value
less cost of disposition or the carrying value of the related loan at the
time of foreclosure.
(4) Excludes $770,000 in gross loans that were in-substance foreclosed at
December 31, 1992, that would have reclassified from foreclosed real estate
to loans receivable accounted for on a nonaccrual basis as a result of the
Company's adoption of FAS 114.
9
As of the dates indicated in the table above, the Bank had no loans
categorized as troubled debt restructuring. As of December 31, 1996, there are
no loans included in the table above where known information about possible
credit problems of the borrower caused management to have doubts as to the
ability of the borrower to comply with the present loan repayment terms.
At December 31, 1996, nonperforming loans included $113,000 of loans
which were considered impaired. The allowance for possible loan losses as of
December 31, 1996, included $70,000 related to loans considered to be impaired.
Other non-performing assets comprise properties acquired by the Bank
through foreclosure or repossession (collectively "REO"). An analysis of the
activity in REO for the periods shown is set forth below.
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994
=============================================================
(In Thousands)
Beginning balance...................................... $ 5,767 $ 6,828 $ 9,798
Foreclosures .......................................... 1,316 3,649 3,848
Other additions (1).................................... 62 1,325 1,367
Provision.............................................. (484) (200) (100)
Dispositions, net...................................... (4,614) (5,835) (8,085)
-------------------------------------------------------------
Ending balance......................................... $ 2,047 $ 5,767 $ 6,828
=============================================================
- -----------------
(1) Consists of improvements and advances pursuant to the Bank's salvage
powers in an effort to make the projects more saleable and purchases by
the Bank of the interests of other lenders in the projects.
Real Estate Owned ("REO"). At December 31, 1996 the REO properties
comprised Condominium Campsites, described below, with a carrying value of
$1,843,000, and three additional residential properties with an aggregate
carrying value of $204,000 and no individual value greater than $87,000.
Condominium Campsites, Virginia Beach, Virginia. In 1989, the Bank
originated a loan for the purchase of a 254 campsite campground located on over
62 acres of land in the Sandbridge section of Virginia Beach, Virginia. The
campsites were then divided into condominium units by the borrower and marketed
on an individual basis. Prior to the foreclosure by the Bank in 1991, 53 of 254
campsites had been sold. During the third quarter of 1993, the Bank entered into
an agreement with a company which specializes in the development and management
of recreational vehicle parks to develop and market the Bank's interest in this
property. Development of the property was completed during 1996 and a total of
87 lots have been sold. The Bank anticipates continued marketing of the sites
through 1998. No assurance can be given, however, that the property can be sold
for an amount equal to or greater than the carrying value.
Regulatory Loan Classification. Federal regulations require savings
associations to review and classify their assets on a regular basis. In
addition, in connection with examinations of savings associations, regulatory
examiners have authority to identify problem assets and, if appropriate,
classify them. The regulation provides for three asset classification categories
(i.e., substandard, doubtful and loss). The regulations also provide for a
special mention category, described as assets which do not
10
currently expose a savings association to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Loans classified as substandard or
doubtful require the savings association to establish general allowances for
loan losses. If an asset or portion thereof is classified loss, the savings
association must either establish a specific allowance for loan losses in the
amount of 100% of the portion of the asset classified loss, or charge off such
amount. General loss allowances established to cover possible losses related to
loans classified substandard or doubtful may be included in determining a
savings association's risk-based capital, subject to certain limitations, while
specific valuation allowances for loan losses do not qualify as risk-based
capital. Examiners may disagree with the savings association's classifications
and amounts reserved. At December 31, 1996, the Bank had $7,170,000 in assets
classified as substandard, and $77,000 classified as doubtful.
Allowances for Possible Losses on Loans and Real Estate Owned.
Management of the Bank assesses the adequacy of the allowances for possible
losses on loans and foreclosed real estate on a quarterly basis, and additions
to the allowances for losses on loans and foreclosed real estate are made when
deemed necessary. The Bank's Board of Directors reviews the reserves for loan
and foreclosed real estate losses quarterly. An allowance for loan losses is
provided when collectibility of specific real estate loans is in doubt and the
value of the security property has declined below the outstanding principal of
the related loan. The Bank also provides allowances for accrued interest on
delinquent loans and for estimated losses against the carrying value of
foreclosed real estate when management determines that collectibility of the
interest is in doubt or a decline in the fair value of the foreclosed real
estate has occurred. Additions to the allowances for losses on loans and
foreclosed real estate are charged to earnings through a provision for loan
losses. The allowances are reduced when a loss actually is incurred or such
allowance is charged-off in accordance with the accounting principles set forth
in FAS 114. See "Impaired Loans." In certain instances, reserves may also be
reduced when the assumptions under which the reserves were established indicate
that all or a portion of the reserve is no longer necessary.
During the fiscal year ended December 31, 1996, the Bank added $150,000
and $484,000, respectively, to its allowances for possible loan and foreclosed
real estate losses. As of December 31, 1996, the Bank had a total of $4,625,000
in its allowances for possible loan and foreclosed real estate losses.
Approximately $4,390,000 of the loss reserves are general unallocated loan loss
reserves and have been established in addition to the reserves indicated after a
specific loan evaluation methodology. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Notes 5 and 6 of Notes to
Consolidated Financial Statements.
11
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
Year Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
======================================================================================
(Dollars in Thousands)
Balance at beginning of period............... $ 3,968 $ 4,328 $ 4,173 $4,651 $2,650
Net loans (charged-off) recovered (1):
Real estate-mortgage....................... 272 (535) (120) (1,188) (249)
Real estate- construction.................. -- -- -- 110 --
--------------------------------------------------------------------------------------
Total (charge-offs) recoveries, net.......... 272 (535) (120) (1,078) (249)
Provisions for loan losses................... 150 175 275 600 2,250
--------------------------------------------------------------------------------------
Balance at end of period..................... $ 4,390 $ 3,968 $ 4,328 $4,173 $4,651
======================================================================================
Rates of net (charge-offs) recoveries
during the period to average loans
outstanding during the period............ 0.06% (0.12%) (0.03%) (0.26%) (0.06%)
======================================================================================
- ---------------------
(1) Includes charge-offs associated with loans reclassified as in-substance
foreclosure in years prior to 1994.
The following table sets forth the breakdown for the allowance for
possible loan losses by loan category at the periods indicated.
At December 31,
------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
==================================================================================================================
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
==================================================================================================================
(Dollars in Thousands)
Unallocated....... $ 4,390 (0.98)% $ 3,865 (0.92%) $ 3,652 (0.86)% $ 3,923 (1.01)% $ 3,790 (1.07)%
Real estate
mortgage:
Residential..... -- 70.42 -- 74.04 --- 80.90 --- 76.24 61 69.09
Commercial...... -- 18.42 -- 16.69 426 16.39 250 19.23 800 21.31
Real estate-
Construction... -- 6.03 -- 6.32 --- 2.01 --- 2.68 --- 6.93
Commercial........ -- 2.40 -- 0.99 --- 0.25 --- 0.47 --- ---
Consumer.......... -- 3.71 103 2.86 250 1.31 --- 2.39 --- 3.74
------------------------------------------------------------------------------------------------------------------
Total Allowances
for Loan
Losses......... $ 4,390 100.00% $ 3,968 100.00% $ 4,328 100.00% $ 4,173 100.00% $ 4,651 100.00%
==================================================================================================================
12
The unallocated or "general" portion of the allowance for possible loan
losses represents management's best estimate of the inherent loss present in the
Bank's loan portfolio at December 31, 1996. Management divides the loan
portfolio into two groups, classified loans and pass loans, in order to
determine the general loan loss reserve.
Management reviews each classified loan greater than or equal to
$400,000 and assigns a general reserve percentage to it based on the following
parameters:
General Reserve
Classification %
=====================================================================
Special Mention 0% - 5%
Substandard 5% - 25%
Doubtful 40% - 60%
These percentages are increased or decreased based on management's
review of the borrower's overall financial condition, type of collateral, loan
payment history, economic conditions and trends, guarantors, historical loss
experience on similar loans and any other relevant information. Classified loans
less than $400,000 are reviewed on a pool basis using the same criteria defined
above.
The pass loans are organized into pools with common characteristics in
terms of their risk profile, year originated, loan-to-value ratio, loan
collateral or any other characteristic considered appropriate by management. A
general reserve percentage is assigned to each pool based on the Bank's
historical loss experience for similar pools of loans.
The unallocated portion of the allowance for loan losses is management's
estimation of the losses that may be realized over the life of the loans
included in its portfolio at December 31, 1996. Management is unable to estimate
the timing or the amount of related future charge-offs.
Investment Activities. Federal savings banks have the authority to
invest in certain types of securities and other investments subject to various
restrictions largely related to limitations on the type of investments as a
percentage of total assets. The Bank's investment activities are within such
restrictions.
The Bank's investment securities, excluding mortgage-backed and related
securities, are described in Note 3 to the Consolidated Financial Statements.
Debt securities of certain federal agencies, securities issued by the United
States Treasury and federal funds sold amounting to $15,050,000 at December 31,
1996, are retained to satisfy the Bank's liquidity requirements. For more
information regarding liquidity requirements see "Management's Discussion and
Analysis of Financial Condition and Results of Operations." See "Regulation" for
further information regarding the Bank's regulatory capital requirements.
13
The carrying value of the Bank's investment portfolio at December 31,
1996, by maturity is as follows:
Weighted
Amortized Estimated Average
Remaining Maturity Cost Fair Value Rate
=======================================================================================================================
(Dollars in Thousands)
Within one year
U. S. Treasuries...................................... $ 2,980 $ 2,982 5.53%
Federal Agencies...................................... 2,003 2,019 7.56
--------------------------------------------------------
4,983 5,001 6.35
--------------------------------------------------------
After one year but within 5 years
U. S. Treasuries...................................... 3,971 3,947 5.06
Federal Agencies...................................... 8,987 8,750 5.59
--------------------------------------------------------
12,958 12,697 5.43
--------------------------------------------------------
No stated maturity
Federal Home Loan Bank stock.......................... 9,842 9,842 7.25
--------------------------------------------------------
$ 27,783 $ 27,540 6.24%
========================================================
The Bank also invests in mortgage-backed and related securities, subject
to regulations affecting such activities. Federal associations such as the Bank
have no limitations on the purchase of mortgage-backed and related securities if
such securities are issued by GNMA, FNMA or FHLMC or qualify under section
3(a)(41) of the Securities Exchange Act of 1934, as amended, commonly referred
to as Secondary Mortgage Market Enhancement Act or "SMMEA" securities. See Note
4 of the Notes to Consolidated Financial Statements for further information
regarding mortgage-backed and related securities.
It is the Bank's practice to purchase mortgage-backed and related
securities to supplement its loan portfolio and to make efficient use of the
Bank's capital. The Bank may purchase securities for a short period of time
under agreements to resell those same securities at a given date. The Bank's
risk-based capital requirements assign the Bank's mortgage-backed and related
securities to a 20% risk-weighted category. In addition, it is the Bank's
intention to use purchased floating rate mortgage-backed and related securities
to assist it in managing its interest rate risk in conjunction with its
asset/liability management. Management also expects the price volatility of the
floating rate mortgage-backed and related securities to be low and, accordingly,
classifies such securities as "available-for-sale" in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Please refer to Notes 2 and 4 of Notes to
Consolidated Financial Statements.
At December 31, 1996, 1995 and 1994, the Bank had $106,621,000,
$137,743,000 and $220,635,000, respectively, in mortgage-backed and related
securities, at amortized cost.
14
The table below sets forth certain information regarding the Bank's
investment in collateralized mortgage obligations at December 31, 1996.
Security Amortized Estimated Index/Frequency Estimated
Rating(1) Cost Fair Value of Adjustment Duration (3)
===========================================================================================
(Dollars in Thousands)
Floating Rate
Resolution Trust Corporation (2).. AAA $ 21,426 $ 21,103 1 yr. CMT/Annual .48 Yrs
Resolution Trust Corporation ..... AAA 358 358 3 yr. CMT/3 yrs. .32 Yrs
Corporate Issuance................ AAA 2,534 2,513 1 mth.LIBOR/Monthly .04 Yrs
------------------------------------
24,318 23,974
------------------------------------
Fixed Rate
Corporate Issuance................ AAA 53,482 52,351 N/A 3.02 Yrs.
FNMA ............................. AAA 704 701 N/A .09 Yrs.
------------------------------------
$ 54,186 $ 53,052
------------------------------------
Total....................... $ 78,504 $ 77,026
====================================
- ------------------
(1) The security rating is as of the issue date.
(2) Each loan in these pools adjusts annually based on the 1 Year Constant
Maturity Treasury ("CMT") index; the entire pool adjusts at a rate of
approximately 6 to 12% per month throughout each annual period.
(3) Estimated at December 31, 1996
High Risk Securities. The Company periodically measures its securities
individually to determine if they are "high risk" in accordance with OTS
regulations. At December 31, 1996 the Company had one mortgage-backed security
in the amount of $6,360,000 which was deemed high risk in accordance with these
regulations.
Source of Funds
Deposits. The primary source of funds for the Bank's lending and other
investment activities has been deposits solicited from the general public. Prior
to 1988, the Bank pursued a strategy of soliciting certificates of deposit with
maturities of one to ten years from depositors outside of its local area market.
The purpose of attracting long-term deposits was both to fund asset growth and
lengthen the maturities of the deposits in the Bank in order to match them more
closely to the maturities of loans purchased. The Bank, on a retail basis, no
longer actively advertises for deposits outside of its local area market and
offers customers outside its local market, with maturing deposits, renewal rates
no higher than those offered to customers in the Bank's local markets.
Currently, the Bank uses alternate sources, such as advances from the FHLB of
Atlanta and brokered deposits, for its long term funds if retail deposit rates
are judged by management to be unattractive.
15
Deposit activity is set forth as follows:
Retail Deposits Brokered
Local Area Other Deposits Total
==============================================================================
(Dollars in Thousands)
Year Ended December 31, 1996
Beginning balance................................ $ 289,162 $ 44,587 $ 159,222 $ 492,971
Deposits purchased............................... -- -- 80 80
Net cash inflow (outflow)........................ 494 (7,617) (73,029) (80,152)
Interest credited................................ 7,927 2,563 -- 10,490
------------------------------------------------------------------------------
Total................................... $ 297,583 $ 39,533 $ 86,273 $ 423,389
==============================================================================
Year Ended December 31, 1995
Beginning balance................................ $ 268,488 $ 59,541 $ 177,041 $ 505,070
Deposits purchased............................... -- -- 71,350 71,350
Net cash inflow (outflow)........................ 10,807 (18,336) (89,169) (96,698)
Interest credited................................ 9,867 3,382 -- 13,249
------------------------------------------------------------------------------
Total................................... $ 289,162 $ 44,587 $ 159,222 $ 492,971
==============================================================================
Year Ended December 31, 1994
Beginning balance................................ $263,608 $148,839 $60,281 $472,728
Deposits purchased............................... -- -- 136,183 136,183
Net cash inflow outflow.......................... (3,134) (94,533) (19,423) (117,090)
Interest credited................................ 8,014 5,235 -- 13,249
------------------------------------------------------------------------------
Total................................... $268,488 $ 59,541 $177,041 $505,070
==============================================================================
Characteristics of time deposits as of December 31, 1996, are set forth below:
Retail Deposits Brokered Deposits
----------------------------------------------------------------------------
Average Average
Remaining Maturity Amount Rate Amount Rate
========================================================================================================================
(Dollars in Thousands)
Within three months........................ $ 39,615 5.22% $ 14,995 6.43%
Three to six months........................ 54,450 5.41% 16,458 5.97%
Six months to one year..................... 56,456 5.38% 21,892 6.26%
One year to two years...................... 37,587 5.81% 32,928 6.28%
Two years to three years................... 20,791 5.80% -- --
Over three years........................... 13,952 6.10% -- --
------------------ -----------------
Total.................................... $ 222,851 $86,273
================== =================
16
A summary of time deposits $100,000 or greater by maturity follows (in
thousands):
Remaining Maturity Balance
================================================================
Within three months........................ $ 4,472
Three months to six months................. 8,670
Six months to one year..................... 8,089
One year to two years...................... 6,904
Two to three years......................... 3,449
Over three years........................... 1,942
-----------------
Total................................... $ 33,526
=================
Borrowings. As a member of the FHLB System, the Bank may obtain
additional funds through loans, which are called advances, from the FHLB of
Atlanta. Advances are secured by a blanket floating lien on qualifying 1-4
family first mortgage loans and certain mortgage-backed and related securities.
