SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------
FORM 10-K
(Mark One)
[root]
[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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
Transition Period: To
------------------- ---------------------
Commission File Number: 0-19398
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Virginia 54-1534067
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2101 Parks Avenue, Virginia Beach, Virginia 23451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (757) 428-9331
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate value of the Common Stock held by nonaffiliates of the
registrant as of March 13, 1998, computed by reference to the closing price of
such stock on the Nasdaq Stock Market on that date, was $74,467,076. Solely for
purposes of this calculation, the term "affiliate" is deemed to include all
executive officers and directors of the registrant. As of March 13, 1998 there
were issued and outstanding 4,981,874 shares of the Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Parts II and IV)
2. Portions of Proxy Statement for 1998 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.
The Bank's primary businesses are those of lending to real estate
developers and owners, small businesses and consumers, and accepting deposits
from small businesses and the general public through its network of 14 branch
locations. The Bank conducts its business in the Hampton Roads area of
southeastern Virginia and its markets comprise the communities of Virginia
Beach, Chesapeake, Norfolk, Hampton, Newport News, York County and Williamsburg.
Lending Activities
General. The Bank originates loans directly and through its mortgage
banking subsidiary, First Coastal Mortgage Corp (First Coastal Mortgage), which
was known as Beach Fed Mortgage Corp until November 1996.
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, 1997, which
exceeded 10% of total loans.
At December 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
======================================================================================
Type of Loan (Dollars in Thousands)
Conventional real
estate loans
Loans on existing
property (1) $373,884 82.27% $398,219 89.48% $395,917 91.32% $413,920 97.52% $370,637 95.73%
Interim construction
loans 41,045 9.03 25,374 5.70 26,824 6.18 8,795 2.07 10,408 2.68
Commercial 24,789 5.45 10,731 2.41 4,343 1.00 1,059 0.25 1,826 0.47
Consumer loans
Deposit account
loans 847 0.19 725 0.16 1,030 0.24 878 0.21 1,484 0.38
Home improvement and
consumer loans 14,489 3.19 12,698 2.85 8,864 2.04 4,966 1.17 7,790 2.02
Equity line of credit 5,102 1.12 3,232 0.73 2,572 0.59 1,726 0.41 1,424 0.37
Less
Discounts and other 1,382 0.30 1,534 0.34 2,020 0.47 2,581 0.61 2,225 0.57
Loan loss reserve 4,297 0.95 4,390 0.99 3,968 0.90 4,328 1.02 4,173 1.08
------------------------------------------------------------------------------------
Total $454,477 100.00 $445,055 100.00% $433,562 100.00% $424,435 100.00% $387,171 100.00%
====================================================================================
Type of Security
Residential real estate
1-to-4 family $315,477 69.41% $322,032 72.36% $332,358 76.66% $336,802 79.35% $297,833 76.92%
Other dwelling units 17,491 3.85 19,940 4.48 5,797 1.33 13,116 3.09 10,010 2.59
Commercial or industrial
real estate 87,063 19.16 84,783 19.05 87,158 20.10 74,523 17.56 74,626 19.28
Commercial 24,789 5.45 10,731 2.41 4,343 1.00 1,059 0.25 1,826 0.47
Deposits 847 0.19 725 0.16 1,030 0.24 878 0.21 1,484 0.38
Other 14,489 3.19 12,768 2.87 8,864 2.04 4,966 1.17 7,790 2.01
Less
Discounts and other 1,382 0.30 1,534 0.34 2,020 0.47 2,581 0.61 2,225 0.57
Loan loss reserve 4,297 0.95 4,390 0.99 3,968 0.90 4,328 1.02 4,173 1.08
------------------------------------------------------------------------------------
Total $454,477 100.00 $445,055 100.00% $433,562 100.00% $424,435 100.00% $387,171 100.00%
====================================================================================
(1) Includes construction loans converted to permanent loans.
2
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.
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. These loans typically provide for an interest rate reset or call after
five, seven or ten 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 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,
1997, the Bank's commercial real estate loans ranged in size up to $2.3 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 rates
between the Bank's prime rate and up 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 potentially adverse 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.
3
Commercial Loans. The Bank makes fixed and variable rate commercial
loans to individuals, corporations and small businesses. Fixed rate loans bear
interest rates generally between 175 and 350 basis points above the like term
United States Treasury securities and have maturities of up to 10 years.
