SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/ x / Quarterly Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
FOR QUARTER ENDED September 30, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Transition Period From: To:
Commission File Number: 0-19398
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Virginia
(State of incorporation)
IRS Employer ID No.: 54-1534067
2101 Parks Avenue, Virginia Beach, Virginia 23451
(Address of principal executive offices)
(804) 428-9331
(Registrant's telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report: N/A
Indicate by check mark whether the registrant (1) has filed all documents
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES x NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date October 31, 1996:
4,968,159
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
Item I
Unaudited Consolidated Statement of Financial Condition
as of September 30, 1996 and December 31, 1995. . . . . . . . 3
Unaudited Consolidated Statement of Income for the three
and nine months ended September 30, 1996 and 1995 . . . . . . 4
Unaudited Consolidated Statement of Cash Flows for the
nine months ended September 30, 1996 and 1995 . . . . . . . . 5 - 6
Unaudited Consolidated Statement of Stockholders'
Equity for the nine months ended September 30, 1996 . . . . . 7
Notes to Unaudited Consolidated Financial Statements. . . . . 8
Item II
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 9 - 14
PART II - OTHER INFORMATION
Item 1
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 15
Item 2
Changes in Securities . . . . . . . . . . . . . . . . . . . . 15
Item 3
Defaults Upon Senior Securities . . . . . . . . . . . . . . . 15
Item 4
Submission of Matters to a Vote of Security Holders . . . . . 15
Item 5
Other Information . . . . . . . . . . . . . . . . . . . . . . 15
Item 6
Exhibits and Report of Form 8-K . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(dollars in thousands, except share data)
<TABLE>
September 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks . . . . . . . . . . . . . $ 11,485 $ 8,519
Securities purchased under agreements to resell . -- 55,000
Investment securities
Held-to-maturity (fair value $14,636,
$14,853, respectively) . . . . . . . . . . . 14,953 15,050
Available-for-sale, carried at fair value. . . 13,847 11,867
Mortgage-backed and related securities
Held-to-maturity (fair value $28,999
$34,186, respectively) . . . . . . . . . . . 30,485 34,458
Available-for-sale, carried at fair value. . . 81,792 103,321
Loans receivable
Held-for-investment. . . . . . . . . . . . . . 433,411 433,562
Held-for-sale. . . . . . . . . . . . . . . . . 2,201 14,020
Foreclosed real estate. . . . . . . . . . . . . . 2,723 5,767
Property and equipment. . . . . . . . . . . . . . 5,322 5,275
Accrued income receivable . . . . . . . . . . . . 4,109 4,546
Other assets. . . . . . . . . . . . . . . . . . . 3,732 7,577
--------- ---------
$604,060 $698,962
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits. . . . . . . . . . . . . . . . . . . . . $432,840 $492,971
Advances from the Federal Home Loan Bank. . . . . 114,010 158,010
Securities sold under agreements to repurchase . 5,090 --
Advance payments by borrowers for taxes and
insurance . . . . . . . . . . . . . . . . . . . 1,654 1,252
Other liabilities . . . . . . . . . . . . . . . . 10,588 5,697
--------- ---------
564,182 657,930
--------- ---------
STOCKHOLDERS' EQUITY
Serial preferred stock, authorized 5,000,000
shares, no shares issued or outstanding. . . . -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 4,967,465 shares issued
and outstanding in 1996 (4,957,422 in 1995). . 50 50
Capital in excess of par value. . . . . . . . . . 9,311 9,237
Retained earnings - substantially restricted . . 30,919 31,706
Net unrealized gain (loss) on securities
available-for-sale . . . . . . . . . . . . . . (402) 39
--------- ---------
39,878 41,032
--------- ---------
$ 604,060 $ 698,962
========= =========
Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
</TABLE>
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share data)
<TABLE>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and fees on loans. . . $ 9,370 $ 9,488 $ 28,024 $ 27,722
Interest on mortgage-backed
and related securities . . . 1,985 3,230 6,359 10,182
Other interest and
dividend income. . . . . . . 507 596 2,016 1,818