At December 31, 1996, fixed-rate advances totaled $98,110,000 with a weighted
average maturity of 20 months, and had a weighted average cost of 6.14%.
Variable rate advances totaled $35,000,000 and had a weighted average maturity
of 20 months and a weighted average cost of 5.43%. The interest rates on the
variable rate advances are based on either 1-month LIBOR or the Federal funds
rate and adjust monthly or quarterly.
The Bank periodically uses reverse repurchase agreements and dollar
roll reverse repurchase agreements to assist in meeting short-term cash-flow
needs. Reverse repurchase agreements involve a borrowing pursuant to which the
lender agrees to return to the Bank the same securities given as collateral. The
Bank enters into reverse repurchase agreements for a limited term, usually 30,
60 or 90 days, or due on demand. The reverse repurchase agreements are repaid by
the Bank when excess cash is available. Dollar roll reverse repurchase
agreements are agreements pursuant to which the lender agrees to return to the
Bank securities that are substantially the same as those that were pledged as
collateral. The dollar roll reverse repurchase agreements have terms of 30, 60
or 90 days. At December 31, 1996, the Bank had $4,920,000 reverse repurchase
agreements outstanding which matured within 90 days. There were no dollar roll
agreements outstanding at December 31, 1996. See Note 11 of Notes to
Consolidated Financial Statements.
Reverse repurchase agreements and dollar roll reverse repurchase
agreements have certain risks. An increase in market interest rates could
decrease the market value of the securities used by the Bank as collateral in
reverse repurchase transactions, and thus the amount of funds that the Bank
could obtain through such transactions would decrease if additional collateral
is not available. In addition, if the Bank sells securities pursuant to a
reverse repurchase agreement to an entity which subsequently becomes insolvent,
the Bank may experience difficulty obtaining the return of such securities. The
borrowing represented by a reverse repurchase agreement is generally over-
collateralized, i.e., the market value of the securities involved exceeds the
price at which the Bank agrees to sell and repurchase the securities. Thus, if
the Bank has difficulty obtaining the return of the securities, it could lose
the amount of such difference. In order to seek to reduce such risks, the Bank
transacts all of its reverse repurchase agreement borrowings with primary
dealers or regional banks, the financial conditions of which it reviews
periodically.
17
Subsidiary Activities
First Coastal Bank is permitted to invest an amount equal to 2% of its
assets in service corporations. An additional investment of 1% of assets may be
made where such investment is primarily for community, inner-city or community
development purposes. The Bank has four first tier subsidiaries, First Coastal
Mortgage, VBF Financial Services Corp. ("VBFFSC"), Princess Anne Service
Corporation ("PASC"), and Eighth Princess Anne Properties, Inc. ("8thPA").
First Coastal Mortgage is a wholly owned subsidiary of the Bank, and
was formed in 1987 for the purpose of engaging in mortgage banking activities.
First Coastal Mortgage solicits loan applicants for a variety of conventional
and government insured mortgage loans secured by residential real estate. During
1992 through 1994, First Coastal had expended its operations to include loan
production offices through central and northern Virginia and into Maryland. Late
in 1995 the Company sold five of its seven loan production branches leaving two
branches operating in the Hampton Roads market contiguous to the Company's
retail banking operations.
Princess Anne Service Corporation and its subsidiaries (collectively
"PASC") were formed throughout the 1980s to invest in a variety of real estate
development projects, and to hold title to or operate certain real estate
properties of the Bank which had been acquired through foreclosure. PASC is a
"non-includable subsidiary" for purpose of compliance with the Bank's regulatory
capital requirements. See "Regulation -- Regulatory Capital Requirements." At
December 31, 1996, the Bank had $34,500 of investment in and advances to PASC.
The Bank is presently winding down the activities of PASC. At December
31, 1996, PASC's assets consist of a partnership investment holding one parcel
of undeveloped commercial real estate. At the present time, the Bank does not
intend to make additional investments in PASC and expects that its present
investment will be recovered over the next several years.
Eighth Princess Anne Properties, Inc. ("8thPA") was acquired from PASC
during 1994 in order to hold a certain piece of foreclosed real estate located
in Virginia Beach, VA. The foreclosed real estate held by 8thPA was sold during
1995. At December 31, 1996, the Bank had $3,000 of net advances due from 8thPA.
VBF Financial Services Corp. is a wholly owned subsidiary of the Bank
and was formed in April 1992 to sell fixed-rate annuities, a range of mutual
funds and tax-exempt investments on an agency basis for a commission. At
December 31, 1996, the Bank had $205,000 of investment in and advances to VBF
Financial Services Corp.
Competition
First Coastal Bank faces strong competition in the attraction of
deposits, its primary source of lendable funds, and in the origination of real
estate loans. The Bank competes for deposits by offering a wide variety of
accounts, competitive rates, premiums and numerous customer services, and
competes for loans principally through the interest rates and loan fees it
charges and the availability of funds to make loan commitments. The Bank's most
direct competition for savings deposits has historically come from commercial
banks, other thrift institutions and credit unions in the Hampton Roads area.
The Bank's competition for real estate loans comes principally from commercial
banks, other thrift institutions, mortgage banking companies, life insurance
companies and other institutional lenders.
18
Personnel
As of December 31, 1996, the Company had 181 full-time employees and 23
part-time employees. The employees are not represented by a collective
bargaining agreement. The Company believes relationships with its employees are
satisfactory.
Regulation
General. As a federally chartered, Savings Association Insurance Fund
("SAIF") insured savings association, the Bank is subject to extensive
regulation by the Office of Thrift Supervision (the "OTS") and the Federal
Deposit Insurance Corporation (the "FDIC"). Lending activities and other
investments must comply with various federal statutory and regulatory
requirements. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors
of the Bank. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulations, whether by the OTS, the
FDIC or the U. S. Congress could have a material adverse impact on the Company,
the Bank and their operations. The Company is also required to file certain
reports with, and otherwise comply with, the rules and regulations of the OTS
and the Securities and Exchange Commission ("SEC").
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
19
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
This risk classification is based on an institution's capital group and
supervisory subgroup assignment. In addition, the FDIC is authorized to increase
such deposit insurance rates, on a semi-annual basis, if it determines that such
action is necessary to cause the balance in the SAIF to reach the designated
reserve ratio of 1.25% of SAIF-insured deposits. In addition, the FDIC may
impose special assessments on SAIF members to repay amounts borrowed from the
U.S. Treasury or for any other reason deemed necessary by the FDIC. The Bank's
federal deposit insurance premium expense for the year ended December 31, 1996,
amounted to approximately $4,514,000.
Prior to September 30, 1996, savings associations paid within a range
of .23% to .31% of domestic deposits and the SAIF was substantially underfunded.
By comparison, prior to September 30, 1996, members of the Bank Insurance Fund
("BIF"), predominantly commercial banks, were required to pay substantially
lower, or virtually no, federal deposit insurance premiums. Effective September
30, 1996, federal law was revised to mandate a one-time special assessment on
SAIF members such as the Savings Bank of approximately .657% of deposits held on
March 31, 1995. The Savings Bank recorded a $3,311,000 pre-tax expense for this
assessment at September 30, 1996. Beginning January 1, 1997, deposit insurance
assessments for SAIF members were reduced to approximately .064% of deposits on
an annual basis; this rate may continue through the end of 1999. During this
same period, BIF members are expected to be assessed approximately 0.13% of
deposits. Thereafter, assessments for BIF and SAIF members should be the same
and the SAIF and BIF may be merged. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Bank declined by
approximately 70% from rates in effect prior to September 30, 1996.
Examination Fees. In addition to federal deposit insurance premiums,
savings institutions, like the Bank, are required by OTS regulations to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a semi-annual basis and is computed based on total assets of the
institution, including subsidiaries. The Bank's OTS assessment expense for the
year ended December 31, 1996 totalled approximately $143,000.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the allowance for loan losses. The portion
of the allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets
20
by multiplying each asset and off-balance sheet item by various risk factors as
determined by the OTS, which range from 0% for cash to 100% for delinquent
loans, property acquired through foreclosure, commercial loans and other assets.
Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and to Note 15 of Notes to Consolidated
Financial Statements for more information about the Bank's regulatory capital at
December 31, 1996.
Prompt Corrective Action. Federal law established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, banking regulators are required to take certain supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's degree of undercapitalization. Under the OTS final rule
implementing the prompt corrective action provisions, an institution shall be
deemed to be (i) "well capitalized" if it has total risk- based capital of 10.0%
or more, has a Tier I risk-based capital ratio (core or leverage capital to
risk- weighted assets) of 6.0% or more, has a leverage capital of 5.0% or more
and is not subject to any order or final capital directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I
risked-based ratio of 4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a leverage capital ratio that is less than 4.0% (3.0% in certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. In addition, under certain
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the Federal Deposit Insurance Act
("FDIA") (i) restricting payment of capital distributions and management fees,
(ii) requiring that the appropriate federal banking agency monitor the condition
of the institution and its efforts to restore its capital, (iii) requiring
submission of a capital restoration plan, (iv) restricting the growth of the
institution's assets and (v) requiring prior approval of certain expansion
proposals. The appropriate federal banking agency for an undercapitalized
institution also may take any number of discretionary supervisory actions if the
agency determines that any of these actions is necessary to resolve the problems
of the institution at the least possible long term cost to the deposit insurance
fund, subject in certain cases to specified procedures. These discretionary
supervisory actions include: requiring the institution to raise additional
capital; restricting transactions with affiliates; restricting interest rates
paid by the institution on deposits; requiring replacement of senior executive
officers and directors; restricting the activities of the institution and its
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate.
The Bank is currently a "well capitalized institution" as defined in
the prompt corrective action regulations and as such is not subject to any
prompt corrective action measures.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
21
OTS regulations impose limitations upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to shareholders of another institution in a
cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. In the
event the Bank's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Finally, under Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized" (not meet any one of its minimum regulatory capital
requirements).
As of December 31, 1996, the Bank was a Tier 1 institution. However,
there can be no assurance that the OTS will not prohibit any capital
distribution by the Bank to the Company.
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended
("HOLA"), requires savings institutions to meet a qualified thrift lender
("QTL") test. The required percentage of qualified thrift investments ("QTIs")
is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs as qualifying QTIs. Compliance with the QTL
test is measured on a monthly basis. As of December 31, 1996, the Bank was in
compliance with its QTL requirement with 83.4% of its assets invested in QTIs.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall be restricted on advances from its FHLB; and (iv) payment of
dividends by the savings association shall be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three years from
the date the savings association ceases to be a QTL, it must cease any activity
and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
Loans-to-One Borrower. Under the HOLA, savings institutions are subject
to the national bank limits on loans-to-one borrower. With respect to the dollar
amount of credit that savings institutions may extend to a single or related
group of borrowers, savings associations are subject, since 1989, to the same
limits as those applicable to national banks, which under current law have
lending limits in an amount equal to 15% of unimpaired capital and unimpaired
surplus on an unsecured basis and an additional
22
amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is
secured by readily marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate. At December
31, 1996, the Bank's lending limit to one borrower was $6.7 million. Current
lending limits to one borrower may adversely affect the Bank's ability to
conduct its operations, particularly its ability to make real estate development
and construction loans which typically carry large balances. At December 31,
1996, the Bank's largest aggregate loans and commitments to one borrower was
$6.65 million.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1996, the required liquid
asset ratio was 5%. The Bank's liquidity ratio at December 31, 1996, was 6.46%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term U.S. Government obligations), and long-term assets (e.g., U.S.
Government obligations of more than one and less than five years and state
agency obligations with a maximum remaining term of 24 months). The regulations
governing liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from, or debt securities subject to repurchase
agreements with, members of the Bank of Primary Dealers in United States
Government Securities or banks whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial future position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of the securities. The OTS may also
designate as liquid assets certain mortgage-related securities with less than
one year to maturity. Short-term liquid assets currently must constitute at
least 1% of an association's average daily balance of net withdrawable deposit
accounts and current borrowings. Monetary penalties may be imposed upon
associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to the greater of 5% of outstanding advances
or at least 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year. At December 31,
1996, the Bank had $9.8 million in FHLB stock, which was in compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the year ended December 31, 1996, dividends paid by the FHLB
of Atlanta to the Bank totaled approximately $714,000.
23
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. The Bank's
reserve requirement at December 31, 1996, was $25,000.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all FHLB sources before borrowing from the Federal
Reserve System. The Bank had no borrowings from the Federal Reserve System at
December 31, 1996.
Holding Company Regulation. General. The Company is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As such,
the Company is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
As a unitary savings and loan holding company, the Company generally is
not be subject to activity restrictions, provided the Bank satisfies the QTL
test. If the Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured savings association) would become
subject to restrictions applicable to bank holding companies unless such other
associations each also qualify as a QTL and were acquired in a supervisory
acquisition.
The Company must obtain approval from the OTS before acquiring control
of any other SAIF- insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. The
Federal Reserve Board may approve an application by a bank holding company to
acquire control of a savings association. A bank holding company that controls a
savings association may merge or consolidate the assets and liabilities of the
savings association with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. Federal savings associations are
permitted to acquire or be acquired by any insured depository institution. As a
result of these provisions, there have been a number of acquisitions of savings
associations by bank holding companies and other financial institutions in
recent years.
A bill has been introduced to the House Banking Committee that would
consolidate the OTS with the Office of the Comptroller of the Currency. The
resulting agency would regulate all federally chartered commercial banks and
thrift institutions. In addition, the bill would abolish the current authority
of a unitary savings and loan holding company (i.e., a holding company with only
one thrift institution subsidiary) that has a thrift institution subsidiary
which meets the qualified thrift lender test
24
from investing in activities other than those permitted for bank holding
companies. Under current regulations, a savings and loan holding company, such
as the Company, which has only one thrift subsidiary which meets the qualified
thrift lender test, such as the Bank, has broad investment authority. The
proposed limitation on investment activities by unitary savings and loan holding
companies, if enacted, would restrict the ability of the Company to engage in
certain non-banking and other business activities. As of December 31, 1996, the
Company was not engaged in any such activities.
Executive Officers of the Registrant
Set forth below is current information concerning the Company's
executive officers.
Name Position Age
================================================================================
John A.B. Davies, Jr. President and Chief Executive Officer 45
Dennis R. Stewart Executive Vice President 47
John M. Chattleton Executive Vice President of the Bank 48
John A. B. Davies, Jr. has served as President and Director of the
Company since June 1991. Previously, he was employed with First American Bank of
Virginia as a Senior Vice President/Retail Administration.