Variable rate loans are originated at market rates with adjustments based on the
Bank's prime rate plus 100 to 250 basis points. These loans are generally
secured by business property such as fixed assets, accounts receivable and
inventory.
Consumer Loans. The Bank makes available a variety of direct 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 are made at market rates and terms.
Loan Maturity and Repricing Information. The following table sets forth
certain information at December 31, 1997, regarding the dollar amount of loans
maturing or repricing in the Bank's loan and mortgage-backed securities
portfolios 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, 1998, are reported as due in one
year or less. At December 31, 1997, 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 1/1/98 Due 1/1/99 - Due After
- 12/31/98 12/31/2002 12/31/2002
=========================================
(In Thousands)
Held or Available-for-sale
Real estate mortgage loans ... $ 304 $ 180 $ 7,986
Mortgage-backed securities ... 43,359 25,849 15,026
--------------------------------------
43,663 26,029 23,012
--------------------------------------
Held-for-investment
Real estate mortgage loans ... 186,966 125,333 53,895
Real estate construction loans 48,630 -- --
Mortgage-backed securities ... 3,019 9,352 11,771
Commercial ................... 13,618 10,787 384
Consumer loans ............... 8,073 8,354 4,011
--------------------------------------
260,306 153,826 70,061
--------------------------------------
Total ............................ $303,969 $179,855 $ 93,073
======================================
4
The table below sets forth the dollar amount of all loans and
mortgage-backed securities at December 31, 1997, that mature or reprice after
December 31, 1998 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 $ 7,986 $ 180
Mortgage-backed securities 40,875 --
---------------------------
48,861 180
---------------------------
Held-for-investment
Real estate mortgage loans 126,263 52,965
Mortgage-backed securities 21,123 --
Commercial ............... 11,171 --
Consumer loans ........... 12,365 --
---------------------------
170,922 52,965
---------------------------
Total ..................... $219,783 $ 53,145
===========================
Loan Commitments. The Bank issues commitments to originate loans to
prospective borrowers. At December 31, 1997, the Bank had committed to originate
$40,314,000 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.
The Bank's loan commitments also include $15,081,000 in 1-4 family
residential loans that are intended to be sold into the secondary market. 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 adverse changes in interest rates through a variety of
means including the purchase 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.
The Bank also purchases mandatory forward delivery commitments and sells
mortgage-backed securities in order to attempt to insulate itself from adverse
interest rate movements. These agreements are fundamentally different from
optional forward delivery commitments due to the fact that the Bank will incur a
loss on the settlement of these agreements if interest rates have fallen and the
Bank fails to deliver the loan or mortgage-backed security committed. See Note
17 of Notes to Consolidated Financial Statements in the 1997 Annual Report to
Stockholders which is attached hereto as Exhibit 13 and incorporated herein by
reference.
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
5
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 has been instructed to follow 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.
Impaired Loans and Non-performing Assets. 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.
6
The following table sets forth information with respect to the Bank's
non-performing assets at the periods indicated.
At December 31,
----------------------------------------------
1997 1996 1995 1994 1993
==============================================
(Dollars in Thousands)
Loans accounted for on a non-accrual basis (1):
Commercial real estate ................................. $ 90 $ 95 $ 99 $2,076 $3,817
Consumer ............................................... -- -- 125 250 --
----------------------------------------------
90 95 224 2,326 3,817
----------------------------------------------
Loans which are contractually past due 90 days or more (2):
Real Estate:
Residential ........................................... 4,397 4,009 3,553 3,507 4,460
Commercial ............................................ 1,693 -- -- 194 267
Land ................................................... 20 -- -- -- --
Consumer ............................................... 47 22 18 77 --
----------------------------------------------
6,157 4,031 3,571 3,778 4,727
----------------------------------------------
Total of non-accrual and
90-days past due loans ................................ $6,247 $4,126 $3,795 $6,104 $8,544
==============================================
Non-accrual and 90-days past
due loans as a percentage
of total loans receivable, net .......................... 1.37% 0.93% 0.88% 1.44% 2.21%
==============================================
Other non-performing assets (3) ........................... $2,382 $2,047 $5,767 $6,828 $9,798
==============================================
- -------------------------
(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.
(3) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession. 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.
