--------------------------------------------------------------------------------
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Five-Year Financial Summary
Virginia Beach Federal Financial Corporation
At December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
(Dollars in thousands, except per share data) -----------------------------------------------------------------------
Selected Financial Condition Data
Total assets $ 616,188 $ 606,138 $ 698,962 $719,325 $682,017
Loans held-for-investment, net 454,477 445,055 433,562 424,435 387,171
Loans held-for-sale 8,356 4,785 14,020 8,341 43,733
Mortgage-backed and related securities 111,006 106,549 137,779 215,470 176,463
Investment securities 19,413 27,796 26,917 38,838 43,917
Securities purchased under agreement to resell -- -- 55,000 -- --
Deposits 407,443 423,389 492,971 505,070 472,728
Borrowings 160,117 138,125 158,010 170,510 155,872
Stockholders' equity 44,149 40,827 41,032 36,885 41,514
Year ended December 31,
------------------------------------------------------------------------
Selected Statement of Operations Data 1997 1996 1995 1994 1993
-----------------------------------------------------------------------
Interest income $ 48,599 $ 48,345 $ 52,286 $ 48,733 $ 47,267
Interest expense 29,637 31,629 37,272 35,664 35,784
-----------------------------------------------------------------------
Net interest income 18,962 16,716 15,014 13,069 11,483
Provision for loan losses 225 150 175 275 600
-----------------------------------------------------------------------
Net interest income after provision for loan losses 18,737 16,566 14,839 12,794 10,883
Other income 3,901 3,254 5,218 4,608 5,743
Other expense 15,981 18,929 18,250 18,661 16,433
-----------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of accounting change 6,657 891 1,807 (1,259) 193
Provision (benefit) for income taxes 2,554 322 641 (688) (259)
Income (loss) before cumulative effect of
accounting change 4,103 569 1,166 (571) 452
Cumulative effect of change in method of
accounting for income taxes -- -- -- -- 700
Net income (loss) $ 4,103 $ 569 $ 1,166 $ (571) $ 1,152
Earnings per share, basic $ 0.82 $ 0.11 $ 0.24 $ (0.12) $ 0.23(a)
Earnings per share, diluted $ 0.81 $ 0.11 $ 0.24 $ (0.12) $ 0.23(a)
At or for the year ended December 31,
------------------------------------------------------------------------
Selected Financial Ratios and Other Data 1997 1996 1995 1994 1993
-----------------------------------------------------------------------
Return on average assets 0.67% 0.09% 0.17% ( 0.08%) 0.17%
Return on average stockholders' equity 9.82 1.39 2.99 ( 1.47) 2.77
Average stockholders' equity to average assets 6.87 6.60 5.59 5.42 6.06
Book value per share $ 8.86 $ 8.21 $ 8.28 $ 7.50 $ 8.48
Dividend payout ratio 25% 145% 67% -- 70%
Number of deposit accounts 28,998 28,140 25,885 24,374 30,635
Banking offices 14 15 12 9 8
(a) Basic and diluted earnings per share for 1993 include $0.14 related to the
cumulative effect of a change in the method of accounting for income
taxes.
11
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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
During 1997, the Company changed 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.
ASSET COMPOSITION AND LOAN PRODUCTION
The Company's total assets were $616.2 million at December 31, 1997, a $10.1
million increase from December 31, 1996. Also at December 31, 1997, loans
receivable held-for-investment were $454.5 million, or 74% of total assets,
representing a $9.4 million increase during 1997. Management believes that one
of the Company's significant strengths lies with its loan originating
capabilities and expects that loan portfolio growth will continue in all
categories of loans with the possible exception of 1-4 family residential loans
as described further below. During 1997, gross loans receivable excluding 1-4
family residential loans grew by $25.7 million or 17% and management's efforts
are focused on these categories of loans for future loan growth. For more
information on loans receivable refer to Note 5 to the accompanying Consolidated
Financial Statements.
1-4 family residential lending is performed by the Company through the Bank and
its wholly-owned subsidiary First Coastal Mortgage Corp. During both 1997 and
1996 the Company originated approximately $118 million in 1-4 family residential
loans. Generally, the Bank retains the shorter term and variable rate loans for
its portfolio and sells the remainder in the secondary market. During 1997 and
1996, the Company retained approximately $31.3 million and $46.9 million,
respectively, for its portfolio. The decrease is attributable to a combination
of lower interest rates and a flattening of the yield curve that occurred
throughout 1997. These factors tend to shift the mix of loan originations away
from the Bank's shorter term and variable rate portfolio products and towards
longer term and fixed rate products which the Bank sells into the secondary
market. These same interest rate factors also cause an increase in the
prepayments of the Bank's existing shorter term and variable rate loans as
borrowers seeking to lower their borrowing costs refinance their loans into long
term loans with lower fixed rates. As a result of this activity, repayments and
prepayments of the Bank's 1-4 family residential loans exceeded new loans added
to the portfolio by $16.6 million. If this trend continues, the Company may
experience further net decreases in its 1-4 family residential loans receivable.
At year end 1997, the Company was experiencing an increase in loan originations
due to borrower refinancing activity, thus producing the $3.6 million increase
in loans receivable available-for-sale compared to year-end 1996 when loan
originations were at their usual seasonal lows.
Throughout 1997 and 1996 the Bank's secondary marketing sales were on a
servicing released basis and, accordingly, there was no capitalization of loan
servicing rights because none were retained. Prior to 1996, the Company retained
loan servicing rights and, while it no longer does so, purchased loan servicing
rights either outright or as a by-product of its correspondent mortgage banking
activities. At year-end 1997, the Company serviced $187.0 million in loans for
which no cost has been capitalized, and serviced $32.8 million in loans with
$288,000 of remaining cost to acquire such servicing. For more information
regarding loans serviced for others, please refer to Note 5 to the accompanying
Consolidated Financial Statements. In the future, the Company may retain loan
servicing rights on loans sold to Xxxxxxx Mac, Xxxxxx Xxx and Xxxxxx Xxx in part
because of the fee income such servicing provides, but also because of the
continuing contact the Company will have with the customer, thus facilitating
the Bank's efforts to sell these customers additional banking products and
services.
12
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
INVESTMENTS
Investment securities and mortgage-backed and related securities totalled $130.4
million at December 31, 1997 or 21.2% of total assets compared to $134.3 million
at December 31, 1996. The Company maintains a portfolio of investments in order
to enhance its return on shareholders' equity. These securities typically have
average lives at purchase date of less than five years, or are variable rate,
and are purchased with the intent of producing a superior total return for the
Company over a reasonable period of time and over a range of interest rate
scenarios. For more information regarding the securities portfolios, please
refer to Note 3 and Note 4 to the accompanying Consolidated Financial
Statements.
NONPERFORMING ASSETS
The Company's nonperforming assets were $8.6 million or 1.4% of total assets at
December 31, 1997 compared to $6.2 million at December 31, 1996. The increase
during the year is largely attributable to impaired loans which increased to
$1.8 million at December 31, 1997 from $0.1 million at December 31, 1996. For
more information regarding the Company's nonperforming loans, impaired loans,
and foreclosed real estate, please refer to Note 5 and Note 6 to the
accompanying Consolidated Financial Statements.