Dennis R. Stewart has been employed by the Company since April 1990. He
is responsible for the accounting, regulatory, tax, treasury, investment,
interest rate risk management and financial management activities of the Bank.
John M. Chattleton has served as Executive Vice President - Chief
Retail Officer of the Bank since he joined the Bank in August, 1992. From 1990
to 1992, Mr. Chattleton was Senior Vice President of Small Business and Consumer
Lending at the Bank of Maryland, in Baltimore, Maryland.
ITEM 2. PROPERTIES
The Bank engages in its business from its home office and branch
offices, which are located throughout the Hampton Roads area in Virginia. The
Bank's principal executive office contains approximately 40,000 square feet and
is leased for a term of ten years, with two five-year renewal options. This
office is located at 2101 Parks Avenue, Virginia Beach, Virginia 23451.
Information regarding the Bank's offices is set forth below.
Executive and Administrative Offices Financial Center Locations
2101 Parks Avenue Chesapeake
Virginia Beach, VA 23451 Cedar Road Financial Center
(757) 428-9331 1000 Cedar Road
Greenbrier Financial Center
1172 Greenbrier Parkway
25
Greenbrier Market Center Mortgage Lending Offices
Harris Teeter Supermarket
1216 Greenbrier Parkway Virginia Beach
2101 Parks Avenue, Suite 103
Newport News
Denbigh Crossing Financial Center Chesapeake
12705 Jefferson Avenue 1172 Greenbrier Parkway
Oyster Point Financial Center Newport News
601 Thimble Shoals Boulevard 601 Thimble Shoals Boulevard
Norfolk
Selden Financial Center
210 E. Main Street, Suite I-1
Virginia Beach
Aragona Financial Center
4848-17 Virginia Beach Boulevard
Courthouse Financial Center
2400 Princess Anne Road
Fairfield Financial Center
5224 Providence Road
Great Neck Financial Center
1324 N. Great Neck Road
Little Neck Financial Center
Harris Teeter Supermarket
3333 Virginia Beach Boulevard
Lynnhaven Financial Center
230 N. Lynnhaven Road
Pavilion Financial Center
2101 Parks Avenue
Shore Drive Financial Center
3037 Shore Drive
Williamsburg
Five Forks Financial Center
213 Ingram Road
26
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party to legal
proceedings incident to its business, including foreclosures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
- --------------------------------------------------------------------------------
Common Stock
The Company's common stock is traded in the over-the-counter market and is
listed for quotation on the Nasdaq Stock Market National Market System under the
symbol "VABF." As of March 14, 1997, there were approximately 570 shareholders
of record. Following are the high and low closing prices in 1996 and 1995 as
reported by Nasdaq and dividends paid by quarters. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
1996 1995
--------------------------------------------------------------------------------------------------
High Low Dividend High Low Dividend
==================================================================================================
1st quarter $9 $6 13/16 $0.04 $7 3/4 $6 $0.04
2nd quarter 8 5/8 6 7/8 0.04 9 3/4 7 1/4 0.04
3rd quarter 8 3/4 6 7/8 0.04 9 15/16 8 3/8 0.04
4th quarter 9 5/8 8 5/8 0.04 9 1/8 7 0.04
See Note 18 of the Notes to Consolidated Financial Statements regarding dividend
restrictions.
Dividend Reinvestment Plan
The Company's shareholders may purchase common stock with reinvested
dividends and have the opportunity to make optional cash investments up to
$2,000 per calendar quarter for the purchase of shares of common stock.
Participants pay no brokerage commissions on purchases and avoid safekeeping
costs on shares held in the Plan. For a prospectus please contact Investor
Relations at (757) 428-9331.
27
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
- --------------------------------------------------------------------------------
At December 31,
------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Financial Condition Data
Total assets .............................................. $ 606,138 $ 698,962 $ 719,325 $ 682,017 $ 631,236
Loans held-for-investment, net ............................ 445,055 433,562 424,435 387,171 354,810
Loans held-for-sale ....................................... 4,785 14,020 8,341 43,733 38,605
Mortgage-backed and related securities .................... 106,549 137,779 215,470 176,463 145,985
Investment securities ..................................... 27,796 26,917 38,838 43,917 55,489
Securities purchased under agreement to resell ............ -- 55,000 -- -- --
Deposits .................................................. 423,389 492,971 505,070 472,728 446,948
Borrowings ................................................ 138,125 158,010 170,510 155,872 135,978
Stockholders' equity ...................................... 40,827 41,032 36,885 41,514 41,145
Year ended December 31,
------------------------------------------------------------------
---------
Selected Statement of Operations Data ....................... 1996 1995 1994 1993 1992
------------------------------------------------------------------
---------
Interest income ........................................... $ 48,345 $ 52,286 $ 48,733 $ 47,267 $ 55,931
Interest expense .......................................... 31,629 37,272 35,664 35,784 42,419
------------------------------------------------------------------
---------
Net interest expense ...................................... 16,716 15,014 13,069 11,483 13,512
Provision for loan losses ................................. 150 175 275 600 2,250
------------------------------------------------------------------
Net interest income after provision for loan losses ....... 16,566 14,839 12,794 10,883 11,262
Other income .............................................. 3,254 5,218 4,608 5,743 5,056
Other expense ............................................. 18,929 18,250 18,661 16,433 12,782
------------------------------------------------------------------
Income (loss) before income taxes, cumulative effect of
accounting change and extraordinary item .................. 891 1,807 (1,259) 193 3,536
Provision (benefit) for income taxes ...................... 322 641 (688) (259) 1,435
------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change and extraordinary item ................ 569 1,166 (571) 452 2,101
Cumulative effect of change in method of
accounting for income taxes ............................. -- -- -- 700 --
Extraordinary item ........................................ -- -- -- -- (1,068)
------------------------------------------------------------------
Net income (loss) ......................................... $ 569 $ 1,166 $ (571) $ 1,152 $ 1,033
==================================================================
Earnings per common and common equivalent share:
Income (loss) before cumulative effect of accounting
change and extraordinary item ........................... $ 0.11 $ 0.24 $ (0.12) $ 0.09 $ 0.43
28
Cumulative effect of accounting change ..................... -- -- -- 0.14 --
Extraordinary item ......................................... -- -- -- -- (0.22)
------------------------------------------------------------------
Net income (loss) .......................................... $ 0.11 $ 0.24 $ (0.12) $ 0.23 $ 0.21
==================================================================
At or for the year ended December 31,
-------------------------------------
Selected Financial Ratios and Other Data ..................... 1996 1995 1994 1993 1992
------------------------------------------------------------------
Return on average assets ................................... 0.09% 0.17% (0.08%) 0.17% 0.15%
Return on average stockholders' equity ..................... 1.39 2.99 (1.47) 2.77 2.47
Average stockholders' equity to average assets ............. 6.60 5.59 5.42 6.06 6.25
Book value per share ....................................... $ 8.21 $ 8.28 $ 7.50 $ 8.48 $ 8.41
Dividend payout ratio ...................................... 145.45% 66.67% -- 69.57% 76.19%
Number of deposit accounts ................................. 28,140 25,885 24,374 30,635 30,183
Banking offices open ....................................... 15 12 9 8 8
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion which follows describes the financial condition and results of
operations of Virginia Beach Federal Financial Corporation (the "Company") and
its subsidiary First Coastal Bank, the "Bank," (formerly Virginia Beach Federal
Savings Bank) and should be read in conjunction with the accompanying
Consolidated Financial Statements.
FIRST COASTAL BANK
On November 21, 1996, the Company's Board of Directors voted to change the name
of its subsidiary bank to First Coastal Bank from Virginia Beach Federal Savings
Bank. The new name reflects the current and future intent of the Company to
offer a full range of commercial banking products and services throughout its
market area, generally known as Hampton Roads. The name change was announced to
the general public on February 18, 1997.
SAIF RECAPITALIZATION
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
enacted on September 30, 1996, the Federal Deposit Insurance Corporation
("FDIC") imposed a special assessment on members whose deposits were insured by
the Savings Association Insurance Fund ("SAIF"). The purpose of the assessment
was to capitalize the SAIF at the designated reserve level of 1.25% as of
October 1, 1996. Based on the Bank's deposits as of March 31, 1995, the date for
measuring the amount of the deposits to be assessed pursuant to the Act, the
Bank paid its special assessment of $3,311,000 on November 27, 1996.
Subsequently, the FDIC lowered the deposit insurance premium rate by 5 basis
points for the fourth quarter of 1996, producing a $57,000 refund to the Bank of
premiums previously paid. In addition, the FDIC lowered the premium for many
SAIF members for 1997 by 16.6 basis points.
Pursuant to the Act, the Bank will pay, in addition to its normal deposit
insurance premium as a member of the SAIF, an amount equal to approximately 6.4
basis points toward the retirement of the Financing Corporation bonds ("Fico
Bonds") issued in the 1980s to assist in the recovery of the savings and loan
industry. Members of the Bank Insurance Fund ("BIF"), by contrast, will pay, in
addition to their normal deposit insurance premium, approximately 1.3 basis
points. Beginning no later than January 1, 2000, the rate paid to retire the
Fico Bonds will be equal for members of the BIF and the SAIF. The Act also
provides for the merging of the BIF and the SAIF by January 1, 1999 provided
there are no financial institutions still chartered as savings associations at
that time. Should the insurance funds be merged before January 1, 2000, the rate
paid by all members of this new fund to retire the Fico Bonds would be equal.
If the Bank's deposits were to remain at their December 31, 1996, level all
throughout 1997, the reduction in deposit insurance premiums would produce a
$703,000 deposit insurance expense reduction compared to what the annual premium
would have been prior to the Act.
ASSET COMPOSITION AND LOAN PRODUCTION
Total assets of the Company were $606.1 million at December 31, 1996, compared
with $699.0 million at December 31, 1995. The majority of the $92.9 million
decrease is the result of management's decision to de-emphasize brokered time
deposits as a source of funds, and to fund the reduction in these deposits
through the maturity and repayment of securities purchased under agreements to
resell and mortgage-backed and related securities. Consequently, these
investments decreased by an aggregate of $86.2
30
Management's Discussion and Analysis of Financial Condition and Results of
Operations million. In addition, the Company's foreclosed real estate and other
assets decreased by $3.7 million and $4.9 million, respectively.
Loans receivable held-for-investment increased by $11.5 million during 1996. The
growth largely occurred, as planned, in the Company's higher yielding loan
products: commercial (i.e. business), land, commercial real estate, property
improvement and consumer, and multi-family categories increased by a total of
$22.6 million. The Company's 1-4 family residential portfolio decreased by $9.4
million as loan repayments and prepayments of $51.7 million exceeded new loans
added of $42.3 million. Please refer to Note 5 to the accompanying Consolidated
Financial Statements for more information regarding the composition of the
Company's loan portfolio.
Single family residential lending is performed by the Company through the Bank
and First Coastal Mortgage Corp (formerly Beach Fed Mortgage Corp). The Bank's
strategy is to originate loans throughout Hampton Roads, retain an amount which
keeps the Bank's total assets and loans receivable at their desired levels, and
sell the remainder into the secondary market. During 1996, the Company closed
$118.4 million, retained $46.9 million for its own portfolio, and sold $71.5
million into the secondary market. Loan closings during 1996 were $126.2 million
lower than the $244.6 million closed during 1995 as the Company experienced the
effects of the sale during the fourth quarter of 1995 of five of its seven loan
production offices. Lower loan volume throughout 1996 compared with 1995 also
resulted in the decrease in loans receivable held-for-sale at December 31, 1996,
which was $4.8 million compared with $14.0 million at December 31, 1995.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 122 ("FAS 122") "Accounting for Certain Mortgage Banking
Activities" which requires, among other things, that the Company capitalize an
amount related to the value of retained servicing for the Bank's loan production
which is sold into the secondary market. Throughout 1996 and 1995, the Bank's
secondary marketing sales were on a servicing released basis and, accordingly,
there was no capitalization of loan servicing rights since none were retained.
In years prior to 1995, the Company had retained servicing on loans sold to
Freddie Mac and Fannie Mae resulting in the majority of the loan servicing
portfolio of $251 million at year end 1996, which is further described in Note 5
to the accompanying Consolidated Financial Statements. Because of accounting
principles in effect prior to FAS 122, the Company did not capitalize the
servicing value related to its in-house originated loans. The book value of
$347,000 at December 31, 1996 associated with the loan servicing portfolio
relates to purchased loan servicing, an activity in which the Company no longer
engages.
The Company's nonperforming assets ("NPA's") comprise foreclosed real estate of
$2.0 million, and delinquent loans receivable held for investment of $4.1
million. Total NPA's were 1.0% of total assets at December 31, 1996, compared
with 1.4% of total assets at December 31, 1995.
DEPOSIT AND BORROWINGS
The deposits of the Company were $423.4 million at December 31, 1996, a decrease
of $69.6 million from December 31, 1995. Brokered time deposits decreased by
$72.9 million during 1996 as maturing brokered time deposits were funded largely
by the repayments and prepayments of mortgage-backed and related securities, and
securities purchased under agreements to resell. Management of the Company
intends to reduce its reliance of the use of brokered deposits to the extent
that it is able to fund the Bank through its retail branch network. During 1996,
the Bank opened three new retail banking centers: two inside new stores of a
supermarket chain which is expanding into Hampton Roads, and one in
Williamsburg, Virginia which is at a temporary site at year end 1996 pending the
completion of a permanent facility during the summer of 1997. As a result of
these initiatives and the growth of the Bank's newer branches, retail deposits
other than brokered time deposits, grew by $3.4 million or 1%
31
Management's Discussion and Analysis of Financial Condition and Results of
Operations
during 1996. Please refer to Note 9 in the accompanying Notes to Consolidated
Financial Statements for information regarding the Company's deposits. If the
Bank were to eliminate its reliance on brokered time deposits, growth of the
Bank's total earning assets will be limited by retail deposit growth and by the
extent to which funds can be obtained from other sources.
The Company also borrows from the Federal Home Loan Bank of Atlanta (the "FHLB")
and typically uses the FHLB as the source of its longer term funding. In
addition, the Company uses short term or overnight borrowings from the FHLB to
adjust its daily cash needs. Please refer to Note 10 to the accompanying
Consolidated Financial Statements for more information on the Company's
borrowings from the FHLB.
LIQUIDITY AND CAPITAL RESOURCES
The Office of Thrift Supervision, (the "OTS") establishes the minimum liquidity
requirements for savings banks. Regulations provide, in part, that the Bank must
maintain daily average balances of liquid assets in excess of a certain
percentage (presently 5%) of net withdrawable deposits and short-term
borrowings). The Bank met its liquidity requirements throughout 1996 and expects
to continue to meet these requirements in the future.
The OTS also sets the minimum capital requirements for savings banks. At
December 31, 1996, the Bank exceeded all of the minimum capital requirements.
The Bank's core and risk-based capital ratios increased to 6.6% and 12.5%,
respectively, at December 31, 1996, from 5.8% and 11.1%, respectively, at
December 31, 1995, largely because of the reduction in the nominal assets and
risk adjusted assets which are the basis of the respective calculations. Please
refer to Note 15 to the accompanying Consolidated Financial Statements for more
information regarding the Bank's regulatory capital at December 31, 1996.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles. These principles
require the measurement of financial condition and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most commercial and industrial companies, virtually all of the assets and
liabilities of a financial institution, such as the Bank, 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.