See Note 5 of Notes to Consolidated Financial Statements in the 1997
Annual Report to Stockholders which is attached hereto as Exhibit 13 and
incorporated herein by reference for information regarding interest income on
non-accrual loans.
As of December 31, 1997, there are no loans not included in the table
above, other than as disclosed elsewhere herein, 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. See
" -- Impaired Loans" and -- "Regulatory Loan Classification."
7
Impaired Loans. At December 31, 1997 and 1996, nonperforming loans
included $1,783,000 and $113,000, respectively, of loans which were considered
impaired. The allowance for possible loan losses as of December 31, 1997 and
1996 included $305,000 and $70,000, respectively, 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,
------------------------------
1997 1996 1995
==============================
(In Thousands)
Beginning balance . $ 2,047 $ 5,767 $ 6,828
Foreclosures ...... 2,244 1,316 3,649
Other additions (1) 136 62 1,325
Provision ......... (100) (484) (200)
Dispositions, net . (1,945) (4,614) (5,835)
------------------------------
Ending balance .... $ 2,382 $ 2,047 $ 5,767
==============================
- ---------------------
(1) Consists of improvements and advances in an effort to make the projects
more saleable.
Real Estate Owned (REO). At December 31, 1997 the REO properties
comprised Condominium Campsites, described below, with a carrying value of
$1,487,000 and eleven additional residential properties with an aggregate
carrying value of $895,000 and no individual value greater than $150,000.
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 major
improvements to the amenities were completed during 1997. A total of 101 lots
have been sold. The Bank anticipates continued marketing of the sites for
several years. 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 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 a specific valuation allowance or a general valuation
allowance for loan losses. If an asset or portion thereof is classified loss,
the savings association must either establish a specific valuation allowance in
the amount of 100% of the portion of the asset classified loss, or charge off
such amount. General valuation allowances established to cover possible losses
related to loans classified substandard or doubtful may be included in
determining a
8
savings association's risk-based capital, subject to certain limitations, while
specific valuation allowances do not qualify as risk-based capital. Examiners
may disagree with the savings association's classifications and amounts
reserved. At December 31, 1997, the Bank had $1,844,000 in assets classified as
special mention, $10,052,000 classified as substandard, $63,000 classified as
doubtful and $331,000 classified as loss. Substandard assets include non-accrual
and impaired loans, foreclosed real estate, and certain performing loans which
management has classified as substandard.
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 or a provision for losses on foreclosed real estate. 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 and Non-performing Assets" herein. 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, 1997, the Bank added $225,000
and $100,000, respectively, to its allowances for possible loan and foreclosed
real estate losses. As of December 31, 1997, the Bank had a total of $4,632,000
in allowances for possible loan and foreclosed real estate losses. Approximately
$635,000 of the loss reserves are general unallocated loan loss reserves. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 5 and 6 of Notes to Consolidated Financial Statements in
the 1997 Annual Report to Stockholders which is attached hereto as Exhibit 13
and incorporated herein by reference.
9
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
========================================================
(Dollars in Thousands)
Balance at beginning of year ........ $ 4,390 $ 3,968 $ 4,328 $ 4,173 $ 4,651
Net loans (charged-off) recovered:
Real estate-mortgage .............. (226) 272 (535) (120) (1,188)
Real estate- construction ......... -- -- -- -- 110
Consumer .......................... (92) -- -- -- --
------------------------------------------------------
Net (charge-offs) recoveries ........ (318) 272 (535) (120) (1,078)
Provision for loan losses ........... 225 150 175 275 600
------------------------------------------------------
Balance at end of year .............. $ 4,297 $ 4,390 $ 3,968 $ 4,328 $ 4,173
=======================================================
Rates of net (charge-offs) recoveries
during the year to average loans
outstanding during the year ....... (0.07%) 0.06% (0.12%) (0.03%) (0.26%)
=======================================================
Beginning in 1997, the Bank's evaluation methodologies were performed
on a loan category basis. Within each loan type, allowances for possible loan
losses are developed on a pooled basis for the lowest risk loans based on
historical and expected loss experience for those pools. In addition, reserves
for all classified and non-performing loans are developed on a case-by-case
basis, or on a pooled basis for loans with common characteristics and balances
less than $400,000 individually, with allowances generally in the 0% to 5% range
for special mention assets, 5% to 25% for substandard assets, 40% to 60% for
doubtful assets, and 100% for loss assets. 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.