DEPOSITS AND BORROWINGS
The deposits of the Company were $407.4 million or 66% of total liabilities and
stockholders' equity at December 31, 1997 compared to $423.4 million at December
31, 1996, a decrease of $16.0 million. During 1997, brokered deposits decreased
by $33.4 million. Thus, non-brokered retail deposits increased by $17.4 million
or 5.2% during 1997. This retail deposit growth during 1997 occurred due to the
growth in deposits in the Bank's newer branches, successful products introduced
throughout the year, and a continuing emphasis on generating deposit
relationships as an integral part of the Company's lending activities,
particularly commercial small business lending. Please refer to Note 9 to the
accompanying Notes to Consolidated Financial Statements for additional
information regarding the Company's deposits.
The Company also borrows from the Federal Home Loan Bank of Atlanta (FHLB) and
through the use of repurchase agreements with retail customers or
broker/dealers. Please refer to Note 10 and Note 11 to the accompanying
Consolidated Financial Statements for more information regarding non-deposit
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Management of the Company views liquidity as the ability to fund its daily
activities and asset balances in an efficient and cost effective manner. Daily
activities are primarily focused on deposit account balance fluctuations,
primarily transaction accounts, which the Company manages with cash on hand or
through short term overnight advances from the Federal Home Loan Bank. Deposits
are used to fund the majority of the Company's assets, although retail non-
brokered deposits comprise only 58% of total assets.
Federal Home Loan Bank advances funded 23.2% of the Company's assets at December
31, 1997. Management of the Company believes that the FHLB will endeavor to keep
a member's borrowings below 30% of total assets or an amount supported by
eligible collateral, whichever is less. At year end 1997, these constraints
imposed a limit of approximately $42.0 million in additional advances from the
Federal Home Loan Bank.
Brokered CD's are an additional source of liquidity for the Company, although
their interest cost is generally higher than the cost of both retail time
deposits and advances from the Federal Home Loan Bank. The Company presently has
arrangements with several issuers of brokered CD's. Management estimates that it
has the ability to issue at least
13
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
$150 million in brokered CD's compared to the $52.9 million or 8.6% of total
assets presently outstanding. However, the unconditional issuance of brokered
CD's is dependent upon the Bank maintaining a "well capitalized" status under
federal regulations.
The Office of Thrift Supervision (the OTS) establishes the minimum liquidity
requirements for savings associations. Regulations provide, in part, that the
Bank must maintain daily average balances of liquid assets in excess of a
certain percentage (presently 4%) of net withdrawable deposits and short-term
borrowings. The Bank met its liquidity requirements throughout 1997 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, 1997, the Bank exceeded all of the minimum capital requirements.
The Bank's core and risk-based capital ratios increased to 7.0% and 12.6%,
respectively, at December 31, 1997 from 6.6% and 12.5%, respectively, at
December 31, 1996 largely because of growth in the Bank's regulatory capital
without a corresponding increase in assets. Please refer to Note 15 to the
accompanying Consolidated Financial Statements for more information regarding
the Bank's regulatory capital at December 31, 1997.
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 market risk, which is defined as the risk of
loss arising from changes in market rates and prices.
The type of market risk which most affects the Company's financial instruments
is interest rate risk, which is best quantified by measuring the change in net
interest income that would occur under specific changes in interest rates.
Substantially all of the Bank's interest bearing assets and liabilities are
exposed to interest rate risk.
Because the Company's bank subsidiary is a savings bank and is regulated by the
OTS, it has policies and procedures in place for measuring interest rate risk
pursuant to OTS Bulletin TB-13, among others. These policies and procedures
stipulate acceptable levels of interest rate risk as measured by the change in
the market value of portfolio equity (MVPE) and the change in net interest
income (NII) over a one year horizon. The OTS performs its own calculation of
MVPE based on input received from the Bank, and the Bank compares its
calculations to those of OTS pursuant to the requirement of TB-13 to do so.
In order to measure interest rate risk, the Company uses computer programs which
enable it to simulate the changes that will occur to the Bank's NII over nine
interest rate scenarios which are developed by "shocking" interest rates (i.e.
moving them immediately and permanently) 400 basis points up and down in 100
basis point increments, from the current level of interest rates. In addition to
the level of interest rates, the most critical assumption regarding the
estimated amount of the Bank's NII is the expected prepayment speed of the 1-4
family residential loans which comprise approximately 45% of the Company's total
assets. For this prepayment speed assumption the Company uses median expected
prepayment speeds which are obtained from a reliable third party source. The
Company also incorporates into its simulations the effects of the interest rate
caps and interest rate floors which are part of the majority of the Bank's
variable rate loans. The Company performs its measurements quarterly.
14
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company uses its business planning forecast as the basis for its interest
rate risk measurement simulations. Therefore, planned business activities are
incorporated into the measurement horizon. Such activities include assumptions
about new loan and deposit volumes, the pricing of loan and deposit products,
and other assumptions about future activities which may or may not be realized.
In order to quantify the Company's NII exposure, the Company focuses on the
simulations of net interest income in the up 200 basis points and down 200 basis
points scenarios. At December 31, 1997 these rate scenarios represented
approximately a 35% change in the level of interest rates. Since these rate
changes are assumed to be immediate and permanent, management considers them to
cover any reasonably foreseeable one year interest rate scenario. ALCO evaluates
the simulation results and makes adjustments to the Bank's planned activities if
in its view there is a need to do so. At December 31, 1997, the change in net
interest income over a one year horizon using these methodologies was no more
than a $556,000 decrease in expected net interest income under the scenario that
produced the decrease. This volatility was within the Bank's policy guidelines.
These measurements, however, are highly subjective in nature and are not
intended to be a prediction of the Company's net interest income under any rate
scenario for the year 1998 or for any other period.
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.
15
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 daily basis and
nonperforming loans are included in the average loan amount (dollars in
thousands).
1997 1996 1995
-----------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------------------------------------------
Assets
Loans $463,380 $40,037 8.64% $436,778 $37,590 8.61% $444,660 $37,288 8.39%
Mortgage-backed and
related securities 99,990 6,898 6.90% 122,140 8,232 6.74% 190,617 12,559 6.59%
Investment securities
and other earning
assets 26,754 1,664 6.22% 41,432 2,523 6.09% 39,189 2,439 6.23%
-------- ------- -------- ------- -------- -------
Total earning assets 590,124 48,599 8.24% 600,350 48,345 8.05% 674,466 52,286 7.75%
------- ------- -------
Non-earning assets 17,800 16,684 21,653
-------- -------- --------
Total assets $607,924 617,034 $696,119
======== ======== ========
Liabilities
Time deposits 275,040 15,866 5.77% 343,699 20,464 5.95% $410,082 24,095 5.87%
Interest bearing
demand and other
deposits 104,891 3,862 3.68% 91,596 3,433 3.75% 85,684 3,405 3.97%
FHLB advances 148,529 9,148 6.16% 118,329 7,567 6.40% 137,372 9,137 6.66%
Other borrowings 13,535 761 5.62% 3,000 165 5.52% 10,545 635 6.02%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing
liabilities 541,995 29,637 5.47% 556,624 31,629 5.68% 643,683 37,272 5.79%
------- ------- -------
Non-interest bearing
liabilities 24,160 19,673 13,488
-------- -------- --------
Total liabilities 566,155 576,297 657,171
Stockholders' equity 41,769 40,737 38,948
-------- -------- --------
Total liabilities and
stockholders'
equity $607,924 $617,034 $696,119
======== ======== ========
Net interest income $18,962 $16,716 $15,014
======= ======= =======
Interest rate spread 2.77% 2.37% 1.96%
==== ==== ====
Net yield on interest
earning assets 3.21% 2.78% 2.23%
==== ==== ====
16
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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 daily 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.