ASSET/LIABILITY MANAGEMENT
The Bank has established an Asset/Liability Management Committee ("ALCO") for
the purpose of monitoring and managing interest rate risk. Interest rate risk
represents the net interest income variation that would occur under a specific
change in interest rates. One commonly used measure of interest rate risk is a
gap report. A gap report identifies what percentage of the Bank's assets, net of
its liabilities, will mature or reprice within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets within a
specific time frame exceeds the amount of interest rate sensitive liabilities
within that same time frame. During a period of falling interest rates, a
positive gap would tend to adversely affect net interest income and a negative
gap would tend to result in an increase in net interest income. In a rising
interest rate environment, a bank with a positive gap would generally be
expected to experience a greater increase in the yield of its assets relative to
the costs of its liabilities and
32
Management's Discussion and Analysis of Financial Condition and Results of
Operations
thus an increase in net interest income, whereas a bank with a negative gap
would be expected to experience the opposite results.
Certain features of the Bank's assets, in particular, and its liabilities can
also have a significant adverse effect on the Bank's net interest income. For
example, when interest rates rise during a period by an amount which exceeds the
periodic interest rate cap in an adjustable rate mortgage loan or
mortgage-backed and related security, the Bank does not fully benefit from the
rate increase until at least the subsequent rate adjustment cycle. Additionally,
the spread between the Bank's assets, such as prime- based loans, and the Bank's
liabilities can narrow. A gap table is not intended to reflect these effects.
The following is the Bank's gap report, as of December 31, 1996. The Bank's
loans held-for-investment and mortgage-backed and related securities have been
adjusted for market-based prepayment assumptions as appropriate. Time deposits
and borrowings are stated at contractual maturity. Then, as presented in the
management adjustment line, other interest bearing deposits, primarily checking
and savings accounts, have been distributed over a number of periods to reflect
those portions of such accounts that are estimated to be replaced or repriced
fully with market rates during the respective periods. As shown, after the
management adjustment, the Bank was in a positive gap position (excess assets
over liabilities) in the one year horizon, with a cumulative adjusted gap as a
percent of earning assets of 7.67%.
33
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Maturity and Rate Sensitivity
-----------------------------------------------------------------------------
Within 4 - 6 7 - 12 1 - 5 Over
Dollars in thousands 3 Months Months Months Years 5 Years Total
===================================================================================================================================
Earning assets
Loans............................................... $118,176 $ 36,871 $ 85,732 $153,108 $ 61,746 $455,633
Investments and mortgage-backed securities.......... 36,077 16,209 28,257 41,979 15,506 138,028
-----------------------------------------------------------------------------
Total earning assets............................... 154,253 53,080 113,989 195,087 77,252 593,661
-----------------------------------------------------------------------------
Interest bearing liabilities
Other deposits...................................... 98,531 -- -- -- -- 98,531
Time deposits....................................... 39,724 54,669 56,351 71,654 550 222,948
FHLB borrowings..................................... 52,000 10,000 10,000 60,000 1,110 133,110
Other borrowings including brokered time deposits... 15,090 24,279 18,991 32,928 -- 91,288
-----------------------------------------------------------------------------
Total interest bearing liabilities................. 205,345 88,948 85,342 164,582 1,660 545,877
-----------------------------------------------------------------------------
Gap before interest rate swaps ....................... (51,092) (35,868) 28,647 30,505 75,592 --
Cumulative gap before swaps .......................... (51,092) (86,960) (58,313) (27,808) 47,784 --
Cumulative unhedged gap as % of earning assets........ (8.61%) (14.65%) (9.82%) (4.68%) 8.05% --
Net interest rate swaps............................... 25,000 -- -- (25,000) -- --
-----------------------------------------------------------------------------
Gap after swaps ...................................... (26,092) (35,868) 28,647 5,505 75,592 --
Cumulative gap after swaps ........................... (26,092) (61,960) (33,313) 27,808 47,784 --
Cumulative hedged gap as % of earning assets.......... (4.40%) (10.44%) (5.61%) (4.68%) 8.05% --
Management adjustments................................ 93,605 (4,927) (9,853) (49,266) (29,559) --
-----------------------------------------------------------------------------
Cumulative management adjusted gap.................... 67,513 26,718 45,512 1,751 47,784 --
Cumulative management adjusted gap as a % of
earnings assets.................................... 11.37% 4.50% 7.67% .29% 8.05% --
For more information about the Company's risk management activities, refer to
Note 16 to the accompanying Consolidated Financial Statements.
34
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
The operating results of the Company depend, to a great degree, on its net
interest income, which is the difference between interest income on interest
earning assets, primarily loans, mortgage-backed and related securities and
investment securities, and interest expense on interest bearing liabilities,
primarily deposits and borrowings. The Company's net income is also affected by
the level of its other income, other expenses and provisions for losses on loans
and foreclosed real estate.
NET INTEREST INCOME
The following table sets forth the weighted average yields earned on the
Company's assets, the weighted average interest rates paid on the Company's
liabilities, and the net yield on average interest earning assets for the
periods indicated. Average balances are determined on a monthly basis and
nonperforming loans are included in the average loan amount (dollars in
thousands).
35
Management's Discussion and Analysis of Financial Condition and Results of
Operations
------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------------------------------------------------------------------------------------------------------
Assets
Loans..................... $436,778 $37,590 8.61% $444,660 $37,288 8.39% $416,868 $32,799 7.87%
Mortgage-backed and
related securities...... 122,140 8,232 6.74% 190,617 12,559 6.59% 197,577 12,255 6.20%
Investment securities
and other earning
assets.................. 41,432 2,523 6.09% 39,189 2,439 6.23% 68,816 3,679 5.35%
-------- ------- -------- ------- -------- -------
Total earning assets.... 600,350 48,345 8.05% 674,466 52,286 7.75% 683,261 48,733 7.13%
------- ------- -------
Non-earning assets........ 16,684 21,653 31,284
-------- -------- --------
Total assets............. 617,034 $696,119 $714,545
======== ======== ========
Liabilities
Time deposits............. 343,699 20,464 5.95% $410,082 24,095 5.87% $384,659 23,250 6.04%
Interest bearing demand
and other deposits...... 91,596 3,433 3.75% 85,684 3,405 3.97% 95,774 3,645 3.81%
FHLB advances............. 118,329 7,567 6.40% 137,372 9,137 6.66% 159,462 7,351 4.61%
Other borrowings.......... 3,000 165 5.52% 10,545 635 6.02% 31,468 1,418 4.50%
------- ------ -------- ------- -------- -------
Total interest
bearing liabilities... 556,624 31,629 5.68% 643,683 37,272 5.79% 671,363 35,664 5.32%
------ ------- -------
Non-interest
bearing liabilities..... 19,673 13,488 4,416
-------- -------- --------
Total liabilities....... 576,297 657,171 675,779
Stockholders' equity...... 40,737 38,948 38,766
-------- -------- --------
Total liabilities and
stockholders' equity $617,034 $696,119 $714,545
======== ======== ========
Net interest income......... $16,716 $15,014 $13,069
======= ======= =======
Interest rate spread........ 2.37% 1.96% 1.81%
===== ===== ======
Net yield on interest
earning assets.......... 2.78% 2.23% 1.91%
===== ===== ======
36
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table presents, for the periods indicated, the change in interest
income and interest expense (in thousands) attributed to (i) changes in volume
(changes in the monthly weighted average balance of the total interest earning
asset and interest bearing liability portfolios multiplied by the prior year
rate), and (ii) changes in rate (changes in rate multiplied by prior year
volume). Changes attributable to the combined impact of volume and rate have
been allocated proportionately based on the absolute values of changes due to
volume and changes due to rate.
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
------------------------------------------------------------
Interest income
Loans (1) ........................ $(5,277) $ 1,252 $(4,025) $ 1,818 $ 2,975 $ 4,793
Investments ...................... 137 (53) 84 (1,772) 532 (1,240)
--------------------------------------------------------------
-------
Total change in interest income .. (5,140) 1,199 (3,941) 46 3,507 3,553
--------------------------------------------------------------
-------
Interest expense
Deposits ......................... (3,721) 118 (3,603) 1,111 (506) 605
Borrowings ....................... (1,649) (391) (2,040) (2,279) 3,282 1,003
--------------------------------------------------------------
Total change in interest expense . (5,370) (273) (5,643) (1,168) 2,776 1,608
--------------------------------------------------------------
Total change in net interest income $ 230 $ 1,472 $ 1,702 $ 1,214 $ 731 $ 1,945
==============================================================
(1) Includes mortgage-backed and related securities.
Net interest income increased 11% to $16.7 million during 1996 compared with
1995. The increase was caused in part by an increase in the ratio of earning
assets as a percent of interest bearing liabilities, which occurred because of a
decrease in non-performing and other non-earning assets, and an increase in
non-interest bearing demand deposits. In addition, a large amount of adjustable
rate loans repriced upward during the year, contributing to the $1.3 million
rate variance attributable to loans. Net interest income also improved during
1996 due to the successful efforts of the Bank's management to control the
interest cost of its retail deposits during a period in which interest rates
rose by amounts ranging from 10 to 80 basis points, while still maintaining
acceptable levels of such deposits.
Net interest income during 1995 increased by $1.9 million or 15% as compared
with 1994. Because of the sharp increase in short term interest rates during
1994, combined with the periodic adjustment caps in these loans, the Company's
adjustable rate loan portfolio did not fully adjust in 1994 to its fully indexed
rate (i.e. the index plus the margin), thus temporarily depressing the Company's
yield on such assets. During 1995, most of these assets adjusted to their fully
indexed rates, thus enhancing 1995's income even though the short term rates to
which these loans adjusted decreased during 1995. This sequence of events is
reflected in the $3.0 million rate variance attributable to loans for the 1995
period versus the 1994 period. The rate variance during 1995 versus 1994
attributable to borrowings also occurred because of rising rates and the
refunding during 1995 and late 1994 of FHLB advances obtained during 1992 and
1993 at much lower rates.
37
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PROVISIONS FOR LOSSES ON LOANS RECEIVABLE AND FORECLOSED REAL ESTATE
The Bank maintains and the Board of Directors monitors allowances for possible
losses on loans receivable and foreclosed real estate. These allowances are
established based upon management's review of individually significant loans and
collateral, delinquent loans, historical trends, individual borrowers, and other
factors which management deems important. In addition, general reserves are
established to provide for unidentified losses which may exist in the loans
receivable portfolio. Determining the appropriate reserve level involves a high
degree of management judgment and is based upon historical and projected losses
in the loans receivable portfolio and the collateral value of specifically
identified problem loans. Further, reserve methodologies are subject to periodic
review and refinement in response to market conditions, actual loss experience
and management's expectations. Accordingly, there can be no assurance that
reserve levels will be adequate to cover future losses that may actually occur.
The provision for losses on loans receivable was $150,000 during 1996 compared
with $175,000 and $275,000 during 1995 and 1994, respectively. Net recoveries of
$272,000 during 1996 were added to the allowance compared to a total of $655,000
in net charge-offs during the two years prior to 1996. Based on the Company's
current underwriting and credit review policies and procedures, the continued
reduction in the Bank's purchased and out of area loans and the low level of
cumulative charges to the allowance over the past three years, it is
management's belief that provisions and reserves related to loans receivable are
at adequate levels. Please refer to Note 5 to the accompanying Consolidated
Financial Statements.
The provision for losses on foreclosed real estate was $484,000 during 1996
compared with $200,000 and $100,000 during 1995 and 1994, respectively. The
provision during 1996 was largely related to an increased effort during 1996 to
sell two particular properties. Such efforts were successful and the properties
were sold during 1996, producing the majority of the charge to the allowance of
$1.8 million. At year end 1996, there remains only one significant foreclosed
real estate property, and the reserves of $235,000 at December 31, 1996 are in
management's judgment adequate to absorb the losses which may eventually be
sustained on the sales of foreclosed real estate. Please refer to Note 6 to the
accompanying Consolidated Financial Statements.
OTHER INCOME
1996 VERSUS 1995
The Company's other income for 1996 decreased by $2.0 million compared with
1995. Gains on sales of loans decreased by $2.0 million to $1.1 million during
1996, consistent with the decrease in loans sold to correspondents from $236
million during 1995 to $84 million during 1996. In addition, income from other
miscellaneous sources decreased by $381,000, also due to the decreased level of
mortgage lending activity. Offsetting these decreases was an increase of
$251,000 in retail banking fees which is consistent with the growth in the
Company's retail banking activities.
1995 VERSUS 1994
Other income increased by $610,000 during 1995 compared to 1994. Market value
adjustments on derivative contracts were negative $0.2 million during 1995
compared to negative $2.1 million during 1994. During 1995, these derivative
contracts were sold.
Other income improved by an additional $2.5 million due to increased gains on
sale of loans. During 1994, intense price competition, poor hedging results
during a period of rising interest rates, and the cost of retained loan
servicing, which was not capitalized under accounting rules prior to adoption of
FAS
38
Management's Discussion and Analysis of Financial Condition and Results of
Operations
122, all combined to produce a gain of $0.6 million on sales of loans. During
1995, the Company sold nearly all of its loans on a "best efforts," servicing
released basis and, accordingly, incurred no hedging gains or losses, and
recognized the income associated with the loan servicing which was sold. As a
result, the Company recorded income of $3.2 million during 1995. Loan servicing
retained during 1994 was $101 million as compared to none during 1995. For
additional discussion of retained loan servicing, please refer to "Asset
Composition and Loan Production" above.
Other income decreased during 1995 as compared to 1994 because of the gains
associated with the bulk sale of loan servicing during 1994 which produced gains
of $3.0 million during 1994 compared with $0.1 million during 1995. As a result
of these sales during 1994, loan servicing revenue decreased by $0.8 million
during 1995 as compared to 1994. For more information regarding the Company's
remaining loan servicing, refer to Note 5 to the accompanying Consolidated
Financial Statements.
OTHER EXPENSE
1996 VERSUS 1995
The Company's other expenses during 1996 included the SAIF assessment of $3.3
million which is described under the caption "SAIF Recapitalization." Excluding
the SAIF charge, other expenses would have been $15.6 million during 1996
compared with $18.2 million during 1995. The decrease of $2.6 million during
1996 is mainly associated with the production, overhead and infrastructure
expenses incurred throughout 1995 related to the Company's five loan production
offices which were sold during the fourth quarter of 1995. Please refer to the
caption "Asset Composition and Loan Production" for a discussion of the sale.
1995 VERSUS 1994
Other expense during 1995 decreased by $411,000 to $18.2 million. Salaries and
benefits, and net occupancy expenses of premises increased by $343,000 during
1995 primarily due to the cost associated with opening and operating three
financial centers and scheduled rent increases of the remainder of the Bank's
leased premises. Other net expense of foreclosed real estate decreased by
$428,000 in conjunction with the decrease in the Company's foreclosed real
estate and the resultant decrease in costs associated with the management and
sale of such assets.
INCOME TAXES
The Company's effective tax rate for 1996 was 36.1% compared with 35.5% during
1995. The Company incurred a tax benefit during 1994 at an effective rate of
54.6%. The Company's effective tax benefit rate during 1994 was affected by
adjustments related to the method the Bank was permitted to use to calculate its
bad debt deduction for financial statement purposes. Please refer to Note 12 to
the accompanying Consolidated Financial Statements for additional information
regarding the Company's income taxes.