Prior to 1997, management's evaluation methodologies did not include the
allocation of general reserves to specific loan categories. Accordingly, the
amounts assigned to loan categories in the table below for periods prior to 1997
represent only specific allowances applicable to doubtful or loss assets which
were determined on a case-by-case basis.
The unallocated portion of the allowance for loan losses is management's
estimation of the losses in excess of those estimated by using the methodology
described above, that may be realized over the life of the loans included in its
portfolio at December 31, 1997. Management is unable to estimate the timing or
the amount of related future charge-offs.
10
The following table sets forth the breakdown for the allowance for
possible loan losses by loan category at the periods indicated.
At December 31,
--------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
==============================================================================================================
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 ategory 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....... $ 635 (.14%) $ 4,390 (0.98%) $ 3,865 (0.92%) $ 3,652 (0.86)% $ 3,923 (1.01)%
Real estate
mortgage:
Residential..... 1,108 61.98 -- 70.42 -- 74.04 -- 80.90 -- 76.24
Commercial...... 1,570 14.64 -- 18.42 -- 16.69 426 16.39 250 19.23
Real estate-
Construction... 388 10.58 -- 6.03 -- 6.32 -- 2.01 -- 2.68
Land........... 119 3.24 -- -- -- -- -- -- -- --
Commercial........ 371 5.23 -- 2.40 -- 0.99 --- 0.25 --- 0.47
Consumer.......... 106 4.47 -- 3.71 103 2.86 250 1.31 --- 2.39
-----------------------------------------------------------------------------------------------------------
Total Allowances
for Loan
Losses......... $ 4,297 100.00% $ 4,390 100.00% $ 3,968 100.00% $ 4,328 100.00% $ 4,173 100.00%
===========================================================================================================
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 in
the 1997 Annual Report to Stockholders which is attached hereto as Exhibit 13
and incorporated herein by reference. Debt securities of certain federal
agencies, securities issued by the United States Treasury and federal funds sold
amounting to $8,050,000 at December 31, 1997 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.
11
The carrying value of the Bank's investment securities portfolio at
December 31, 1997, by maturity is as follows:
Weighted
Amortized Estimated Average
Remaining Maturity Cost Fair Value Rate
===============================================================================
(Dollars in Thousands)
Within one year
U. S. Treasuries ........... $ 2,000 $ 2,000 5.13%
Federal Agencies ........... 5,018 4,796 4.05
----------------------------------
7,018 6,796 4.35
----------------------------------
After one year but within 5 years
U. S. Treasuries ........... 2,987 2,990 5.29
Federal Agencies ........... 2,000 2,003 6.99
----------------------------------
4,987 4,993 5.97
----------------------------------
No stated maturity
Federal Home Loan Bank stock 7,404 7,404 7.25
----------------------------------
$19,409 $19,193 5.87%
==================================
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 in the 1997 Annual Report to
Stockholders which is attached hereto as Exhibit 13 and incorporated herein by
reference 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.
At December 31, 1997, 1996 and 1995, the Bank had $110,939,000,
$106,621,000 and $137,743,000, respectively, in mortgage-backed and related
securities, at amortized cost.
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, 1997 the Company had two mortgage-backed securities
in the amount of $3,974,000 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. The
Bank solicits retail deposits in its local market area and offers remaining
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,
12
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.
Deposit activity is set forth as follows:
Retail Deposits Brokered
Local Area Other Deposits Total
=================================================
(Dollars in Thousands)
Year Ended December 31, 1997
Beginning balance .......... $ 297,583 $ 39,533 $ 86,273 $ 423,389
Deposits purchased ......... -- -- 20,000 20,000
Net cash inflow (outflow) .. 13,386 (9,886) (53,365) (49,865)
Interest credited .......... 10,439 3,480 -- 13,919
-------------------------------------------------
Total ............. $ 321,408 $ 33,127 $ 52,908 $ 407,443
=================================================
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
=================================================
A summary of time deposits $100,000 or greater by maturity follows (in
thousands):
Remaining Maturity Balance
===================================================
Within three months ...... $ 6,500
Three months to six months 6,147
Six months to one year ... 9,432
One year to two years .... 4,535
Two to three years ....... 1,537
Over three years ......... 1,738
-------
Total .................... $29,889
=======
13
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, 1997, fixed-rate advances totaled $96,084,000 with a weighted
average maturity of 15 months, and had a weighted average cost of 6.07%.