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------
Interest income
Loans (1) $ 774 $ 339 $ 1,113 $ (5,277) $1,252 $ (4,025)
Investment securities (912) 53 (859) 137 (53) 84
-----------------------------------------------------------------------------
Total change in interest income (138) 392 254 (5,140) 1,199 (3,941)
-----------------------------------------------------------------------------
Interest expense
Deposits (3,488) (681) (4,169) (3,721) 118 (3,603)
FHLB advances and borrowings 2,462 (285) 2,177 (1,649) (391) (2,040)
-----------------------------------------------------------------------------
Total change in interest expense (1,026) (966) (1,992) (5,370) (273) (5,643)
-----------------------------------------------------------------------------
Total change in net interest income $ 888 $1,358 $ 2,246 $ 230 $1,472 $ 1,702
=============================================================================
(1) Includes mortgage-backed and related securities.
Net interest income increased by $2.2 million or 13% to $19.0 million during
1997 compared with 1996. Interest income increased by $0.3 million due to the
shift in earning asset mix away from lower yielding investment securities and
into higher yielding loans and mortgage-backed securities. Further enhancing
interest income was a shift in loan mix away from the lowest yielding 1-4 family
residential loans, and toward higher yielding loan types such as commercial and
construction. Interest expense decreased by $2.0 million due to several factors:
interest rates generally decreased throughout the year; there was a shift in mix
away from higher cost brokered time deposits, and toward lower cost FHLB
advances and non-interest bearing deposits; and the Company's attempts to lower
interest cost by pricing time deposits as conservatively as market conditions
and liquidity concerns would permit.
Net interest income increased by 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.
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
17
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 $225,000 during 1997 compared
with $150,000 and $175,000 during 1996 and 1995, respectively. Net charges to
the loan reserves were $318,000 during 1997. Net recoveries of $272,000 during
1996 and $535,000 during 1995 were added to the allowance during these years.
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 net charges to the allowance over the past
two years, it is management's belief that provisions and reserves related to
loans receivable are at adequate levels although no assurance can be given that
additions to the allowance will not be necessary. Please refer to Note 5 to the
accompanying Consolidated Financial Statements.
The provision for losses on foreclosed real estate was $100,000 during 1997
compared with $484,000 and $200,000 during 1996 and 1995, 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 1997, there remains only one significant foreclosed
real estate property, and the reserves of $335,000 at December 31, 1997 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
1997 Versus 1996
The Company's other income increased by $647,000 or 20% to $3.9 million during
1997 compared to 1996. Retail banking fees increased by $646,000 due to the
imposition during April 1997 of ATM surcharge fees (i.e. fees paid by
non-customers of the Bank using Bank-owned ATM's), an increase in the number of
ATM's producing both surcharge revenue and foreign usage revenue, and an
increase in charges on deposit accounts (e.g. NSF charges on commercial demand
deposit accounts) due, in turn, to an increase in the number of such accounts.
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.
OTHER EXPENSE
1997 Versus 1996
The Company's other expenses decreased by $2.9 million during 1997 compared with
1996. During 1996, the Federal Deposit Insurance Corporation (FDIC) imposed a
one-time special assessment on all members, including the Bank, whose deposits
were insured by the Savings Association Insurance Fund (SAIF). The purpose was
to recapitalize the SAIF, and the Company's portion of this assessment was $3.3
million. In addition, the FDIC lowered the deposit insurance premium rates for
1997 for most members, including the Bank, by 16.6 basis points. These actions
by the FDIC, combined with a lower deposit insurance base during 1997 compared
to 1996, caused the Company's deposit insurance to decrease by $4.2 million
during 1997 compared to 1996.
Absent the deposit insurance reduction noted above, the Company's other expenses
increased by $1.3 million during 1997 compared to 1996. Salaries and employee
benefits increased by $1.3 million and other expenses increased by
18
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
$0.3 million due to the expansion of the Company's lending and retail banking
activities during 1996 and 1997. At the end of 1995 the Company had 57 personnel
assigned to the lending areas of the Bank, 95 personnel assigned to retail
banking areas, 11 branches (including supermarket branches) open, and 17 ATM's
installed. At the end of 1997 the Company had 79 lending and 125 retail banking
personnel, and operated 14 branches and 32 ATM's. The increase in expenses is
consistent with these franchise-building activities of the Bank.
1996 Versus 1995
The Company's other expenses during 1996 included the SAIF assessment of $3.3
million which is described above. 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.
INCOME TAXES
The Company's effective tax rate for 1997 was 38.4% compared with 36.1% during
1996 and 35.5% during 1995. 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 xxxx, 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 xxxx, large thrifts must change to the
specific charge-off method for computing their bad debt deduction for 1996 and
future years. Furthermore, the xxxx repeals current law 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
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which will be effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and presentation of
comprehensive income and its components (revenues,expenses, gains and losses)
within the Company's consolidated financial statements. Generally, comprehensive
income includes net income along with other transactions not typically recorded
as a component of net income, including changes in unrealized gains and losses
on securities available for sale. The provisions of this statement are effective
with 1998 interim reporting. The disclosure requirements will have no impact on
financial position or results of operations of the Company.
The FASB has also issued Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for determining a company's operating
segments and the type and level of financial information to be disclosed in both
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS 131 will be effective for financial statements for fiscal years
beginning after December 15, 1997. However, SFAS 131 is not required to be
applied for interim reporting in the initial year of application.
19
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
YEAR 2000
During 1997 the Company instituted a comprehensive set of procedures and
timetables to address and resolve issues surrounding what is commonly known as
the "year 2000 problem" which is related to computer-based business applications
and the potential for such applications to fail to recognize the year 2000 and
beyond and thus to fail to operate properly. These procedures and timetables
generally provide for identification of all potentially problematic software
applications by year end 1997, the development of a plan for modifying
problematic applications and the commencement of such modifications by mid-1998,
the completion of modifications and commencement of testing by year end 1998,
and the completion of testing and software modifications by mid-1999.
Nearly all of the computer-based applications which are used by the Company and
which are the object of year 2000 concerns are either purchased software
applications, such as general ledger and loan application processing systems run
in-house, or are related to outsourced data processing activities such as
deposit account transaction processing and loan servicing. In most cases the
software vendor or outsourced processors will be required to adapt their
respective software and systems to be year 2000 compliant. Because the Company
has historically dealt only with vendors with large customer bases, the Company
believes that it is not at substantially greater risk because of this loss of
direct control over year 2000 remediation activities of these vendors.
Nevertheless, the Company is overseeing the activities of such vendors to the
extent that it can, as if such activities were the Company's own.
The Company generally expects to carry out its year 2000 activities with its
human resources presently on hand. The impact of year 2000 expenditures is not
expected to have a material impact on the Company's results of operations,
liquidity and capital resources.
FORWARD-LOOKING STATEMENTS
A number of matters and subject areas discussed in this Annual Report that are
not historical or current facts involve potential future circumstances and
developments. These include expected future financial results, liquidity needs,
management's or the Company's expectations and beliefs and similar matters
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations or elsewhere in this Annual Report. The discussions of
such matters and subject areas are qualified by the inherent risk and
uncertainties surrounding future expectations generally, and also may materially
differ from the Company's actual future experience.