-------- -------- -------- --------
Total interest income. . . . 11,862 13,314 36,399 39,722
-------- -------- -------- --------
Interest on deposits. . . . . . 5,865 7,125 18,366 20,559
Interest on Federal Home
Loan Bank advances . . . . . 1,731 2,323 5,617 7,327
Interest on repurchase
agreements . . . . . . . . . 68 219 89 613
-------- -------- -------- --------
Total interest expense . . . 7,664 9,667 24,072 28,499
-------- -------- -------- --------
Net interest income . . . . . . 4,198 3,647 12,327 11,223
Provision for loan losses . . . 50 75 150 75
-------- -------- -------- --------
Net interest income after
provision for loan losses. . 4,148 3,572 12,177 11,148
-------- -------- -------- --------
OTHER INCOME
Gain on sales of securities
available-for-sale. . . . . . -- 103 -- 103
Market value adjustment on
derivative contracts . . . . -- -- -- (232)
Gain on sales of loans. . . . . 239 595 917 1,174
Gain on sales of foreclosed
real estate. . . . . . . . . 11 75 107 94
Retail banking fees . . . . . . 226 190 609 423
Mortgage loan servicing fees. . 182 190 550 546
Other . . . . . . . . . . . . . 101 212 357 602
-------- -------- -------- --------
759 1,365 2,540 2,710
-------- -------- -------- --------
OTHER EXPENSES
Salaries and employee
benefits. . . . . . . . . . . 1,649 1,783 4,806 5,441
Net occupancy expense of
premises. . . . . . . . . . . 756 923 2,222 2,572
Provision for losses on
foreclosed real estate . . . 60 75 484 75
Other net (income) expense of
foreclosed real estate . . . (22) 9 86 204
Federal deposit insurance
premiums. . . . . . . . . . . 3,620 324 4,277 979
Other . . . . . . . . . . . . . 1,042 1,232 3,132 3,428
-------- -------- -------- --------
7,105 4,346 15,007 12,699
-------- -------- -------- --------
Income (loss) before
income taxes . . . . . . . . (2,198) 591 (290) 1,159
Provision (benefit) for
income taxes . . . . . . . . (835) 201 (99) 394
-------- -------- -------- --------
Net income (loss) . . . . . . . $(1,363) $ 390 $ (191) $ 765
========= ========= ========= =========
Earnings (loss) per
common share
Net income (loss) . . . . . . . $ (.27) $ 0.08 $ (0.04) $ 0.16
========= ========= ========= =========
Dividend per common share . . . $ .04 $ 0.04 $ 0.12 $ 0.12
========= ========= ========= =========
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
</TABLE>
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
For the Nine Months
Ended September 30,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . $ (191) $ 765
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating
activities
Provision for loan losses . . . . . . . . . . 150 75
Provision for losses on real estate acquired
in settlement of loans. . . . . . . . . . . 484 75
Depreciation. . . . . . . . . . . . . . . . . 863 761
Amortization of loan discounts and fees . . . (913) (862)
Amortization of other discounts and premiums. 317 790
Gain on sales of securities available-for-sale -- (103)
Market value adjustment on derivative contracts -- 232
Gain on sales of foreclosed real estate . . . (107) (94)
Gain on sales of loans. . . . . . . . . . . . (917) (1,174)
Originations/purchases of loans held-for-sale (77,433) (164,402)
Proceeds from sales of loans held-for-sale. . 90,169 153,543
Decrease in accrued income receivable . . . . 437 260
Decrease in other assets. . . . . . . . . . . 3,787 1,041
Increase in other liabilities . . . . . . . . 4,851 8,699
-------- ---------
Net cash provided by (used for)
operating activities. . . . . . . . . . . 21,497 (394)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans receivable . . . . . . . . (90) (8,533)
Principal payments received on mortgage-backed
and related securities . . . . . . . . . . . . 24,920 21,990
Proceeds from maturities of investment securities 8,000 9,038
Proceeds from sales of
Securities purchased under
agreements to resell . . . . . . . . . . . . 55,000 --
Mortgage-backed and related securities
available-for-sale . . . . . . . . . . . . . -- 52,407
Foreclosed real estate . . . . . . . . . . . . 3,878 4,528
Investment in limited partnership. . . . . . . -- 5,200
Property and equipment . . . . . . . . . . . . 8 --
Purchases of
Investment securities held-to-maturity . . . . (8,000) (3,000)
Investment securities available-for-sale . . . (2,000) --
Property and equipment . . . . . . . . . . . . (878) (1,546)