Variable rate advances totaled $47,000,000 and had a weighted average maturity
of 9 months and a weighted average cost of 5.74%. The interest rates on the
variable rate advances are based on either 1-month LIBOR, 3-month LIBOR or the
Federal funds rate and adjust daily, monthly or quarterly.
The Bank periodically uses repurchase agreements to assist in meeting
short-term cash-flow needs. 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 repurchase agreements for a limited term,
usually 30, 60 or 90 days, or due on demand. The repurchase agreements are
repaid by the Bank when excess cash is available. At December 31, 1997, the Bank
had $17,033,000 repurchase agreements outstanding, all of which matured within
90 days. See Note 11 of Notes to Consolidated Financial Statements in the 1997
Annual Report to Stockholders which is attached hereto as Exhibit 13 and
incorporated herein by reference.
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 these 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 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 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 repurchase agreement borrowings with primary dealers or
regional banks, the financial conditions of which it reviews periodically.
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. In addition, the Bank can designate a subsidiary as an
operating subsidiary if it engages only in activities that would be permissible
for the Bank to engage in. 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 operating 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 loan production branches and
presently has three branches operating in the Hampton Roads market contiguous to
the Company's retail banking operations.
Princess Anne Service Corporation and its subsidiaries (collectively
PASC) are service corporations and were formed throughout the 1980s to invest in
a variety of real estate development
14
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, 1997, the Bank had $34,100 of investment in and advances to PASC.
The Bank is presently winding down the activities of PASC. At December
31, 1997, 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, 1997, the Bank had $11,600 of net advances due from 8thPA.
VBF Financial Services Corp. is a wholly owned operating subsidiary of
the Bank and was formed in April 1992 to sell fixed-rate annuities, a range of
mutual funds and tax-advantaged investments on an agency basis for a commission.
At December 31, 1997, the Bank had $195,000 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 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.
Personnel
As of December 31, 1997, the Company had 211 full-time employees and 15
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.
15
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.
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, 1997,
amounted to approximately $333,000.
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 .013% of
deposits. Thereafter, assessments for BIF and SAIF
16
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 decreased 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, 1997 totalled approximately $135,000.
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. The Bank exceeded all three of its
minimum capital requirements at December 1997.
Savings associations with a greater than "normal" level of interest
rate exposure will be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirement. Specifically, interest rate
exposure will be measured as the decline in net portfolio value due to a 200
basis point change in market interest rates. The interest rate risk component to
be deducted from total capital is equal to one-half the difference between an
institution's measured exposure and the "normal" level of exposure which is
defined as two percent of the estimated economic value of its 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 in the 1997 Annual Report to Stockholders which is attached
hereto as Exhibit 13 and incorporated herein by reference for more information
about the Bank's regulatory capital at December 31, 1997.
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. 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. As of December 31,
1997, 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.
17
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Savings
associations that are subsidiaries of holding companies, like the Bank, will
continue to be required to file a notice with OTS prior to making the capital
distribution. The OTS proposed limitations on capital distributions are similar
to the limitations imposed upon national banks. The Bank is unable to predict
whether or when the proposed regulation will become effective.
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, 1997, the Bank was in compliance with its QTL
requirement with 77.0% of its assets invested in QTIs.
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 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, 1997, the
Bank's lending limit to one borrower was $7.14 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, 1997,
the Bank's largest aggregate loans and commitments to one borrower was $7.10
million, of which $5.0 million was actually funded as of such date.
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, 1997, the required liquid
asset ratio was 4%. The Bank's liquidity ratio at December 31, 1997 was 5.38%.
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
18
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,
1997, the Bank had $7.4 million in FHLB stock, which was in compliance with this
requirement. Dividends paid to the Bank on FHLB stock totalled $565,000 for the
year ended December 31, 1997.
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, 1997 was $25,000.
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
19
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 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, 1997, the Company was not engaged in any material
amount of 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 46
Dennis R. Stewart Executive Vice President 48
John M. Chattleton Executive Vice President of the Bank 49
John M. Reddecliff Executive Vice President of the Bank 36
John A. B. Davies, Jr. has served as Chief Executive Officer of the
Company and the Bank since June 1991. Previously, he was employed with First
American Bank of Virginia as a Senior Vice President/Retail Administration.