The Company's business, operations and financial performance are subject to
certain risks and uncertainties which could result in material differences in
actual results from management's or the Company's current expectations. These
risks and uncertainties include, but are not limited to, general economic
conditions, market interest rate levels, demand for the Company's products and
services and costs of operations.
20
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--------------------------------------------------------------------------------
Report of Independent Auditors
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, 1997 and 1996, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 1997. These consolidated 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 consolidated 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
January 30, 1998
21
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Consolidated Statement of Financial Condition
Virginia Beach Federal Financial Corporation
December 31,
-------------------------
1997 1996
(Dollars in thousands, except share data) -------------------------
Assets
Cash and amounts due from banks $ 7,236 $ 3,059
Federal funds sold and interest bearing deposits 194 4,276
Investment securities
Held-to-maturity (approximate fair value $10,786 in 1997 and $14,687 in 1996) 11,006 14,943
Available-for-sale 8,407 12,853
Mortgage-backed and related securities
Held-to-maturity (approximate fair value $23,780 in 1997 and $28,849 in 1996) 24,369 29,764
Available-for-sale 86,637 76,785
Loans receivable, net
Held-for-investment 454,477 445,055
Held-for-sale 8,356 4,785
Foreclosed real estate, net 2,382 2,047
Accrued income receivable, net 4,414 4,289
Property and equipment, net 6,888 5,642
Other assets 1,822 2,640
-------------------------
$616,188 $606,138
=========================
Liabilities and Stockholders' Equity
Liabilities
Deposits $407,443 $423,389
Advances from the Federal Home Loan Bank 143,084 133,110
Securities sold under agreements to repurchase 17,033 5,015
Advance payments by borrowers for taxes and insurance 906 966
Other liabilities 3,573 2,831
-------------------------
572,039 565,311
-------------------------
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
4,980,611 shares in 1997 and 4,970,307 shares in 1996 50 50
Capital in excess of par value 9,465 9,336
Unrealized gain (loss) on available-for-sale securities, net of tax 46 (39)
Retained earnings - substantially restricted 34,588 31,480
-------------------------
44,149 40,827
-------------------------
Commitments and contingencies -------------------------
$616,188 $606,138
=========================
The notes to consolidated financial statements are an integral part of this
statement
22
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Consolidated Statement of Operations
Virginia Beach Federal Financial Corporation
Year ended December 31,
--------------------------------------
1997 1996 1995
(Dollars in thousands, except per share data) --------------------------------------
Interest and fees on loans $ 40,037 $ 37,590 $ 37,288
Interest on mortgage-backed and related securities 6,898 8,232 12,559
Other interest and dividend income 1,664 2,523 2,439
--------------------------------------
Total interest income 48,599 48,345 52,286
--------------------------------------
Interest on deposits 19,728 23,897 27,500
Interest on advances from the Federal Home Loan Bank 9,148 7,567 9,137
Interest on repurchase agreements 761 165 635
--------------------------------------
Total interest expense 29,637 31,629 37,272
--------------------------------------
Net interest income 18,962 16,716 15,014
Provision for loan losses 225 150 175
--------------------------------------
Net interest income after provision for loan losses 18,737 16,566 14,839
--------------------------------------
OTHER INCOME
Gain on sales of securities available-for-sale 15 -- 103
Gain on sales of loans 1,258 1,132 3,166
Gain on sales of foreclosed real estate 60 181 94
Retail banking fees 1,496 850 599
Mortgage loan servicing fees 687 726 641
Other 385 365 615
--------------------------------------
3,901 3,254 5,218
--------------------------------------
OTHER EXPENSES
Salaries and employee benefits 7,904 6,564 8,500
Net occupancy expense 3,103 3,078 3,388
Provision for losses on foreclosed real estate 100 484 200
Other net expense of foreclosed real estate 97 126 202
Federal deposit insurance premiums 333 4,514 1,314
Other 4,444 4,163 4,646
--------------------------------------
15,981 18,929 18,250
--------------------------------------
Income before income taxes 6,657 891 1,807
Provision for income taxes 2,554 322 641
--------------------------------------
Net income $ 4,103 $ 569 $ 1,166
======================================
Earnings per share, basic $ 0.82 $ 0.11 $ 0.24
Earnings per share, diluted $ 0.81 $ 0.11 $ 0.24
The notes to consolidated financial statements are an integral part of this
statement
23
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
Virginia Beach Federal Financial Corporation
December 31,
------------------------------------------
1997 1996 1995
(Dollars in thousands) ------------------------------------------
Cash flows from operating activities
Net income $ 4,103 $ 569 $ 1,166
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 225 150 175
Provision for losses on foreclosed real estate 100 484 200
Depreciation 1,155 1,131 1,041
Amortization of loan discounts, premiums and fees, net (794) (1,090) (1,001)
Amortization of other discounts and premiums, net (1,395) 379 896
Gain on sales of securities available-for-sale (15) -- (103)
Gain on sales of foreclosed real estate (60) (181) (94)
Gain on sales of loans (1,258) (1,132) (3,166)
Loss on sales of property and equipment -- -- 59
Acquisition of loans held-for-sale (117,790) (118,488) (216,770)
Proceeds from sales of loans held-for-sale 115,477 128,855 214,257
Decrease (increase) in accrued income receivable (125) 257 327
Decrease in other assets 773 4,671 4,032
Increase (decrease) in other liabilities 742 (2,906) 343
------------------------------------------
Net cash provided by operating activities 1,138 12,699 1,362
------------------------------------------
Cash flows from investing activities
Net increase in loans receivable (11,097) (11,869) (11,950)
Principal payments received on mortgage-backed and related
securities 28,972 31,161 29,680
Proceeds from maturities of investment securities 9,122 9,000 15,038
Proceeds from sales of
Securities purchased under agreements to resell -- 55,000 --
Investment securities available-for-sale 2,015 -- --
Mortgage-backed and related securities available-for-sale -- -- 52,407
Foreclosed real estate 2,005 4,795 5,929
Property and equipment -- 8 288
Purchases of
Securities purchased under agreement to resell -- -- (55,000)
Investment securities held-to-maturity -- (8,000) (3,000)
Investment securities available-for-sale (2,684) (2,000) --
Mortgage-backed and related securities available-for-sale (31,959) -- --
Property and equipment (2,401) (1,466) (1,546)
Improvements to foreclosed real estate (136) (62) (1,325)
------------------------------------------
Net cash provided by (used for) investing activities (6,163) 76,567 30,521
------------------------------------------
(continued)
24
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
Virginia Beach Federal Financial Corporation
December 31,
-----------------------------------------
1997 1996 1995
(Dollars in thousands) -----------------------------------------
Cash flows from financing activities
Net increase in money market deposit accounts,
NOW accounts and savings deposits 31,509 8,775 10,134
Net decrease in time deposits (47,455) (78,358) (22,233)
Proceeds from advances from the Federal Home Loan Bank 232,700 359,000 427,000
Payments on advances from the Federal Home Loan Bank (222,726) (383,900) (425,000)
Net increase (decrease) in securities sold under agreements to
repurchase 12,018 5,015 (14,500)
Net decrease in advance payments by borrowers for taxes and
insurance (60) (286) (254)
Proceeds from sale of common stock 129 99 269
Cash dividends paid (995) (795) (789)
-----------------------------------------
Net cash provided by (used for) financing activities 5,120 (90,450) (25,373)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 95 (1,184) 6,510
Cash and cash equivalents at beginning of year 7,335 8,519 2,009
-----------------------------------------
Cash and cash equivalents at end of year $ 7,430 $ 7,335 $ 8,519
=========================================
Cash and cash equivalents includes:
Cash $ 7,236 $ 3,059 $ 6,093
Federal funds sold and interest bearing deposits 194 4,276 2,426
-----------------------------------------
$ 7,430 $ 7,335 $ 8,519
=========================================
Supplemental cash flow information
Interest paid on deposits, advances and other borrowings $ 30,151 $ 32,930 $ 37,155
Income taxes paid 1,995 1,606 1,327
Schedule of noncash investing and financing activities
Real estate acquired in settlement of loans, net of allowances $ 2,244 $ 312 $ 3,649
The notes to consolidated financial statements are an integral part of this
statement
25
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Consolidated Statement of
Stockholders' Equity
Virginia Beach Federal Financial Corporation
Unrealized
Capital in Gain (Loss) on
(Dollars in thousands, Common Stock Excess of Available-for-Sale Retained
Shares Amount Par Value Securities Earnings Total
except share data) -------------------------------------------------------------------------------------
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
Net income for 1997 -- -- -- -- 4,103 4,103
Sale of common stock to
employee stock purchase
plan 6,091 -- 78 -- -- 78
Exercise of stock options 750 -- 5 -- -- 5
Sale of common stock to
dividend reinvestment plan 3,463 -- 46 -- -- 46
Change in unrealized gain
(loss) on available-for-sale
securities, net of tax -- -- -- 85 -- 85
Cash dividends paid
($0.20 per share) -- -- -- -- (995) (995)
-------------------------------------------------------------------------------------
Balance, December 31, 1997 4,980,611 $50 $9,465 $ 46 $34,588 $44,149
=====================================================================================
The notes to consolidated financial statements are an integral part of this
statement
26
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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. 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.