Additions to foreclosed real estate. . . . . . (207) (1,286)
-------- ---------
Net cash provided by investing activities. . . . 80,631 78,798
--------- ---------
Continued
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
</TABLE>
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
For the Nine Months
Ended September 30,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in money market
deposit accounts, NOW accounts
and savings deposits . . . . . . . . . . . . . $1,672 $ 1,936
Net decrease in certificates
of deposit . . . . . . . . . . . . . . . . . . (61,803) (3,204)
Proceeds from Federal Home Loan Bank advances. . 240,500 279,000
Payments on Federal Home Loan Bank advances. . . (284,500) (320,000)
Net increase (decrease) in securities
sold under agreements to repurchase. . . . . . 5,090 (9,868)
Net increase in advance payments by borrowers. . 402 754
Proceeds from issuance of common stock . . . . . 73 217
Cash dividends paid. . . . . . . . . . . . . . . (596) (592)
--------- ---------
Net cash used for financing activities . . . . (99,162) (51,757)
--------- ---------
Increase in cash and due from banks . . . . . . . . 2,966 26,647
Cash and due from banks at beginning of year. . . . 8,519 2,009
--------- ---------
Cash and due from banks at end of period. . . . . . $ 11,485 $ 28,656
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits. . . . . . . . . . . . $ 25,289 $ 27,938
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Real estate acquired in settlement of loans,
net of allowances. . . . . . . . . . . . . . . . $ 1,004 $ 2,462
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
</TABLE>
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
<TABLE>
Unrealized
Gain
(Loss) on
Capital in Available
Excess of for-Sale Retained
Shares Amount Par Value Securities Earnings Total
-------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
Balance,
Dec. 31, 1995 4,957,422 $ 50 $ 9,237 $ 39 $ 31,706 $41,032
Net (loss) for the
nine months ended
Sept. 30, 1996 (191) (191)
Sale of shares of
common stock to
Employee Stock
Purchase Plan 8,543 -- 66 -- -- 66
Exercise of stock
options for shares
of common stock 1,500 -- 8 -- -- 8
Change in unrealized
gain (loss) on
available-for-sale
securities, net of tax (441) -- (441)
Cash dividends paid (596) (596)
-------- ------- ---------- ---------- --------- --------
Balance,
Sept. 30, 1996 4,967,465 $50 $9,311 $(402) $30,919 $39,878
========= ======== ========== ========== ======== =======
Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
</TABLE>
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements are
prepared in accordance with the instructions to Form 10-Q and do not
include all of the disclosures and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of the management of Virginia Beach Federal Financial
Corporation (the "Company" or the "Bank") the financial statements
reflect all adjustments, consisting of only normal recurring
accruals, necessary to present fairly the financial position of the
Company.
The Notes to the Consolidated Financial Statements of the Annual
Report on Form 10-K for the fiscal year ended December 31, 1995
should be read in conjunction with this Form 10-Q.
2. Net unamortized premiums on loans and mortgage-backed securities
amounted to $769,000 at September 30, 1996. Deferred loan fees at
September 30, 1996 amounted to $1,490,000.
3. The results of operations for the three or nine months ended
September 30, 1996 are not necessarily indicative of the results to
be expected for the entire fiscal year or any other period.
4. In addition to undisbursed loan funds of $28,754,000, the Bank had
outstanding commitments to purchase or originate $41,549,000, in
loans at September 30, 1996. The Bank also had outstanding
commitments to sell $8,394,000, in loans at September 30, 1996.
5. Primary earnings per share has been computed based on the weighted
average number of shares outstanding assuming the issuance of shares
under the Company's stock option plan and use of the proceeds to
purchase the Company's outstanding common stock at the weighted
average market price during the year. At September 30, 1996, there
were 287,950 option shares exercisable at a weighted average exercise
price of $6.86 per share. There is no material difference between
primary and fully diluted earnings per share.