On August 20, 1996, President Clinton signed into law the Small Business Job
Protection Act of 1996. This bill, among other things, equalizes the taxation of
thrifts and banks. For tax years up through 1995, thrifts had been able to
deduct a portion of their bad-debt reserves set aside to cover potential loan
losses ("bad-debt reserves"). Under the bill, large thrifts must change to the
specific charge-off method for computing their bad debt deduction for 1996 and
future years. Furthermore, the bill repeals current law
39
Management's Discussion and Analysis of Financial Condition and Results of
Operations
mandating recapture of thrifts' bad debt reserves if they convert to banks. Bad
debt reserves set aside through 1987 generally will not be taxed, however, any
reserves added since January 1, 1988, will be taxed over a six year period
beginning in 1997. Institutions can delay these taxes for two years if they meet
a residential-lending test. This legislation is not expected to have a material
adverse effect on the financial condition or results of operations of the
Company taken as a whole.
IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 125 ("FAS 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
was issued during June, 1996. FAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities and establishes new criteria for determining whether a transfer of
financial assets in exchange for cash or other consideration should be accounted
for as a sale or as a pledge of collateral in a secured borrowing. This
statement is effective for such transactions occurring after December 31, 1996,
and is to be applied prospectively. Earlier or retroactive application is not
permitted. In addition, during December, 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
127 which provides for the deferral for one year the implementation of certain
provisions of FAS 125. These statements will be adopted by the Company effective
January 1, 1997, and are not expected to have a material effect on the Company's
financial condition or results of operations.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
REPORT OF INDEPENDENT AUDITORS 1996 AND 1995
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
To the Board of Directors and Stockholders of
Virginia Beach Federal Financial Corporation
We have audited the accompanying consolidated statement of financial condition
of Virginia Beach Federal Financial Corporation and subsidiaries (the "Company")
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, cash flows and stockholders' equity for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Virginia Beach Federal
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
\s\ KPMG Peat Marwick LLP
--- ---------------------
Richmond, Virginia
January 31, 1997
41
REPORT OF INDEPENDENT ACCOUNTANTS 1994
--------------------------------------
The Board of Directors
Virginia Beach Federal Financial Corporation
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity for the year ended December 31, 1994 (appearing
on pages 43 through 72 of the Virginia Beach Federal Financial Corporation's
1996 Annual Report on Form 10-K) present fairly, in all material respects, the
results of operations and cash flows of Virginia Beach Federal Financial
Corporation and its subsidiary for the year ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statements presentation. We
believe that our audit provided a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Virginia
Beach Federal Financial Corporation for any periods subsequent to December 31,
1994.
\s\ PRICE WATERHOUSE
- --- ----------------
February 7, 1995
42
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
December 31
----------------------
(Dollars in thousands, except share data) 1996 1995
==========================================================================================================================
Assets
Cash and amounts due from banks ........................................ $ 3,059 $ 6,093
Federal funds sold and interest bearing deposits ....................... 4,276 2,426
Securities purchased under agreements to resell ........................ -- 55,000
Investment securities
Held-to-maturity (approximate fair value $14,687 in 1996
and $14,853 in 1995) ................................................ 14,943 15,050
Available-for-sale ................................................... 12,853 11,867
Mortgage-backed and related securities
Held-to-maturity (approximate fair value $28,849 in 1996
and $34,186 in 1995) ................................................. 29,764 34,458
Available-for-sale ................................................... 76,785 103,321
Loans receivable, net
Held-for-investment .................................................. 445,055 433,562
Held-for-sale ........................................................ 4,785 14,020
Foreclosed real estate, net ............................................ 2,047 5,767
Accrued income receivable, net ......................................... 4,289 4,546
Property and equipment, net ............................................ 5,642 5,275
Other assets ........................................................... 2,640 7,577
----------------------
$ 606,138 $ 698,962
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits ............................................................. $ 423,389 $ 492,971
Advances from the Federal Home Loan Bank ............................. 133,110 158,010
Securities sold under agreements to repurchase ....................... 5,015 --
Advance payments by borrowers for taxes and insurance ................ 966 1,252
Other liabilities .................................................... 2,831 5,697
----------------------
565,311 657,930
----------------------
Stockholders' equity
Serial preferred stock, 5,000,000 shares authorized,
no shares issued or outstanding ..................................... -- --
Common stock, $.01 par value, 10,000,000 shares authorized; issued and
outstanding 4,970,307 shares in 1996 and 4,957,422 shares in 1995 .... 50 50
Capital in excess of par value ....................................... 9,336 9,237
Unrealized gain (loss) on available-for-sale securities, net of tax .. (39) 39
Retained earnings - substantially restricted ......................... 31,480 31,706
----------------------
40,827 41,032
----------------------
Commitments and contingencies
----------------------
$606,138 $698,962
======================
The notes to consolidated financial statements are an integral part of this
statement
43
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Year ended December 31,
-------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994
=========================================================================================
Interest and fees on loans ............................ $ 37,590 $ 37,288 $ 32,799
Interest on mortgage-backed and related securities .... 8,232 12,559 12,255
Other interest and dividend income .................... 2,523 2,439 3,679
-------------------------------
Total interest income ............................... 48,345 52,286 48,733
-------------------------------
Interest on deposits .................................. 23,897 27,500 26,895
Interest on advances from the Federal Home Loan Bank .. 7,567 9,137 7,351
Interest on repurchase agreements ..................... 165 635 1,418
-------------------------------
Total interest expense .............................. 31,629 37,272 35,664
-------------------------------
Net interest income ................................... 16,716 15,014 13,069
Provision for loan losses ............................. 150 175 275
-------------------------------
Net interest income after provision for loan losses ... 16,566 14,839 12,794
-------------------------------
OTHER INCOME
Gain (loss) on sales of securities available-for-sale -- 103 (202)
Market value adjustment on derivative contracts ..... -- (242) (2,115)
Gain on sales of loans .............................. 1,132 3,166 617
Gain on sales of mortgage loan servicing rights ..... -- 111 2,984
Gain on sales of foreclosed real estate ............. 181 94 557
Retail banking fees ................................. 850 599 341
Mortgage loan servicing fees ........................ 726 641 1,442
Other ............................................... 365 746 984
-------------------------------
3,254 5,218 4,608
-------------------------------
OTHER EXPENSES
Salaries and employee benefits ...................... 6,564 8,500 8,612
Net occupancy expense ............................... 3,078 3,388 2,933
Provision for losses on foreclosed real estate ...... 484 200 100
Other net expense of foreclosed real estate ......... 126 202 630
Federal deposit insurance premiums .................. 4,514 1,314 1,236
Other ............................................... 4,163 4,646 5,150
-------------------------------
18,929 18,250 18,661
-------------------------------
Income (loss) before income taxes ..................... 891 1,807 (1,259)
Provision (benefit) for income taxes .................. 322 641 (688)
-------------------------------
Net income (loss) ..................................... $ 569 $ 1,166 $ (571)
===============================
Net income (loss) per share ........................... $ .11 $ .24 $ (0.12)
===============================
The notes to consolidated financial statements are an integral part of this
statement
44
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
December 31,
------------------------------------
(Dollars in thousands) 1996 1995 1994
===================================================================================================
Cash flows from operating activities
Net income (loss) ........................................ $ 569 $ 1,166 $ (571)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for loan losses ............................... 150 175 275
Provision for losses on foreclosed real estate .......... 484 200 100
Depreciation ............................................ 1,131 1,041 916
Amortization of loan discounts, premiums and fees, net .. (1,090) (1,001) (927)
Amortization of other discounts and premiums, net ....... 379 896 278
Market value adjustment on derivative contracts ......... -- 242 2,115
(Gain) loss on sales of securities available-for-sale ... -- (103) 202
Gain on sales of foreclosed real estate ................. (181) (94) (557)
Gain on sales of loans .................................. (1,132) (3,166) (617)
Gain on sales of mortgage loan servicing rights ......... -- (111) (2,984)
Loss on sales of property and equipment ................. -- 59 --
Stock dividend on Federal Home Loan Bank stock .......... -- -- (122)
Acquisition of loans held-for-sale ...................... (118,488) (216,770) (283,168)
Proceeds from sales of loans held-for-sale .............. 128,855 214,257 319,177
Decrease (increase) in accrued income receivable ........ 257 327 (217)
Decrease (increase) in other assets ..................... 4,671 3,783 (6,334)
Increase (decrease) in other liabilities ................ (2,906) 343 (4,766)
-----------------------------------
Net cash provided by operating activities .............. 12,699 1,244 22,800
-----------------------------------
Cash flows from investing activities
Net increase in loans receivable ......................... (11,869) (11,950) (40,460)
Principal payments received on mortgage-backed and related
securities .............................................. 31,161 29,680 45,703
Proceeds from maturities of investment securities ........ 9,000 15,038 9,076
Proceeds from sales of
Securities purchased under agreements to resell ......... 55,000 -- --
Investment securities available-for-sale ................ -- -- 41,391
Mortgage-backed and related securities available-for-sale -- 52,407 36,318
Mortgage loan servicing rights .......................... -- 118 3,060
Foreclosed real estate .................................. 4,795 5,929 8,642
Property and equipment .................................. 8 288 --
Purchases of
Securities purchased under agreement to resell .......... -- (55,000) --
Investment securities held-to-maturity .................. (8,000) (3,000) (11,970)
Investment securities available-for-sale ................ (2,000) -- (25,371)
Mortgage-backed and related securities held-to-maturity . -- -- (57,328)
Mortgage-backed and related securities available-for-sale -- -- (77,350)
Property and equipment .................................. (1,466) (1,546) (2,234)
Improvements to foreclosed real estate .................. (62) (1,325) (1,367)
---------------------------------
Net cash provided by (used for) investing activities ... 76,567 30,639 (71,890)
---------------------------------
(continued)
The notes to consolidated financial statements are an integral part of this
statement
45
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Year ended December 31,
-------------------------------------
(Dollars in thousands) 1996 1995 1994
=========================================================================================================
Cash flows from financing activities
Net increase (decrease) in money market deposit accounts,
NOW accounts and savings deposits 8,775 10,134 (21,114)
Net increase (decrease) in time deposits ..................... (78,358) (22,233) 53,456
Proceeds from advances from the Federal Home Loan Bank ....... 359,000 427,000 302,500
Payments on advances from the Federal Home Loan Bank ......... (383,900) (425,000) (295,500)
Net increase (decrease) in securities sold under agreements to
repurchase ................................................ 5,015 (14,500) 7,638
Net increase (decrease) in advance payments by borrowers for
taxes and insurance ....................................... (286) (254) (277)
Proceeds from sale of common stock ........................... 99 269 188
Cash dividends paid .......................................... (795) (789) (784)
-----------------------------------
Net cash provided by (used for) financing activities ...... (90,450) (25,373) 46,107
-----------------------------------
Increase (decrease) in cash and cash equivalents ............. (1,184) 6,510 (2,983)
Cash and cash equivalents at beginning of year ............... 8,519 2,009 4,992
-----------------------------------
Cash and cash equivalents at end of year ..................... $ 7,335 $ 8,519 $ 2,009
===================================
Cash and cash equivalents includes
Cash ......................................................... $ 3,059 $ 6,093 $ 1,461
Federal funds sold and interest bearing deposits ............. 4,276 2,426 548
-----------------------------------
$ 7,335 $ 8,519 $ 2,009
===================================
Supplemental cash flow information
Interest paid on deposits, advances and other borrowings ..... $ 32,930 $ 37,155 $ 33,619
Income taxes paid (refunded) ................................. 1,606 1,327 (353)
Schedule of noncash investing and financing activities
Real estate acquired in settlement of loans, net of allowances $ 312 $ 3,649 $ 3,848
The notes to consolidated financial statements are an integral part of this
statement
46
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
(Dollars in thousands, except share data)
Unrealized
Gain
(Loss)
on
Capital in Available-
Common Stock Excess of for-sale Retained
Shares Amount Par Value Securities Earnings Total
========================================================================
Balance, December 31, 1993 ..... 4,894,455 $ 49 $ 8,781 $ -- $ 32,684 $ 41,514
Net loss for 1994 .............. -- -- -- -- (571) (571)
Sale of common stock to
employee stock purchase plan . 12,546 -- 95 -- -- 95
Exercise of stock options ...... 13,650 -- 93 -- -- 93
Cumulative effect of change in
method of accounting for
investments in debt and equity
securities, net of tax ....... -- -- -- (532) -- (532)
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax ...... -- -- -- (2,930) -- (2,930)
Cash dividends paid ($0.16 per
share) ....................... -- -- -- -- (784) (784)
--------------------------------------------------------------------------
Balance, December 31, 1994 ..... 4,920,651 49 8,969 (3,462) 31,329 36,885
Net income for 1995 ............ -- -- -- -- 1,166 1,166
Sale of common stock to
employee stock purchase plan . 20,259 1 167 -- -- 168
Exercise of stock options ...... 16,512 -- 101 -- -- 101
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax ....... -- -- -- 3,501 -- 3,501
Cash dividends paid ($0.16 per
share) ....................... -- -- -- -- (789) (789)
--------------------------------------------------------------------------
---------
Balance, December 31, 1995 ..... 4,957,422 50 9,237 39 31,706 41,032
Net income for 1996 ............ -- -- -- -- 569 569
Sale of common stock to
employee stock purchase plan . 10,935 -- 87 -- -- 87
Exercise of stock options ...... 1,950 -- 12 -- -- 12
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax ....... -- -- -- (78) -- (78)
Cash dividends paid ($0.16 per
share) ....................... -- -- -- -- (795) (795)
--------------------------------------------------------------------------
Balance, December 31, 1996 ..... 4,970,307 $ 50 $ 9,336 $ (39) $ 31,480 $ 40,827
===========================================================================
The notes to consolidated financial statements are an integral part of this
statement
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Virginia
Beach Federal Financial Corporation (the "Company") and its wholly-owned
subsidiary First Coastal Bank and its wholly-owned subsidiaries. In November,
1996, the Company's Board of Directors voted to change the name of its
subsidiary bank to First Coastal Bank from Virginia Beach Federal Savings Bank.
The name change was announced to the general public in February, 1997. The
Company is a unitary thrift holding company with its primary market area and
majority of business being in the Hampton Roads region of Virginia. All
significant intercompany balances and transactions have been eliminated.
Securities Purchased Under Agreements to Resell
The Company enters into purchases of securities under agreements to resell. The
amounts advanced under these agreements represent short-term loans and are
reflected as assets in the statement of financial condition. Securities
underlying the agreements are held by the Company in safekeeping at the Federal
Home Loan Bank.
Investments in Debt and Equity Securities
The Company accounts for its investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115 (FAS 115),
"Accounting for Certain Investments in Debt and Equity Securities." FAS 115
requires that these securities be classified and accounted for according to
three categories: held-to-maturity, available-for-sale or trading. The Company
does not trade securities. Realized gains and losses on investments in debt and
equity securities are determined on a specific cost basis.
Held-to-maturity securities are stated at cost, adjusted for amortization of
premiums and accretion of fees and discounts using the level yield method. The
Company has adequate liquidity and capital, and it is management's intention to
hold such assets to maturity.
Available-for-sale securities are carried at fair value based upon market or
broker quotations. Deferred income taxes are provided on any increase or
decrease in fair value. Such increase or decrease in fair value, net of deferred
income taxes, is reflected as a separate component of stockholders' equity.
Amortization of premiums and accretion of fees and discounts are recognized
using the level yield method.