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 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 except for Federal Home Loan Bank stock which is carried at
par value. 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 discounts are determined 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 premiums or 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 xxxxxx its interest rate risk on loan commitments and the inventory
of mortgage loans held for sale through mandatory and optional delivery forward
commitments to permanent investors, or through forward sales of mortgage-backed
securities. 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 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 fair
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. Cash received on impaired loans is recorded as interest income or
applied as a reduction of principal if in management's opinion the ultimate
collectibility of principal is in doubt.
27
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Provision for Uncollected Interest
The Company classifies loans as non-accrual and 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. Loans are restored to accrual status when the loan is
brought current and is judged by management to no longer be impaired.
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 eight 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
(repurchase agreements). These fixed-coupon 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.
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.
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. As such, amounts paid or received under
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. In addition,
gains or losses on xxxxxx of specific mortgage loan rate commitments ("rate
locks") and closed loans are
28
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
deferred, included in the carrying value of loans receivable held-for-sale, and
recognized as part of gain on sales of loans when the loans are funded by the
permanent investor.
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.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
NOTE 2 - EARNINGS PER SHARE
Basic and diluted earnings per share have been computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share" and
all prior periods have been restated to reflect this new standard. Net income is
the numerator for both basic and diluted calculations. A reconciliation of the
weighted average number of common shares used in the determination of earnings
per share follows (in thousands):
December 31,
----------------------------
1997 1996 1995
----------------------------
Weighted average basic common shares 4,973 4,962 4,936
Dilutive stock options 93 17 19
----------------------------
Weighted average diluted common shares 5,066 4,979 4,955
===========================
NOTE 3 - INVESTMENT SECURITIES
Investment securities are summarized as follows (in thousands):
December 31, 1997
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------
Held-to-maturity, carried at amortized cost
U.S. Treasuries $ 3,988 $ -- $ 1 $ 3,987
Federal Agencies 7,018 8 227 6,799
-------------------------------------------------------
$11,006 $ 8 $228 $10,786
Available-for-sale, carried at fair value
U.S. Treasuries $ 999 $ 4 $ -- $ 1,003
Federal Home Loan Bank stock 7,404 -- -- 7,404
-------------------------------------------------------
$ 8,403 $ 4 $ -- $ 8,407
=======================================================
29
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENT SECURITIES (continued)
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
=======================================================
The amortized cost and estimated fair value of investment securities at December
31, 1997 by contractual maturity are as follows (in thousands):
Amortized Estimated
Cost Fair Value
------------------------
Held-to-maturity
Due in one year or less $ 7,018 $ 6,795
Due after one year but within 5 years 3,988 3,991
------------------------
$11,006 $10,786
========================
Available-for-sale
Due after one year but within 5 years $ 999 $ 1,003
No contractual maturity 7,404 7,404
------------------------
$ 8,403 $ 8,407
========================
In 1997, proceeds from the sale of investment securities classified as
available-for-sale were approximately $2,015,000 and gross realized gains were
$15,000. There were no sales of investment securities classified as
available-for-sale during 1996 and 1995.
30
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 4 - MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities are summarized as follows (in thousands):
December 31, 1997
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------
Held-to-maturity, carried at amortized cost
Collateralized mortgage obligations
Private - fixed rate $24,369 $ 8 $597 $23,780
=====================================================
Available-for-sale, carried at fair value
FHLMC fixed rate $ 5,246 $110 $ -- $ 5,356
FNMA variable rate 3,103 57 -- 3,160
FHLMC variable rate 13,121 139 28 13,232
Collateralized mortgage obligations
Agency
Fixed rate 33,225 55 62 33,218
Variable rate 15,519 1 162 15,358
Private
Fixed rate 15,252 50 90 15,212
Variable rate 1,104 8 11 1,101
-----------------------------------------------------
$86,570 $420 $353 $86,637
=====================================================
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
=====================================================
31
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 4 - MORTGAGE-BACKED AND RELATED SECURITIES (continued)
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,
----------------------------
1997 1996 1995
----------------------------
Sale proceeds -- -- $52,407
=========================
Gross realized gains -- -- $ 235
=========================
Gross realized losses -- -- $ 132
=========================
NOTE 5 - LOANS RECEIVABLE
Loans receivable held-for-investment consist of the following (in thousands):
December 31,
-------------------------
1997 1996
-------------------------
First mortgage loans
1-4 family residential $278,766 $295,322
Multi-family residential 3,735 13,673
Commercial real estate 68,380 65,893
Land 14,891 16,504
Commercial 24,183 10,710
Construction
1-4 family residential 38,320 15,661
Multi-family residential 3,697 3,042
Commercial 6,767 8,276
Other loans
Second mortgage participations purchased 979 5,360
Property improvement and consumer 20,438 16,538
-------------------------
460,156 450,979
Less
Net deferred premiums (discounts) 23 (64)
Net deferred loan fees (1,405) (1,470)
Allowance for loan losses (4,297) (4,390)
-------------------------
$454,477 $445,055
=========================
Included in loans receivable at December 31, 1997 and 1996 are $6,516,000 and
$7,294,000, 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 $219,844,000, $250,959,000 and
$281,890,000 at December 31, 1997, 1996 and 1995, respectively. At December 31,
1997, loans serviced for others consisted of the following: FHLMC $156,104,000,
FNMA $62,471,000, other $1,269,000. The carrying value of this servicing was
$288,000 at December 31, 1997, representing the remaining unamortized cost to
acquire such servicing from others.