Dennis R. Stewart has served as Chief Financial Officer of 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 Company and the Bank.
John M. Chattleton has served as 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.
John M. Reddecliff has served as Chief Lending Officer of the Bank
since 1997. Prior thereto he was head of the commercial lending activities at
the Bank since 1992. Previously he was employed by NationsBank in the commercial
real estate lending area.
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. For
further
20
information regarding the Company's locations, refer to the outside back cover
of the 1997 Annual Report to Stockholders which is attached hereto as Exhibit 13
and incorporated herein by reference.
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, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The information contained under the section captioned "Corporate
Information--Common Stock" on the inside back cover of the 1997 Annual Report to
Stockholders which is attached hereto as Exhibit 13 and is incorporated herein
by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "Five Year Financial
Summary" on page 11 of the 1997 Annual Report to Stockholders which is attached
hereto as Exhibit 13 and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 12 through 20 of the 1997 Annual Report to Stockholders which is attached
hereto as Exhibit 13 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements together with the report thereon of KPMG Peat
Marwick LLP dated January 30, 1998 appear on pages 21 to 46 of the accompanying
1997 Annual Report to Stockholders which is attached hereto as Exhibit 13 and is
incorporated herein by reference.
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.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 1998 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.
(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 Relationships and Related
Transactions" in the Proxy Statement.
22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page in
Annual
Report*
----------
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements
Report of Independent Auditors .......................................................... 21
Virginia Beach Federal Financial Corporation
o Consolidated Statement of Financial Condition
December 31, 1997 and 1996............................................................ 22
o Consolidated Statement of Operations for the three years ended
December 31, 1997, 1996 and 1995...................................................... 23
o Consolidated Statement of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995...................................................... 24 - 25
o Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 1997, 1996 and 1995...................................................... 26
o Notes to Consolidated Financial Statements............................................ 27 - 46
* Incorporated by reference from the indicated pages of the 1997
Annual Report to Stockholders.
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).
(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).
23
(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, John M. Chattleton, Executive Vice
President of the Bank and John M. Reddecliff,
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).
(10.7) Virginia Beach Federal Financial Corporation 1997
Directors Stock Compensation Plan.
(13) Virginia Beach Federal Financial Corporation 1997
Annual Report to Stockholders. Except for those
portions of the Annual Report incorporated by
reference in this Form 10-K, such Annual Report shall
not be deemed to be filed with the SEC.
(21) Subsidiaries.
(23.1) Consent of Independent Auditors - KPMG Peat Marwick
LLP
(99.1) Annual Report on Form 11-K for the fiscal year ended
December 31, 1997.
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, 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.
24
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 25, 1998 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 25,1998 Date: March 25,1998
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 25,1998 Date: March 25,1998
By: /s/ Edward E. Brickell By: /s/ Robert H. DeFord, Jr.
----------------------------------- --------------------------------------------------
Edward E. Brickell Robert H. DeFord, Jr.
Director Director
Date: March 25,1998 Date: March 25,1998
By: /s/ Betty Anne Huey By: /s/ Rufus S. Kight, Jr.
----------------------------------- --------------------------------------------------
Betty Anne Huey Rufus S. Kight, Jr.
Director Director
Date: March 25,1998 Date: March 25,1998
By: /s/ Ivan D. Mapp By: /s/ George R. C. McGuire
----------------------------------- --------------------------------------------------
Ivan D. Mapp George R. C. McGuire
Director Director
Date: March 25,1998 Date: March 25,1998
25
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, John M. Chattleton, Executive Vice President of the
Bank and John M. Reddecliff, 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)
(10.7) Virginia Beach Federal Financial Corporation 1997 Directors
Stock Compensation Plan.
(13) Virginia Beach Federal Financial Corporation 1997 Annual Report
to Stockholders. Except for those portions of the Annual Report
incorporated by reference in this Form 10-K, such Annual Report
shall not be deemed to be filed with the SEC.
(21) Subsidiaries.
(23.1) Consents of Independent Auditors - KPMG Peat Marwick LLP
(99.1) Annual Report on Form 11-K for the Fiscal Year Ended December
31, 1997.
26