Lending Activities
The Company originates mortgage loans for its own portfolio or for sale in the
secondary market. Loan origination fees and certain direct loan origination
costs are deferred. Once originated, mortgage loans are designated as held
either for investment or sale. Mortgage loans held-for-investment are stated at
unpaid principal balances, less the allowance for loan losses and net of
deferred loan origination costs, fees and discounts. Loan origination fees, net
of related direct costs, are amortized into interest income on loans using the
level yield method. Mortgage loans held for sale are carried at the lower of
cost or market value, determined on an aggregate basis. The Company hedges its
interest rate risk on loan commitments and the inventory of mortgage loans held
for sale through optional delivery forward commitments to permanent investors.
Hedging gains and losses are deferred and recognized when the related loans are
sold.
Allowance for Loan Losses
The allowance for loan losses is maintained at an amount management deems
adequate to cover estimated losses inherent in the loan portfolio. In
determining the amount to be maintained, management considers
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect borrowers' abilities to repay, the estimated
value of underlying collateral and current economic conditions. The Company's
actual credit losses may differ from those estimates used to establish the
allowance. The allowance for loan losses is increased by charges to earnings and
decreased by net charge-offs.
The Company measures the value of impaired loans based either on discounted
expected future cash flows, the observable market value of a loan or the market
value of the collateral securing the loan and establishes an allowance for loan
losses based on this measurement. The Company includes, as a component of its
allowance of loan losses, amounts it deems adequate to cover estimated losses
related to impaired loans. Interest income on impaired loans is recognized on a
cash basis.
Provision for Uncollected Interest
The Company provides an allowance for uncollected interest when loans become 90
days delinquent or are identified as impaired. The allowance is netted against
accrued interest income receivable in the financial statements.
Foreclosed Real Estate
At the date of foreclosure, real estate is recorded at the lower of the carrying
value of the loan or its fair value, provided by independent appraisals, less
estimated costs of sale. Costs related to the development of the real estate are
capitalized. Costs in excess of estimated fair value of individual properties
and net cost related to holding properties are expensed.
Subsequent to foreclosure, valuations are periodically performed by management,
and an allowance for losses is established by a charge to earnings if the
carrying value of a property exceeds its estimated fair value less estimated
costs of sale. Actual losses sustained by the Company may differ from those
estimates used to determine the fair value of foreclosed real estate.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Assets are depreciated using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated life of the improvement. Estimated
lives are three to five years for equipment and five to thirty-nine years for
buildings and leasehold improvements.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as a liability in the statement of financial condition. The securities
underlying the agreements remain in the consolidated asset accounts.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Earnings (loss) per share has been computed based on the weighted average number
of shares outstanding. The weighted average number of shares used in the
computation of earnings (loss) per share was 4,964,107, 4,935,535 and 4,899,292
in 1996, 1995, and 1994, respectively. The potential issuance of shares under
the Company's stock option plan does not have a material dilutive effect on
earnings per share.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in accordance with generally accepted accounting principles. Actual
results may differ from these estimates.
Derivative Financial Instruments
The Company uses derivative financial instruments in order to manage its
financial asset and liability portfolio interest rate risk. It is the Company's
intent that such transactions qualify for hedge accounting treatment. Derivative
financial instruments which do not qualify for hedge accounting treatment are
carried at fair value and included in other assets in the statement of financial
condition, and realized and unrealized gains and losses on financial instruments
are recognized in results of operations each period unless the instruments
qualify for hedge accounting.
Changes in the fair value of derivative financial instruments qualifying for
hedge accounting treatment are not recognized in the results of operations and
the statement of financial condition. Amounts paid or received under such
interest rate swap agreements are recognized in the periods in which they accrue
as an adjustment to the interest income or expense associated with the specific
assets or liabilities to which the swap agreements are assigned.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with the 1996
presentation.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 2 - SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell at December 31, 1995, consist of
$55,000,000 of FNMA mortgage-backed securities at a rate of 5.53% with a face
value of $57,642,000 and an estimated fair value of $58,171,000. The outstanding
repurchase agreement at December 31, 1995, was with a primary broker/dealer and
matured within ninety days. Securities purchased under agreements to resell
averaged $9,016,000 and $591,000 during 1996 and 1995, respectively. The maximum
amount outstanding at any month-end during 1996 and 1995 was $55,000,000.
NOTE 3 - INVESTMENT SECURITIES
Investment securities are summarized as follows (in thousands):
December 31, 1996
-------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
===================================================================
Held-to-maturity, carried at amortized
cost
U. S. Treasuries......................... $ 5,953 $ -- $ 25 $ 5,928
Federal Agencies......................... 8,990 42 273 8,759
-------------------------------------------------------------------
$ 14,943 $ 42 $ 298 $ 14,687
===================================================================
Available-for-sale, carried
at fair value
U. S. Treasuries......................... $ 998 $ 3 $ -- $ 1,001
Federal Agencies......................... 2,000 10 -- 2,010
Federal Home Loan Bank stock............. 9,842 -- -- 9,842
-------------------------------------------------------------------
$ 12,840 $ 13 $ -- $ 12,853
===================================================================
December 31, 1995
-------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
===================================================================
Held-to-maturity, carried at
amortized cost
Federal Agencies......................... $ 15,050 $ 85 $ 282 $ 14,853
===================================================================
Available-for-sale, carried
at fair value
U. S. Treasuries......................... $ 2,001 $ 24 $ -- $ 2,025
Federal Home Loan Bank stock............. 9,842 -- -- 9,842
-------------------------------------------------------------------
$ 11,843 $ 24 $ -- $ 11,867
===================================================================
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
The amortized cost and estimated fair value of investment securities at December
31, 1996, by contractual maturity are as follows (in thousands):
Amortized Estimated
Fair Value
Cost
--------------------------------
Held-to-maturity
Due in one year or less.................................... $ 3,985 $ 4,000
Due after one year but within 5 years...................... 10,958 10,687
--------------------------------
$ 14,943 $ 14,687
================================
Available-for-sale
Due in one year or less.................................... $ 998 $ 1,001
Due after one year but within 5 years...................... 2,000 2,010
No contractual maturity.................................... 9,842 9,842
--------------------------------
$ 12,840 $ 12,853
================================
There were no sales of investment securities classified as available-for-sale
during 1996 and 1995. In 1994, proceeds from the sale of investment securities
classified as available-for-sale were approximately $41,000,000 and gross
realized losses were $1,000,000.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 4 - MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities are summarized as follows (in thousands):
December 31, 1996
------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
============================================================
Held-to-maturity, carried at
amortized cost
Collateralized mortgage obligations
Private - fixed rate.................................... $ 29,764 $ 36 $ 951 $28,849
==================================================
Available-for-sale, carried at fair value
FHLMC fixed rate......................................... 6,858 $ 163 $ -- $ 7,021
FNMA variable rate....................................... 4,489 64 -- 4,553
FHLMC variable rate...................................... 16,770 264 -- 17,034
Collateralized mortgage obligations
Agency
Fixed rate............................................ 704 -- 3 701
Variable rate......................................... 21,784 2 325 21,461
Private
Fixed rate............................................ 23,718 26 242 23,502
Variable rate......................................... 2,534 4 25 2,513
-------------------------------------------------
$76,857 $ 523 $ 595 $76,785
=================================================
December 31, 1995
------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
============================================================
Held-to-maturity, carried at
amortized cost
Collateralized mortgage obligations
Private - fixed rate................................$ 34,458 $ 121 $ 393 $ 34,186
============================================================
Available-for-sale, carried at fair value
FHLMC fixed rate.....................................$ 8,535 $ 232 $ -- $ 8,767
FNMA variable rate.................................. 6,542 108 -- 6,650
FHLMC variable rate.................................. 22,439 291 -- 22,730
Collateralized mortgage obligations
Agency
Fixed rate.......................................... 4,992 -- 44 4,948
Variable rate....................................... 25,254 31 299 24,986
Private
Fixed rate.......................................... 31,797 117 176 31,738
Variable rate....................................... 3,726 -- 224 3,502
------------------------------------------------------------
$103,285 $ 779 $ 743 $103,321
============================================================
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
In accordance with supplemental guidelines established by the Financial
Accounting Standards Board pertaining to the implementation of FAS 115, in
December, 1995, the Company transferred mortgage-backed securities with a book
value of $45,324,000 from held-to-maturity to available-for- sale. The fair
value of the transferred securities at the date of transfer was $45,453,000 and
the related unrealized gain of $129,000 is included in the separate component of
stockholders' equity net of deferred income taxes. This transfer was executed to
afford the Company greater flexibility in managing its available-for-sale
portfolio in response to market conditions.
Proceeds from the sale of mortgage-backed and related securities
available-for-sale, gross realized gains and gross realized losses are as
follows (in thousands):
Year ended December 31,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
Sale proceeds.................................... -- $ 52,407 $ 36,318
======================================================
Gross realized gains............................. -- $ 235 $ 933
======================================================
Gross realized losses............................ -- $ 132 $ 194
======================================================
NOTE 5 - LOANS RECEIVABLE
Loans receivable held-for-investment consist of the following (in thousands):
December 31,
----------------------------------------
1996 1995
========================================
First mortgage loans
1-4 family residential.............................................. $295,322 $304,720
Multi-family residential............................................ 13,673 10,428
Commercial real estate.............................................. 65,893 61,271
Land................................................................ 16,504 11,802
Commercial.......................................................... 10,710 4,307
Construction
1-4 family residential............................................. 41,338 26,663
Multi-family residential........................................... 10,825 5,434
Commercial......................................................... 8,276 12,623
Other loans
Second mortgage participations purchased............................ 5,360 7,096
Property improvement and consumer................................... 16,538 12,404
----------------------------------------
484,439 456,748
Less
Undisbursed portion of construction loans in
process............................................................ (33,460) (17,197)
Net deferred discounts.............................................. (64) (303)
Net deferred loan fees.............................................. (1,470) (1,718)
Allowance for loan losses........................................... (4,390) (3,968)
----------------------------------------
$445,055 $433,562
========================================
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Included in loans receivable at December 31, 1996 and 1995 are $7,294,000 and
$8,509,000, respectively, of loans granted to facilitate the sale of foreclosed
real estate.
Real estate securing first mortgage loans originated by the Company is located
primarily within the Commonwealth of Virginia.
Loans serviced for others amounted to $250,959,000, $281,890,000, and
$315,001,000 at December 31, 1996, 1995 and 1994, respectively. At December 31,
1996, loans serviced for others consisted of the following: FHLMC $177,468,000,
FNMA $71,849,000, other $1,642,000. The carrying value of this servicing was
$347,000 at December 31, 1996, representing the remaining unamortized cost to
acquire such servicing from others.
Nonperforming loans totaled $4,126,000, $3,795,000, and $6,104,000 at December
31, 1996, 1995 and 1994, respectively. Foregone interest on these loans is as
follows (in thousands):
Year ended December 31,
--------------------------------------------
1996 1995 1994
============================================
Interest at contractual rates.......................................... $ 350 $ 330 $ 518
Interest income recognized............................................. 223 198 221
--------------------------------------------
Interest income foregone............................................... $ 127 $ 132 $ 297
============================================
Changes in the allowance for loan losses follows (in thousands):
--------------------------------------------
1996 1995 1994
============================================
Balance, January 1..................................................... $ 3,968 $ 4,328 $ 4,173
Provision for loan losses.............................................. 150 175 275
Charges to the allowance, net of recoveries............................ 272 (535) (120)
--------------------------------------------
Balance, December 31................................................... $ 4,390 $ 3,968 $ 4,328
============================================
Nonperforming loans at December 31, 1996 and 1995 included $113,000, and
$242,000, respectively, of loans which were considered to be impaired in
accordance with FAS 114. The allowance for possible loan losses as of December
31, 1996 and 1995 included $70,000 and $172,000, respectively, related to loans
considered to be impaired. During the years ended December 31, 1996, 1995 and
1994, the Company had an average recorded investment in impaired loans of
$132,000, $607,000 and $1,868,000, respectively. Interest income of $27,000 and
$32,000 was recognized on a cash basis related to loans considered to be
impaired during the years ended December 31, 1995 and 1994, respectively. No
interest income was recognized on such loans during the year ended December 31,
1996.
Loans receivable held-for-sale consist entirely of newly originated first
mortgage loans secured by single-family residences located primarily within the
Commonwealth of Virginia.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 6 - FORECLOSED REAL ESTATE
Foreclosed real estate consists of the following (in thousands):
December 31,
-----------------------------
1996 1995
=============================
Properties acquired through foreclosure......................... $ 2,282 $ 7,366
Less allowance for losses on foreclosed real estate............. (235) (1,599)
-----------------------------
$ 2,047 $ 5,767
=============================
Changes in the allowance for losses on foreclosed real estate follows (in
thousands):
---------------------------------------------------
Year ended December 31,
---------------------------------------------------
1996 1995 1994
===================================================
Balance, January 1............................ $ 1,599 $ 1,571 $ 2,038
Provision for losses on foreclosed
real estate................................ 484 200 100
Charges to the allowance...................... (1,848) (172) (567)
---------------------------------------------------
Balance, December 31.......................... $ 235 $ 1,599 $ 1,571
===================================================
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 7 - ACCRUED INCOME RECEIVABLE
Accrued income receivable consists of the following (in thousands):
December 31,
-------------------------------------
1996 1995
=====================================
Interest on loans........................................................... $ 3,435 $ 3,359
Interest on mortgage-backed and related securities.......................... 749 959
Other interest and dividends................................................ 422 501
-------------------------------------
4,606 4,819
Less allowance for uncollectable interest................................... (317) (273)
-------------------------------------
$ 4,289 $ 4,546
=====================================
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
---------------------------------
1996 1995
=================================
Land and improvements........................................................ $ 1,346 $ 1,016
Buildings.................................................................... 1,723 1,391
Leasehold improvements....................................................... 1,797 1,642
Furniture and equipment...................................................... 5,939 5,795
---------------------------------
10,805 9,844
Less accumulated depreciation and amortization............................... (5,163) (4,569)
---------------------------------
$ 5,642 $ 5,275
=================================
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 9 - DEPOSITS
Deposits consist of the following (in thousands):
Rate at
December 31, December 31,
--------------------------------------------------------------------
1996 1996 1995
--------------------------------------------------------------------
Demand accounts................................... -- $ 15,637 $ 11,792
NOW accounts...................................... 2.08% 15,806 15,519
Money market deposit accounts..................... 3.52% 38,399 34,007
Savings deposits.................................. 3.96% 44,423 44,172
Time deposits
Brokered...................................... 5.00% - 7.30% 86,273 159,222
Retail........................................ 4.00% - 7.99% 222,851 228,259
--------------------------------------------
$423,389 $492,971
============================================
Weighted average interest rate.................... 5.00% 5.38%
============================================
The aggregate amount of time deposit accounts with balances of $100,000 or more
approximated $19,327,000 and $21,635,000 at December 31, 1996 and 1995,
respectively.
At December 31, 1996, approximately $12,211,000 in mortgage-backed securities
were pledged as collateral on certain deposits which exceed FDIC insurance
limits.