32
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 5 - LOANS RECEIVABLE (continued)
Nonperforming loans totaled $6,247,000, $4,126,000 and $3,795,000 at December
31, 1997, 1996 and 1995, respectively. Foregone interest on these loans is as
follows (in thousands):
Year ended December 31,
-------------------------
1997 1996 1995
-------------------------
Interest at contractual rates $538 $350 $330
Interest income recognized 396 223 198
-------------------------
Interest income foregone $142 $127 $132
=========================
Changes in the allowance for loan losses follows (in thousands):
1997 1996 1995
------------------------------
Balance, January 1 $4,390 $3,968 $4,328
Provision for loan losses 225 150 175
Less net charge-offs (recoveries) 318 (272) (535)
-------------------------------
Balance, December 31 $4,297 $4,390 $3,968
===============================
Nonperforming loans at December 31, 1997 and 1996 included $1,783,000 and
$113,000, respectively, of loans which were considered to be impaired in
accordance with FAS 114. Each impaired loan had an allowance for loan losses
determined on a specific identification basis. 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. During the years ended
December 31, 1997, 1996 and 1995, the Company had an average recorded investment
in impaired loans of $463,000, $132,000 and $607,000, respectively. Interest
income on impaired loans is recognized on a cash basis and was $27,000 during
1995. No interest income was recorded on impaired loans during 1997 and 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.
The Company makes loans to executive officers, directors, and their affiliates.
At December 31, 1997 and 1996, such loans amounted to $5,003,000 and $1,016,000,
respectively. During 1997, $4,115,000 of such loans were made and $128,000
principal payments were received by the Company.
NOTE 6 - FORECLOSED REAL ESTATE
Foreclosed real estate consists of the following (in thousands):
December 31,
---------------------
1997 1996
---------------------
Properties acquired through foreclosure $2,717 $2,282
Less allowance for losses on foreclosed real estate (335) (235)
---------------------
$2,382 $2,047
=====================
33
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 6 - FORECLOSED REAL ESTATE (continued)
Changes in the allowance for losses on foreclosed real estate follows (in
thousands):
Year ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
Balance, January 1 $235 $ 1,599 $1,571
Provision for losses on foreclosed real estate 100 484 200
Charges to the allowance -- (1,848) (172)
--------------------------------
Balance, December 31 $335 $ 235 $1,599
================================
NOTE 7 - ACCRUED INCOME RECEIVABLE
Accrued income receivable consists of the following (in thousands):
December 31,
---------------------
1997 1996
---------------------
Interest on loans $3,647 $3,435
Interest on mortgage-backed and related securities 784 749
Other interest and dividends 319 422
---------------------
4,750 4,606
Less allowance for uncollectible interest (336) (317)
---------------------
$4,414 $4,289
=====================
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
-------------------------
1997 1996
-------------------------
Land and improvements $ 1,346 $ 1,346
Buildings 2,183 1,723
Leasehold improvements 1,924 1,797
Furniture and equipment 7,181 5,939
-------------------------
12,634 10,805
Less accumulated depreciation and amortization (5,746) (5,163)
-------------------------
$ 6,888 $ 5,642
=========================
34
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 9 - DEPOSITS
Deposits consist of the following (in thousands):
Weighted
Average
Rate at
December 31, December 31,
---------------------------------------------
1997 1997 1996
---------------------------------------------
Demand accounts -- $ 20,427 $ 15,637
NOW accounts 1.84% 17,216 15,806
Money market deposit accounts 4.27% 67,377 38,399
Savings deposits 3.94% 40,755 44,423
Time deposits
Brokered 6.11% 52,908 86,273
Retail 5.56% 208,760 222,851
--------------------------
$ 407,443 $ 423,389
==========================
Weighted average interest rate 4.88% 5.00%
==========================
The aggregate amount of time deposit accounts with balances of $100,000 or more
approximated $29,889,000 and $19,327,000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, approximately $16,290,000 in mortgage-backed and
investment 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,
-------------------------
1997 1996
-------------------------
Within 1 year $195,731 $203,865
1-2 years 36,453 70,515
2-3 years 11,718 20,791
3-4 years 6,707 6,591
4-5 years 10,835 6,710
Over 5 years 224 652
-------------------------
$261,668 $309,124
=========================
Interest on deposits follows (in thousands):
Year ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
OW accounts $ 333 $ 328 $ 348
Money Market Deposit accounts 1,626 1,392 1,310
Savings deposits 1,903 1,713 1,747
Time deposits
Brokered 4,082 7,889 10,837
Retail 11,844 12,623 13,309
Less early withdrawal penalties (60) (48) (51)
-------------------------------------
$19,728 $23,897 $27,500
=====================================
35
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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,
--------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------
1997 $ -- $ 37,000 -- 5.84%
1998 97,000 65,000 5.80% 5.86
1999 30,000 25,000 6.33 6.33
2000 10,000 -- 6.35 --
2001 and thereafter 6,084 6,110 6.04 6.03
----------------------
$143,084 $133,110
======================
The Bank's investment in Federal Home Loan Bank stock of $7,404,200,
mortgage-backed and related securities of $21,177,000 and first mortgage loans
of approximately $249,299,000 are pledged as collateral for advances at December
31, 1997. The total additional amount of advances available from the Federal
Home Loan Bank was estimated to be $42,000,000 at December 31, 1997.
NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of certain information regarding investment securities sold under
agreements to repurchase follows (in thousands):
1997 1996 1995
----------------------------------------------
Balance at December 31 $ 17,033 $ 5,015 $ --
Maximum month-end balance during the year 17,704 5,110 20,358
Monthly average balance during the year 13,257 3,000 10,545
Investment securities underlying the agreements at year end
Carrying value 19,387 12,499 --
Estimated market value 19,153 12,512 --
Monthly average interest rate during the year 5.58% 5.59% 6.06%
Weighted average interest rate at year end 5.63% 5.71% --
Weighted average maturity at year end 40 days 21 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 for income taxes consists of the following (in thousands):
Year ended December 31,
-------------------------------
1997 1996 1995
-------------------------------
Current $2,614 $ 449 $612
Deferred (60) (127) 29
-------------------------------
$2,554 $ 322 $641
===============================
36
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 12 - INCOME TAXES (continued)
A reconciliation of the income tax provision 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,
---------------------------------
1997 1996 1995
---------------------------------
Expected income tax expense at federal income tax rate $2,263 $ 303 $614
Increase (decrease) in taxes resulting from
Nondeductible expenses 11 28 13
State income tax 371 11 20
Other, net (91) (20) (6)
---------------------------------
$2,554 $ 322 $641
=================================
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. Due to law changes effective for 1996, the
Company computed its bad debt deduction using the direct charge-off method for
1996 and 1997.
The Company's retained earnings at December 31, 1997 includes $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):
December 31,
---------------------
1997 1996
---------------------
Deferred tax assets
Book bad debt reserves $1,633 $1,668
Xxxx-to-market adjustment on securities available-
for-sale -- 20
Deferred loan fees -- 176
Non-accrual interest 127 --
AMT credit carryfoward 316 --
Other 365 221
---------------------
2,441 2,085
---------------------
Deferred tax liabilities
Federal Home Loan Bank stock dividends 721 1,182
Xxxx-to-market adjustment on securities available-
for-sale 24 --
Deferred loan fees 329 --
Other 123 89
---------------------
1,197 1,271
---------------------
Net deferred tax asset, included in other assets $1,244 $ 814
=====================
37
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 12 - INCOME TAXES (continued)
There was no valuation allowance for gross deferred tax assets as of December
31, 1997 or 1996 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
1997, 1996 and 1995 were $114,000, $43,500 and $120,000, 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, 1997 and 1995. ESOP shares receive normal dividends and are
included in total shares outstanding for earnings per share purposes.
Employee Stock Purchase Plan
The Company also maintains 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 $3,700,
$4,200 and $7,200 for the years ended December 31, 1997, 1996 and 1995,
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 524,432 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.
38
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 14 - STOCK OPTION PLANS (continued)
1997 1996 1995
In thousands except per share data ----------------------------
Net income As reported $4,103 $569 $1,166
Pro forma 3,315 454 985
Earnings per common share, basic As reported .82 .11 .24
Pro forma .67 .09 .20
Earnings per common share, diluted As reported .81 .11 .24
Pro forma .65 .09 .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 1997: dividend
yield of 1.2%; expected volatility of 45%; a risk-free interest rate of 5.7%to
6.8%; and an expected option life of 8 years. The assumptions used for grants in
1996 and 1995 were: dividend yield 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
1997, 1996 and 1995 was $6.89, $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:
1997 1996 1995
---------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
Outstanding, Jan 1 287,500 $ 7.29 257,450 $ 7.31 182,962 $ 6.41
Granted 146,500 14.59 43,500 7.46 92,000 8.89
Exercised (750) 7.00 (1,950) 5.56 (16,512) 6.14
Forfeited -- -- (11,500) 8.66 (1,000) 7.38
------- ------- -------
Outstanding, Dec 31 433,250 9.76 287,500 7.29 257,450 7.31
======= ======= =======
Options exercisable at year end 424,083 $ 9.81 252,162 $ 7.21 216,449 $ 7.31
======= ======= =======
The following table summarizes information about fixed price stock options
outstanding as of December 31, 1997:
Weighted
Average Weighted Weighted
Total Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Outstanding Life Price Exercisable Price
Exercise Prices ----------------------------------------------------------------------
$4.25 to 6.88 90,000 5.4 years $ 5.54 88,333 $ 5.52
7.00 to 7.81 94,750 6.8 7.28 88,917 7.29
8.13 to 9.38 102,000 7.7 8.86 100,333 8.87
10.00 to 13.13 50,500 9.4 11.34 50,500 11.34
16.25 to 18.38 96,000 9.9 16.29 96,000 16.29
------- -------
$4.25 to 18.38 433,250 7.7 9.76 424,083 9.81
======= =======
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, 1997,
1996 and 1995 and are included in the above tables.
39
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 15 - REGULATORY REQUIREMENTS AND RESTRICTIONS
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 adverse effect on the Company's financial condition. 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, 1997, that the Bank meets all capital adequacy requirements to
which it is subject. As of December 31, 1997, 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, 1997
Tangible $43,298 7.0% $ 9,331 1.5% $21,771 3.5%
Core 43,298 7.0% 18,661 3.0% 31,102 5.0%
Risk-Based 47,074 12.6% 29,826 8.0% 37,283 10.0%
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%
40
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
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, 1997 December 31, 1996
------------------------------------------------------------------
Estimated Estimated
Notional Carrying Fair Notional Carrying Fair
Amount Value Value Amount Value Value
------------------------------------------------------------------
Recorded financial instruments
Financial assets:
Cash and cash equivalents $ -- $ 7,430 $ 7,430 $ -- $ 7,335 $ 7,335
Investment securities -- 19,413 19,193 -- 27,796 27,540
Mortgage-backed and related securities -- 111,006 110,417 -- 106,549 105,634
Loans held-for-sale -- 8,356 8,363 -- 4,785 4,790
Loans held-for-investment, net -- 454,477 465,734 -- 445,055 468,545
Financial liabilities:
Deposits with no stated maturity -- 145,775 145,775 -- 114,265 114,265
Time deposits -- 261,668 261,678 -- 309,124 312,185
Securities sold under agreements to
repurchase -- 17,033 17,033 -- 5,015 5,015
Advances from the Federal Home Loan
Bank -- 143,084 143,344 -- 133,110 133,554
Off-balance sheet financial instruments
Interest rate swap agreements - hedging 25,000 -- (161) 25,000 -- (310)
Loan commitments with mandatory rates
and terms 34,121 -- 113 17,769 -- 19
Forward sales of mortgage-backed
securities - mandatory delivery 2,000 -- 11 -- -- --
Forward sales of loans - optional delivery 19,716 -- 182 8,510 -- 67
Letters of credit 5,963 -- -- 3,783 -- --
41
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 16 - ADDITIONAL INFORMATION ABOUT FINANCIAL INSTRUMENTS (continued)
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.
Recorded Financial Instruments
The carrying amount reported for cash and cash equivalents 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 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.
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 their
obligations.
42
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 17 - COMMITMENTS AND CONTINGENCIES
In addition to undisbursed loan funds of $34,503,000 at December 31, 1997, the
Company has issued commitments to originate loans amounting to $40,314,000.
These commitments are agreements to lend funds to a customer as long as there
has been no violation of any condition established in the agreement. Each
customer's creditworthiness is evaluated on a case by case basis. All
outstanding loan commitments are expected 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 $19,716,000 at
December 31, 1997. The risks associated with loan sale commitments are that the
buyer will be unable to perform. Each buyer is evaluated as to its ability to
perform in accordance with Company guidelines.
Also, at December 31, 1997, the Company had issued $5,963,000 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 these matters is not expected to have a
material adverse effect on the consolidated financial position of the Company.
Total rent expense under operating leases amounted to $1,220,000, $1,235,000 and
$1,542,000 in 1997, 1996 and 1995, respectively.
Minimum rentals under noncancelable leases with initial terms of more than one
year are as follows (in thousands):
Year ending December 31, Amount
-------------------------------------
1998 $1,380
1999 1,350
2000 1,220
2001 235
2002 125
After 2002 393
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.
43
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
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,
-----------------------
1997 1996
-----------------------
Assets
Cash in bank $ 769 $ 504
Investment in subsidiary 43,379 40,452
Other assets 16 16
-----------------------
Total assets $44,164 $40,972
=======================
Liabilities and Stockholders' Equity
Liabilities $ 15 $ 145
-----------------------
Stockholders' Equity
Common stock 50 50
Capital in excess of par value 9,465 9,336
Unrealized gain (loss) on available-for-sale
securities, net of tax 46 (39)
Retained earnings 34,588 31,480
-----------------------
Total stockholders' equity 44,149 40,827
-----------------------
Total liabilities and stockholders' equity $44,164 $40,972
=======================
CONDENSED STATEMENT OF OPERATIONS
Year ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
Equity in earnings of subsidiary $4,122 $ 587 $1,189
Interest income 15 18 26
Other expense 47 48 60
--------------------------------
Income before income taxes 4,090 557 1,155
Income tax benefit (13) (12) (11)
--------------------------------
Net income $4,103 $ 569 $1,166
================================
44
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
Cash flows from operating activities
Net income $ 4,103 $ 569 $ 1,166
Adjustments to reconcile net income to net cash provided
(used) by operating activities
(Increase) decrease in other assets -- (8) 18
Increase (decrease) in liabilities (130) 29 28
Equity in net income of subsidiary (4,122) (587) (1,189)
--------------------------------------
Net cash provided (used) by operating activities (149) 3 23
--------------------------------------
Cash flows from investing activities
Dividends from subsidiary 1,280 550 400
--------------------------------------
Net cash provided by investing activities 1,280 550 400
--------------------------------------
Cash flows from financing activities
Issuance of common stock 129 99 269
Cash dividends paid (995) (795) (789)
--------------------------------------
Net cash used for financing activities (866) (696) (520)
--------------------------------------
Net increase (decrease) in cash 265 (143) (97)
Cash at beginning of year 504 647 744
--------------------------------------
Cash at end of year $ 769 $ 504 $ 647
======================================
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 $1,280,000 and
$550,000 to the Company during 1997 and 1996, respectively. There can be no
assurance that the OTS will not object to any amount of future cash dividends
declared by the Bank.