A summary of time deposits by maturity follows (in thousands):
December 31,
------------------------------------------
1996 1995
------------------------------------------
Within 1 year.......................................................... $150,520 $223,741
1 - 2 years............................................................ 57,547 89,509
2 - 3 years............................................................ 87,104 52,253
3 - 4 years............................................................ 6,591 6,260
4 - 5 years............................................................ 6,710 15,094
Over 5 years........................................................... 652 624
------------------------------------------
$309,124 $387,481
==========================================
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Interest on deposits follows (in thousands):
Year ended December 31,
-----------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------
NOW accounts........................................................ $ 328 $ 348 $ 272
Money Market Deposit accounts....................................... 1,392 1,310 956
Savings deposits.................................................... 1,713 1,747 2,417
Time deposits
Brokered.......................................................... 7,889 10,837 5,962
Retail............................................................ 12,623 13,309 17,342
Less early withdrawal penalties..................................... (48) (51) (54)
-----------------------------------------------------------
$ 23,897 $ 27,500 $ 26,895
===========================================================
NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank are as follows (in thousands):
Weighted Average Rate
December 31, at December 31,
------------------------------------------------------------------------------
Maturity 1996 1995 1996 1995
------------------------------------------------------------------------------
1996............................................. $ -- $ 146,900 --% 6.06%
1997............................................. 37,000 5,000 5.84 7.40
1998............................................. 65,000 5,000 5.86 7.60
1999............................................. 25,000 -- 6.33 --
2000 and thereafter.............................. 6,110 1,110 6.03 3.50
---------------------------------------
$ 133,110 $ 158,010
=======================================
The Bank's investment in Federal Home Loan Bank stock of $9,842,000,
mortgage-backed and related securities of $30,175,000 and first mortgage loans
of approximately $132,147,000 are pledged as collateral for advances at December
31, 1996. The total additional amount of advances available from the Federal
Home Loan Bank was estimated to be $50,890,000 at December 31, 1996.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of certain information regarding investment securities sold under
agreements to repurchase follows (in thousands):
1996 1995 1994
---------------------------------------------------------------
Balance at December 31....................................... $ 5,015 $ -- $ 14,500
Maximum month-end balance during the year.................... 5,110 20,358 49,646
Monthly average balance during the year...................... 3,000 10,545 31,468
Investment securities underlying the
agreements at year end
Carrying value........................................... 12,499 -- 15,572
Estimated market value................................... 12,512 -- 14,806
Monthly average interest rate during the year................ 5.59% 6.06% 4.39%
Weighted average interest rate at year end................... 5.71% -- 5.99%
Weighted average maturity at year end........................ 21 days -- 71 days
The investment securities underlying the agreements to repurchase these
identical securities were delivered to, and held by, the broker dealers or
regional bank who arranged the transactions.
NOTE 12 - INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Year ended December 31,
-------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------
Current......................................................... $ 449 $ 612 $ (869)
Deferred........................................................ (127) 29 181
-------------------------------------------------------------
$ 322 $ 641 $ (688)
=============================================================
The deferred income tax provision in 1994 is net of a $580,000 reclassification
from the current tax liability account resulting from a change in the method by
which the Company is accounting for loan fees for tax reporting purposes.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
A reconciliation of the income tax provision (benefit) at the statutory federal
income tax rate of 34% to the amount reported in the consolidated statement of
operations follows (in thousands):
Year ended December 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
Expected income tax expense (benefit) at federal income tax rate............ $ 303 $ 614 $ (428)
Increase (decrease) in taxes resulting from
Effect of statutory bad debt deduction.................................. -- -- (202)
Nondeductible expenses.................................................. 28 13 --
State income tax........................................................ 11 20 --
Other, net.............................................................. (20) (6) (58)
------------------------------------------------
$ 322 $ 641 $ (688)
================================================
Prior to 1996, the Internal Revenue Code provided that a qualified savings
institution could compute its bad debt reserve, and the related deduction for
income tax reporting purposes, based upon either the percentage of taxable
income method or the ratio of actual charge-offs to loans outstanding, subject
to a base year amount determined at December 31, 1987. The Company computed its
bad debt deduction for income tax reporting purposes using the percentage of
taxable income method for 1995 and the experience method for 1994. Due to law
changes effective for 1996, the Company computed its bad debt deduction using
the direct charge-off method for 1996.
The Company's retained earnings at December 31, 1996, 1995 and 1994 include
$8,279,000 of tax bad debt reserves for which deferred tax has not been
provided. Pursuant to provisions in the Small Business Job Protection Act of
1996, the reserves would be subject to tax only if the Company fails to qualify
as a "bank" or in the case of certain excess distributions to shareholders.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows (in
thousands):
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
December 31,
---------------------------------------
1996 1995
---------------------------------------
Deferred tax assets
Book bad debt reserves............................................. $ 1,668 $ 1,594
Mark-to-market adjustment on securities
available-for-sale............................................. 20 --
Deferred loan fees................................................. 176 271
Other.............................................................. 221 112
---------------------------------------
2,085 1,977
---------------------------------------
Deferred tax liabilities
Federal Home Loan Bank stock dividends............................. 1,182 1,182
Mark-to-market adjustment on securities
available-for-sale............................................... -- 20
Other.............................................................. 89 196
---------------------------------------
1,271 1,398
---------------------------------------
Net deferred tax asset, included in other assets....................... $ 814 $ 579
=======================================
There was no valuation allowance for gross deferred tax assets as of December
31, 1996 or 1995 since management believes that it is more likely than not that
the entire amount of the gross deferred tax assets will be realized based on
projected future taxable income, reversals of taxable temporary differences and
taxable income in the available carryback periods.
NOTE 13 - EMPLOYEE BENEFIT PLANS
Employee Savings Plan
The Company maintains an employee savings plan (the "Savings Plan") covering all
employees who have completed one year of service and attained age 21. The
Savings Plan provides for an employee salary reduction feature pursuant to
Section 401(k) of the Internal Revenue Code. The Company matches 50% of an
employee's contributions. The Company's contribution is limited to 3% of an
employee's total compensation. These matching contributions vest to the
participants over a four-year period. The Company's matching contributions for
1996, 1995 and 1994 were $43,500, $120,000 and $117,000, respectively.
Employee Stock Ownership Plan
The Company maintains an employee stock ownership plan ("ESOP") covering all
employees who have attained the age of 21. Contributions to the ESOP are at the
Board of Directors' discretion and are allocated to participants based upon the
participant's percentage of total covered compensation. These contributions vest
to the recipients over a four-year period or less depending on their years of
service. The Company's contribution to the ESOP was $60,000 for the year ended
December 31, 1996. There were no contributions to the ESOP for the years ended
December 31, 1995 and 1994.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Employee Stock Purchase Plan
During 1994, the Company established an employee stock purchase plan ("ESPP").
All employees of the Company are eligible to participate in the ESPP which
allows participants to purchase common stock at 95% of the current market price.
The Company contributes the remaining 5%. The Company's contribution to the ESPP
was $4,200, $7,200 and $6,800 for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 14 - STOCK OPTION PLANS
The Company has stock option plans (the "Plans") that provide for the granting
of both qualified and nonqualified options to employees and directors. Under the
Plans, the option price cannot be less than the fair market value of the stock
on the date granted. An option's maximum term is ten years from the date of
grant. Options granted under the Plans may be subject to a graded vesting
schedule. An aggregate of 499,432 shares of the Company's common stock is
reserved for issuance upon exercise of the options granted under the Plans.
The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for the Plans. Accordingly, no compensation cost
has been recognized for its fixed stock options. Had compensation cost for
options granted under the Plans been determined based on the fair value at the
grant dates consistent with the alternative method of FASB Statement No. 123
(FAS 123), the Company's net income and earnings per common share would have
been reduced to the pro forma amounts indicated below. These results may not be
representative of the effects on reported net income for future years. In
accordance with the transition provisions of FAS 123, the pro forma amounts
reflect fixed stock options with grant dates subsequent to January 1, 1995.
In thousands except per share data 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Net income As reported Pro $ 569 $ 1,166
forma 418 916
Earnings per common share As reported Pro .11 .24
forma .10 .20
For purposes of computing the pro forma amounts indicated above, the fair value
of each option on the grant date is estimated using the Black-Scholes option
pricing model with the following assumptions used for grants in 1996 and 1995:
dividend yields of 1.5%; expected volatility of 49%; a risk-free interest rate
of 5.5% to 6.9%; and an expected option life of 8 years.
The weighted-average fair value of each option granted by the Company during
1996 and 1995 was $3.37 and $4.38, respectively. A summary of the status of the
Plans as of December 31 and changes during the years ended on those dates is
presented below:
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
1996 1995 1994
-------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
=======================================================================================================
Outstanding, Jan 1 257,450 $ 7.31 182,962 $ 6.41 171,762 $ 6.16
Granted 43,500 7.46 92,000 8.89 32,500 8,06
Exercised (1,950) 5.56 (16,512) 6.14 (13,650) 6.84
Forfeited (11,500) 8.66 (1,000) 7.38 (7,650) 7.00
------------------- ----------------- -----------------
Outstanding, Dec 31 287,500 7.29 257,450 7.31 182,962 6.41
=================== ================= =================
Options exercisable at
year end 252,162 216,449 176,296
=================== ================= =================
The following table summarizes information about fixed price stock options
outstanding as of December 31, 1996:
Weighted
Average Weighted Weighted
Total Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
=========================================================================================================================
$ 4.25 to 6.88 90,000 6.4 years $ 5.54 86,667 $ 5.49
7.00 to 7.81 95,500 7.5 years 7.28 83,833 7.30
8.13 to 9.38 102,000 8.7 years 8.86 81,662 8.93
-------------------- --------------------
$ 4.25 to 9.38 287,500 7.6 years 7.29 252,162 7.21
==================== ====================
During 1993, the Company reserved 80,000 shares for non-employee directors'
stock options, to be granted in five equal annual installments with an exercise
price equal to the market value at the date of the grant. Under this plan,
options for 16,000 shares were granted during each year ended December 31, 1996,
1995 and 1994 and are included in the above tables.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 15 - REGULATORY REQUIREMENTS AND RESTRICTIONS
Savings institutions must maintain specific capital standards that are no less
stringent than the capital standards applicable to national banks. The Bank is
subject to regulatory capital requirements administered by the Office of Thrift
Supervision (the "OTS"). Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by the
OTS that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the OTS about components, risk weightings and other factors.
Quantitative measures established by the OTS to ensure capital adequacy provide
for three capital standards: a tangible capital requirement, a core capital
requirement and a risk-based capital requirement. Management believes, as of
December 31, 1996, that the Bank meets all capital adequacy requirements to
which it is subject. As of December 31, 1996, the most recent notification from
the OTS categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes has changed the institution's
category.
The Bank's actual and regulatory capital amounts and ratios are set forth below.
(in thousands)
Minimum To Be Well
Requirements For Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
============================================================================================
As of December 31, 1996
Tangible.......................... $ 40,456 6.6% $ 9,212 1.5% $ 21,494 3.5%
Core.............................. 40,456 6.6% 18,424 3.0% 30,706 5.0%
Risk-Based........................ 44,487 12.5% 28,503 8.0% 35,628 10.0%
As of December 31, 1995
Tangible.......................... $ 40,408 5.8% $10,527 1.5% $24,563 3.5%
Core.............................. 40,408 5.8% 21,054 3.0% 35,090 5.0%
Risk-Based........................ 43,993 11.1% 31,700 8.0% 39,626 10.0%
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 16 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values of
the Company's recorded financial instruments, as well as information about
certain specific off-balance sheet financial instruments (in thousands):
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------------------------
Estimated
Notional Carrying Fair Notional Carrying Estimated
Amount Value Value Amount Value Fair Value
=============================================================================================
Recorded financial instruments
Financial assets:
Cash and cash equivalents........... $ -- $ 7,335 $ 7,335 $ -- $ 8,519 $ 8,519
Securities purchased under
agreements to resell............. -- -- -- -- 55,000 55,000
Investment securities............... -- 27,796 27,540 -- 26,917 26,720
Mortgage-backed and related
securities....................... -- 106,549 105,634 -- 137,779 137,507
Loans held-for-sale................. -- 4,785 4,790 -- 14,020 14,222
Loans held-for-investment, net...... -- 445,055 468,545 -- 433,562 466,003
Interest rate cap agreement
trading.......................... -- -- -- 5,000 -- --
Interest rate cap agreements
hedging.......................... -- -- -- 35,000 169 22
Financial liabilities:
Deposits with no stated maturity.... -- 114,265 114,265 -- 105,490 105,490
Time deposits....................... -- 309,124 312,185 -- 387,481 390,942
Securities sold under agreements to
repurchase....................... -- 5,015 5,015 -- -- --
Advances from the Federal Home
Loan Bank........................ -- 133,110 133,554 -- 158,010 158,690
Off-balance sheet financial instruments
Interest rate swap agreements -
hedging.......................... 25,000 -- (310) 25,000 -- (719)
Loan commitments with mandatory
rates and terms.................. 17,769 -- 19 28,567 -- 84
Forward sales of loans - optional
delivery......................... 8,510 -- 67 19,868 -- 301
Letters of credit................... 3,783 -- -- 2,795 -- --
The estimated fair values of financial instruments have been determined using
available market information and appropriate valuation methodologies. Much of
the information used to determine fair value is highly subjective and judgmental
in nature and therefore the results may not be precise. In addition, estimates
of cash flows, risk characteristics, credit quality and interest rates are all
subject to change. Since the fair value is estimated as of the balance sheet
date, the amounts which will actually be realized or paid upon settlement or
maturity of the various instruments could be significantly different.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Recorded Financial Instruments
The carrying amount reported for cash, cash equivalents and securities purchased
under agreements to resell approximates those assets' fair values. Fair value
for investments and mortgage-backed securities is based on quoted market prices
or dealer quotes.
The fair value for loans held-for-sale is based upon either actual commitments
to sell individual loans or, if uncommitted, the market prices for similar
loans.
Residential mortgages, and consumer installment loans which have similar
characteristics, have been valued on a pooled basis using market prices for
securities backed by loan transactions with similar rates and terms. All other
loans, which are principally commercial real estate and land loans, have been
individually valued by discounting the estimated future contractual loan cash
flows to their present value using an assigned discount rate which may or may
not be the contractual rate in effect with the obligor. This discount rate used
is the rate at which loans with similar credit risk and remaining maturities
would be entered into at the balance sheet date. The fair value of loans
receivable does not include the value of the customer relationship or the right
to fees generated by the customer's accounts.
The Company has used certain derivative financial instruments for the purpose of
interest rate risk management. All of the Company's derivative financial
instruments are for purposes other than trading. The Company has used interest
rate caps to limit its short term borrowing costs related to specifically
identified short term borrowings, including repurchase agreements and variable
rate Federal Home Loan Bank advances. Interest rate caps also have been used by
the Company to remove, for a limited period of time, the lifetime caps inherent
in certain of the Company's floating rate mortgage-backed and related
securities. Interest rate caps have also been used to limit the Company's
exposure to adverse market value changes in other derivative financial
instruments. Fair values of interest rate cap agreements are the estimated
amounts to settle the positions as provided by dealer quotes.
The fair value of demand deposits, savings accounts and money market deposits is
the amount payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated using the rates currently offered
for deposits with similar remaining maturities. As with loan receivables, the
fair value of deposit liabilities also does not include the value of the
customer relationships or the right to fees generated by the accounts.
For securities sold under agreements to repurchase, the carrying amount is a
reasonable estimate of fair value. The fair value of advances from the Federal
Home Loan Bank is based on rates currently offered for advances with similar
remaining maturities.
Off-Balance Sheet Financial Instruments
Interest rate swaps have been used by the Company to extend the duration of its
liabilities. At the inception of the contract, the Company agreed to pay a fixed
rate to the counterparty and receive a floating rate. The floating rate received
by the Company approximates the actual borrowing costs on specifically
identified short term borrowings including repurchase agreements and variable
rate Federal Home Loan Bank advances. The Company has entered into an aggregate
of $25 million notional swap agreements under which it pays fixed rates ranging
from 6.52% to 6.60% and receives 3 month LIBOR. These agreements expire in 1998.