45
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 19 - QUARTERLY CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
1997 Quarter ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
(in thousands, except per share data) ------------------------------------------------------------
Interest income $11,943 $12,223 $12,300 $12,133
Provision for loan losses 75 100 50 --
Net interest income after provision for loan
losses 4,575 4,704 4,721 4,737
Other income 787 890 1,088 1,136
Other expenses 3,919 3,962 4,036 4,064
Income before income taxes 1,443 1,632 1,773 1,809
Net income 895 987 1,099 1,122
Earnings per share, basic (1) .18 .20 .22 .23
Earnings per share, diluted (1) .18 .20 .22 .22
Dividends paid per share .05 .05 .05 .05
1996 Quarter ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------
Interest income $12,558 $11,979 $11,862 $11,946
Provision for loan losses -- 100 50 --
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 3,923
Income (loss) before income taxes 900 1,008 (2,198) 1,181
Net income (loss) 547 625 (1,363) 760
Earnings (loss) per share, basic (1) .11 .13 (.27) .15
Earnings (loss) per share, diluted (1) .11 .13 (.27) .15
Dividends paid per share .04 .04 .04 .04
(1) Quarterly amounts are independently calculated and may not total to the
annual amounts.
46
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
corporate
information
Securities and
Regulatory Counsel
Xxxxxxx, Spidi, Sloane & Xxxxx, P.C.
Washington, DC
Independent Auditors
KPMG Peat Marwick LLP
Richmond, VA
Stock Transfer Agent
American Stock Transfer & Trust Company
New York, NY
Form 10-K
A copy of the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1997, including financial
statement schedules, as filed with the Common Stock
Securities and Exchange Commission, will The Company's common stock is traded on
be furnished without charge to stockholders the over-the-counter market and is listed
as of the record date upon written request National Market System under the symbol
to: Corporate Secretary, Virginia Beach "VABF." As of march 13, 1998, there were
Federal Financial Corporation, 2101 Parks approximately 557 shareholders o record.
Avenue, Xxxxx 000, X.X. Xxx 000, Virginia Following are the high and low closing
Xxxxx, XX 00000. prices in 1997 and 1996 as reported by
Nasdaq and dividends paid by quarters.
Annual Meeting Over-the-counter market quotations reflect
The Annual Meeting of the Virginia Beach inter-dealer prices, without retail xxxx-up,
Federal Financial Corporation will be held xxxx-down or commission and may not necessarily
on April 29, 1998 at 2:00 p.m. at the Clarion represent actual transactions.
Hotel, 0000 Xxxxxx Xxxx, Xxxxxxxx Beach, VA.
1997 1996
high low dividend high low dividend
---------------------------------------------------------------------------
1st quarter $11 5/16 $ 9 3/8 $0.05 $ 9 $6 13/16 $0.04
2nd quarter 13 1/2 9 3/4 0.05 8 5/8 6 7/8 0.04
3rd quarter 16 3/4 13 1/4 0.05 3 3/4 6 7/8 0.04
4th quarter 18 3/4 15 0.05 9 5/8 8 5/8 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 the
reinvestment 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 (000) 000-0000.
branches
FIRST COASTAL BANK
AND ATMs
Executive and Additional ATM locations
Administrative Offices Wal-Mart ATM McDonalds ATM
0000 Xxxxx Xxxxxx 1521 Sam's Circle 000 Xxxxxxx Xxxxx Xxxxxxxxx
Xxxxxxxx xxxxx, Xxxxxxxx 00000 Chesapeak Virginia Beach
Wal-Mart ATM McDonald's ATM
Executive and Administrative 0000 Xxxxxxxxxx Xxxx. 16th Street and Atlantic
Offices Peninsula Chesapeake Virginia Beach
000 Xxxxxxx Xxxxxx Xxxx.
Xxxxxxx Xxxx Xxxxxxxx 00000 Wal-Mart ATM McDonald's ATM
12401 Jefferson Aenue 21st Street and Pacific
Chesapeake Newport News Virginia Beach
Cedar Road Financial Center
0000 Xxxxx Xxxx Xxx-Xxxx ATM McDonalds ATM
0000 X. Xxxxxxxx Xxxxxxx 00xx Xxxxxx and Atlantic
Greenbrier Financial Norfolk Virginia Beach
and Mortgage Center
0000 Xxxxxxxxxx Xxxxxxx Wal-Mart ATM McDonald's ATM
000 Xxxxxxx Xxxxx 2057 General Booth Boulevard
Greenbrier MarketCenter Virginia Beach Virginia Beach
Inside Xxxxxx Xxxxxx Supermarket
0000 Xxxxxxxxxx Xxxxxxx Selden Arcade ATM McDonalds ATM
000 Xxxx Xxxx Xxxxxx 1507 Atlantic Avenue
Norfolk Virginia Beach
Newport News
Denbigh Crossing Financial Center Sam's Club ATM
00000 Xxxxxxxxx Xxxxxx 1501 Sam's Circle
Chesapeake
Oyster Point Financial
and Mortgage Center Sam's Club ATM
000 Xxxxxxx Xxxxxx Xxxx. 00000 Xxxxxxxxx Xxxxxx
Xxxxxxx Xxxx
Xxxxxxxx Beach Other Virginia ATM locations
Xxxxxxx Financial Center Sam's Club ATM Wal-Mart ATM
0000 Xxxxxxxx Xxxxx Xxxx. 000 Xxx-Xxxx Xxx 000 Xxxxxxx 00 Xxxx
Xxxxxxxxxx Xxxxxx
Courthouse Financial Center Sam's Club ATM Wal-Mart ATM
0000 Xxxxxxxx Xxxx Xxxx 0000 Xxxx Xxxxx Xxxxxx 000 Xxxxx Xxxxx
Xxxxxxxx Xxxxxxxx
Xxxxxxxxx Financial Center Wal-Mart ATM Wal-Mart ATM
0000 Xxxxxxxxxx Xxxx 000 Xxx-Xxxx Xxx 0000 Xxxxxxxx Xxxxx
Xxxxxxxxxx Pulaski
Great Neck Financial Center Wal-Mart ATM Wal-Mart ATM
1324 N. Great Neck Road US Highway 23 Bypass 125 Washington Plaza
Big Stone Gap Fredericksburg
Little Neck Financial Center Wal-Mart ATM Wal-Mart ATM
Inside Xxxxxx Xxxxxx Supermarket 0000 Xxxx Xxxxxx Xxxxx 0000 Xxxx Xxxxxxxx Xxxxxx
XX Xxxxx, 0000 Xxxxxxxx Beach Blvd. Galax South Hill
Lynnhaven Financial Center
000 X. Xxxxxxxxx Xxxx
Pavilion Financial
and Mortgage Center
0000 Xxxxx Xxxxxx
Xxxxx Xxxxx Financial Center
0000 Xxxxx Xxxxx
Xxxxxxxxxxxx
Five Forks Financial Center FIRST COASTAL BANK
000 Xxxxxx Xxxx -------------------------------
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