The fair value of swap agreements is the estimated amount to settle the
positions as provided by dealer quotes. The fair value of letters of credit,
commitments to originate, purchase or sell loans is determined based upon
differences between current and contractual interest rates.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Credit Risks
The Company has credit risk to the extent that the counterparties to the
derivative financial instruments do not perform their obligation under the
agreements. Counterparties to the Company's agreements are primary
broker/dealers and it is not expected that they will fail to meet its
obligation.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
In addition to undisbursed loan funds at December 31, 1996, the Company has
issued commitments to originate loans amounting to $15,788,000. All outstanding
loan commitments are scheduled to be disbursed within 90 days. In connection
with its loans held-for-sale and its loan commitments, the Company has also
entered into commitments to sell loans of approximately $8,510,000 at December
31, 1996. Also, at December 31, 1996, the Company had issued $3,783,000 in
standby letters of credit. Standby letters of credit generally provide for
collateral of real estate or other personal property. All standby letters of
credit expire within three years.
Loans are primarily sold to third-party investors, some of whom require the
repurchase of loans in the event of default or faulty documentation. Recourse
periods for the third-party investor loans vary from 90 days to one year and
conditions for repurchase vary with the investor. Mortgages subject to recourse
are collateralized by one-to-four family residences, have loan-to-value ratios
of 80% or less, or have private mortgage insurance, or are insured or guaranteed
in whole or in part by an agency of the United States government. Management
does not expect any material losses to occur on loans repurchased, if any,
pursuant to recourse provisions. Loans that are sold to Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation or Government
National Mortgage Association are on a nonrecourse basis, whereby foreclosure
losses are generally not the responsibility of the Company.
The Company is a defendant in certain litigation arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of this matter is not expected to have a
material adverse effect on the consolidated financial position of the Company.
Total rent expense under long-term operating leases amounted to $1,235,000,
$1,542,000 and $1,299,000 in 1996, 1995 and 1994, respectively. One of the
long-term operating leases provides a 21% equity interest in the appreciation in
underlying real estate.
Minimum rentals under noncancelable leases with initial terms of more than one
year are as follows (in thousands):
Year ending
December 31, Amount
================================
1997 $1,332
1998 1,327
1999 1,369
2000 1,276
2001 233
After 2001 577
Included in the above table is the minimum rental commitment associated with a
mortgage lending office sold during 1995 for which the Company remains
contingently liable.
68
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Condensed financial statements of Virginia Beach Federal Financial Corporation
(the "Parent Company") are shown below (in thousands). The Parent Company has no
significant operating activities.
CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31,
--------------------
1996 1995
====================
ASSETS
Cash in bank ........................................................ $ 504 $ 647
Investment in subsidiary ............................................ 40,452 40,493
Other assets ........................................................ 16 8
--------------------
Total assets ...................................................... $ 40,972 $ 41,148
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities ......................................................... $ 145 $ 116
--------------------
STOCKHOLDERS' EQUITY
Common stock ...................................................... 50 50
Capital in excess of par value .................................... 9,336 9,237
Unrealized gain (loss) on available-for-sale securities, net of tax (39) 39
Retained earnings ................................................. 31,480 31,706
--------------------
Total stockholders' equity ....................................... 40,827 41,032
--------------------
Total liabilities and stockholders' equity ....................... $ 40,972 $ 41,148
====================
Year ended December 31,
------------------------------
1996 1995 1994
------------------------------
CONDENSED STATEMENT OF OPERATIONS
Equity in earnings (loss) of subsidiary $ 587 $ 1,189 $ (550)
Interest income ....................... 18 26 41
Other expense ......................... 48 60 64
-----------------------------
Income (loss) before income taxes ..... 557 1,155 (573)
Income tax benefit .................... (12) (11) (2)
-----------------------------
Net income (loss) ..................... $ 569 $ 1,166 $ (571)
=============================
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Year ended December 31,
------------------------------
1996 1995 1994
------------------------------
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating activities
Net income (loss) ......................................... $ 569 $ 1,166 $ (571)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
(Increase) decrease in other assets .................... (8) 18 7
Increase in liabilities ................................ 29 28 29
Equity in net (income) loss of subsidiary ............. (587) (1,189) 550
-----------------------------
Net cash provided by operating activities .......... 3 23 15
-----------------------------
Cash flows from investing activities
Dividends from subsidiary ................................. 550 400 --
Additional capital contribution in subsidiary ............. -- -- (400)
----------------------------
Net cash provided by (used for) investing activities 550 400 (400)
------------------------------
Cash flows from financing activities
Issuance of common stock .................................. 99 269 188
Cash dividends paid ....................................... (795) (789) (784)
---------------------------
Net cash used for financing activities ............. (696) (520) (596)
---------------------------
Net decrease in cash ........................................... (143) (97) (981)
Cash at beginning of year ...................................... 647 744 1,725
------------------------------
Cash at end of year ............................................ $ 504 $ 647 $ 744
=============================
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
Under Virginia law, the Company may not pay a cash dividend to its stockholders
if, after giving effect to the dividend, the Company would not be able to pay
its debts as they become due or if the Company's total assets would be less than
the sum of its total liabilities, plus the amount that would be needed to
satisfy any preferential rights upon dissolution to stockholders whose
preferential rights are superior to those of stockholders receiving the
dividend. Because the Company has no separate operations apart from ownership of
the Bank, the Company's ability to pay dividends is substantially dependent upon
funds received by it from the Bank.
The OTS has adopted regulations that impose limitations on all capital
distributions by savings institutions. The OTS may prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. The Bank paid cash dividends of $550,000 and
$400,000 to the Company during 1996 and 1995, respectively. There can be no
assurance that the OTS will not object to any amount of future cash dividends
declared by the Bank.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
NOTE 19 - QUARTERLY CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data) 1996 Quarter ended
---------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------
Interest income ................... $ 12,558 $ 11,979 $ 11,862 $ 11,946
Net interest income after provision
for loan losses ................. 3,920 4,109 4,148 4,389
Other income ...................... 951 829 759 715
Other expenses .................... 3,971 3,930 7,105 3,922
Income before income taxes ........ 900 1,008 (2,198) 1,182
Net income (loss) ................. 547 625 (1,363) 760
Earnings (loss) per share ......... .11 .13 (.27) .15
Dividends paid per share .......... .04 .04 .04 .04
(in thousands, except per share data) 1995 Quarter ended
------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------
Interest income ................... $ 13,076 $ 13,332 $ 13,314 $ 12,564
Net interest income after provision
for loan losses ................. 3,938 3,638 3,572 3,691
Market value adjustment on
derivative contracts ............ (312) 80 -- (10)
Gain on sales of mortgage loan
servicing rights ................ -- -- -- 111
Other income ...................... 921 1,322 1,828 1,278
Other expenses .................... 4,390 4,629 4,809 4,422
Income before income taxes ........ 157 411 591 648
Net income ........................ 104 271 390 401
Earnings per share ................ .02 .06 .08 .08
Dividends paid per share .......... .04 .04 .04 .04
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The registrant has not had any disagreements with its accountants on any
matter of accounting principles or practices or financial statement disclosure.
On August 9, 1995, the Board of Directors of the Company selected KMPG Peat
Marwick LLP, Suite 1900, 1021 East Cary Street, Richmond, Virginia 23219-4023,
as the new certified public accounting firm. KPMG Peat Marwick LLP replaced
Price Waterhouse LLP, 700 World Trade Center, Norfolk, Virginia 23510.
During the two most recent calendar years audited by Price Waterhouse LLP,
there were no reportable disagreements related to any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
Price Waterhouse LLP rendered an unqualified opinion on the consolidated
financial statements of the Company and its subsidiary, Virginia Beach Federal
Savings Bank, for each of the last two years audited. Such years were the year
ended December 31, 1994 and the year ended December 31, 1993.
The Company did not, nor did anyone on the Company's behalf consult during
1993, 1994 or prior to August 9, 1995, with KMPG Peat Marwick LLP regarding the
application of accounting principles to a specified transaction, either
completed or proposed. Neither were they consulted during such period regarding
the type of audit opinion that might be rendered on the Bank's financial
statements; nor was a written report provided to the Bank or oral advice
provided that KMPG Peat Marwick LLP concluded was an important factor considered
by the Company in reaching a decision as to the accounting, auditing or
financial reporting issue; or any matter that was either the subject of a
disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information contained under the section captioned "Election of Directors"
in the Company's definitive proxy statement for the 1997 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.
Information regarding executive officers is contained in the section captioned
"Executive Officers of the Registrant" under Part I hereof and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information contained under the section captioned "Election of Directors"
in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- ------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Virginia Beach Federal Financial Corporation
(b) Security Ownership by Management
Information required by this item is incorporated herein by reference
to the section captioned "Election of Directors" and "Voting Securities
and Principal Holders Thereof" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the section captioned "Certain Transactions with Management and Others" in the
Proxy Statement.
74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
- ----------------------------------------------------------------------
Page in
Annual
Report
On
Form
10-K
----------------
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements
Report of Independent Auditors as of December 31, 1996 and 1995........................... 41
Report of Independent Auditors as of December 31, 1994.................................... 42
Virginia Beach Federal Financial Corporation
o Consolidated Statement of Financial Condition
December 31, 1996 and 1995............................................................. 43
o Consolidated Statement of Operations for the three years ended December
31, 1996, 1995 and 1994................................................................ 44
o Consolidated Statement of Cash Flows for the three years ended December
31, 1996, 1995 and 1994................................................................ 45 - 46
o Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 1996, 1995 and 1994....................................................... 47
o Notes to Consolidated Financial Statements............................................. 48 - 72
2. Financial Statement Schedules
(None)
All schedules have been omitted as they are not applicable or the
required information is shown in the Notes to Consolidated
Financial Statements.
Exhibits
(3.1) Restated Articles of Incorporation of Virginia Beach Federal
Financial Corporation (Incorporated by reference to Post-Effective
Amendment No. 1 to the Registrant's Form S-4 Registration
Statement dated March 21, 1991, File No. 33-27398).
(3.2) Bylaws of Virginia Beach Federal Financial Corporation
(Incorporated by reference to Post-Effective Amendment No. 1 to
the Registrant's Annual Report on Form S-4 Registration
Statement dated March 21, 1991, File No. 33-27398).
75
(10.1) Virginia Beach Federal Financial Corporation 1981 Stock Option
Plan, as amended (Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1984).
(10.2) Lease between the Runnymede Corporation and Virginia
Beach Federal Savings Bank, dated April 20, 1989
(Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended
December 31, 1989).
(10.3) Virginia Beach Federal Financial Corporation - 1991
Stock Option Plan (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1990).
(10.4) Amended and Restated Agreement and Plan of
Reorganization, dated February 21, 1991, by and
between Virginia Beach Federal Savings Bank, Virginia
Beach Federal Financial Corporation and Virginia
Beach Federal Interim Savings Bank (Incorporated by
reference to Post-Effective Amendment No. 1 to the
Registrant's Form S-4 Registration Statement dated
March 21, 1991, File No. 33-27398).
(10.5) Employment Agreement with John A. B. Davies, Jr., President
and Chief Executive Officer of the Corporation, Dennis R.
Stewart, Executive Vice President and Chief Financial Officer of
the Corporation and John M. Chattleton, Executive Vice President
of the Bank.
(10.6) Employee Stock Purchase Plan. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
(21) Subsidiaries.
(23.1) Consent of Independent Auditors - KPMG Peat Marwick LLP
(23.2) Consent of Independent Auditors - Price Waterhouse LLP
(23.3) Consent of Independent Auditors - Price Waterhouse LLP
(99.1) Annual Report on Form 11-K for the fiscal year ended December
31, 1996.
76
(b) Reports on Form 8-K
During the quarter ended December 31, 1996, the Registrant filed no
current reports on Form 8-K.
(c) The exhibits set forth above are either filed herewith or incorporated
by reference herein.
(d) All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
Dated: March 27, 1997 By: /s/ John A. B. Davies, Jr.
--------------- ---------------------------------------------
John A. B. Davies, Jr.
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John A. B. Davies, Jr. By: /s/ Charles P. Fletcher
---------------------------------------------------- --------------------------------------------------
John A. B. Davies, Jr. Charles P. Fletcher
President and Director Chairman of the Board
(Principal Executive Officer)
Date: March 27, 1997 Date: March 27, 1997
By: /s/ Dennis R. Stewart By: /s/ Floyd E. Kellam, Jr.
---------------------------------------------------- --------------------------------------------------
Dennis R. Stewart Floyd E. Kellam, Jr.
Executive Vice President/ Vice Chairman of the Board
Chief Financial Officer
(Principal Financial Officer)
Date: March 27, 1997 Date: March 27, 1997
By: /s/ Edward E. Brickell By: /s/ Robert H. DeFord, Jr.
---------------------------------------------------- --------------------------------------------------
Edward E. Brickell Robert H. DeFord, Jr.
Director Director
Date: March 27, 1997 Date: March 27, 1997
By: /s/ Betty Anne Huey By: /s/ Rufus S. Kight, Jr.
---------------------------------------------------- --------------------------------------------------
Betty Anne Huey Rufus S. Kight, Jr.
Director Director
Date: March 27, 1997 Date: March 27, 1997
By: /s/ Ivan D. Mapp By: /s/ George R. C. McGuire
---------------------------------------------------- --------------------------------------------------
Ivan D. Mapp George R. C. McGuire
Director Director
Date: March 27, 1997 Date: March 27, 1997
INDEX TO EXHIBITS
EXHIBITS
(3.1) Restated Articles of Incorporation of Virginia Beach Federal Financial Corporation
(Incorporated by reference to Post-Effective Amendment No. 1 to the Registrant's
Form S-4 Registration Statement dated March 21, 1991, File No. 33-27398).
(3.2) Bylaws of Virginia Beach Federal Financial Corporation (Incorporated by reference
to Post-Effective Amendment No. 1 to the Registrant's Form S-4 Registration
Statement dated March 21, 1991, File No. 33-27398).
(10.1) Virginia Beach Federal Financial Corporation 1981 Stock Option Plan, as amended
(Incorporated by reference to the Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1984).
(10.2) Lease between the Runnymede Corporation and Virginia Beach Federal Savings
Bank, dated April 20, 1989 (Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 1989).
(10.3) Virginia Beach Federal Financial Corporation - 1991 Stock Option Plan
(Incorporated by reference to the Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1990).
(10.4) Amended and Restated Agreement and Plan of Reorganization, dated February 21,
1991, by and between Virginia Beach Federal Savings Bank, Virginia Beach Federal
Financial Corporation and Virginia Beach Federal Interim Savings Bank
(Incorporated by reference to Post-Effective Amendment No. 1 to the Registrant's
Form S-4 Registration Statement dated March 21, 1991, File No. 33-27398).
(10.5) Employment Agreement with John A. B. Davies, Jr., President and Chief Executive
Officer of the Corporation, Dennis R. Stewart, Executive Vice President and Chief
Financial Officer of the Corporation and John M. Chattleton, Executive Vice
President of the Bank.
(10.6) Employee Stock Purchase Plan. (Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995)
(21) Subsidiaries.
(23.1) Consents of Independent Auditors - KPMG Peat Marwick LLP
(23.2) Consent of Independent Auditors - Price Waterhouse LLP
(23.3) Consent of Independent Auditors - Price Waterhouse LLP
(99.1) Annual Report on Form 11-K for the Fiscal Year Ended December 31, 1996.