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item II. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL CONDITION
ASSETS
The Company's total assets at September 30, 1996 were $604 million
which is a decrease of $94.9 million or 13.6% from December 31, 1995. This
decrease is mainly due to the net effect of a $55.0 million decrease in
securities purchased under agreements to resell, a $23.6 million decrease
in the Bank's securities portfolios, a $12.0 million decrease in loans
receivable, a $3.8 million decrease in other assets and a $3.0 million
decrease in foreclosed real estate. These decreases were partially off-set
by a $3.0 million increase in cash and amounts due from banks. The
reduction in total assets has caused the Bank's core capital ratio to
increase to 6.6% at September 30, 1996 from 5.8% at December 31, 1995.
The $55.0 million decrease in securities purchased under agreements
to resell was due to the Company electing not to replace these assets when
they matured, thus reducing the total assets of the Company. The decrease
of $23.6 million in the Bank's securities portfolios at September 30, 1996
as compared to December 31, 1995 is due mainly to the normal repayment and
maturity of securities. The Bank collected $24.9 million in principal on
mortgage-backed and related securities and $8.0 million from maturities of
fixed and variable rate investment securities. These reductions were off-
set by the purchase of $10.0 million fixed rate U.S. Treasury or U. S.
Government Agency securities. In accordance with Financial Accounting
Standards No.115 ("FAS115"), the Company has recorded a reduction to
shareholders' equity of $402,000 to reflect a decline in the market value
of securities classified as available-for-sale.
The Bank's loan portfolio decreased $12.0 million at September 30,
1996 as compared to December 31, 1995. The decrease of $11.8 million in
loans held-for-sale is attributable primarily to the Company's sale of five
of its loan production offices outside the local retail banking market
during the fourth quarter of 1995. While total loans receivable held for
investment is essentially unchanged at September 30, 1996 as compared with
December 31, 1995, there have been changes in the mix of such loans.
Residential mortgage loans have deceased by $8.2 million due to lower levels
of mortgage production for its own portfolio due, in turn, to decreased loan
origination capacity discussed above. In addition, the Bank's total
portfolio of commercial real estate and construction loans has decreased
$2.9 million, the balances of these types of loans in its local lending area
have increased $8.2 million. The Bank's land acquisition, commercial and
consumer lending portfolios increased a total of $11.3 million at September
30, 1996, as compared to December 31, 1995.
LIABILITIES
Total liabilities decreased by $93.7 million or 14.2% to $564 million
during the first nine months of 1996. This decrease is mainly due to a
$60.1 million decrease in deposits and a $44.0 million decrease in advances
from the Federal Home Loan Bank. These decreases were partially offset by
a $5.1 increase in securities sold under agreements to repurchase, and a
$4.9 million increase in other liabilities associated with recurring
fluctuations in the timing of payment for certain accrued items. The
decrease in deposit balances is in keeping with management's emphasis of
focusing on the local retail deposit base. Of the $60.1 million decrease
in deposits since December 1995, $66.6 million occurred in brokered and
other out-of-area deposits offset by an increase in local deposits.
The decrease of $44.0 million in Federal Home Loan Bank advances is
mainly attributable to the Bank's repayment of maturing advances with funds
generated from the sale of securities under agreements to resell during the
first quarter.
NON-PERFORMING ASSETS
Non-performing assets of the Bank comprise delinquent loans on which
income accrual has ceased or is being fully reserved, and property acquired
through foreclosure or repossession. Non-performing assets totaled $6.4
million at September 30, 1996 compared to $9.6 million at December 31, 1995.
The delinquent loan component of non-performing assets was $3.7
million, $3.8 million, and $4.6 million, at September 30, 1996, December 31,
1995 and September 30, 1995, respectively. The delinquent loans were
substantially secured by single-family residential properties at September
30, 1996.
Charges to the foreclosed real estate allowance were $1,829,000
during the first nine months of 1996; of that amount, $1,368,000 related to
a single strip shopping center property which was sold during June 1996 and
$153,000 related to a former restaurant facility sold during September 1996.
Allowances for possible losses on loans and foreclosed real estate
are maintained by the Bank when the collectability of loans is impaired and
the value of the security property has declined below the outstanding
principal balance of the related loan, or the carrying value of foreclosed
real estate has been impaired. The allowances for possible losses on loans
receivable held-for-investment and foreclosed real estate totaled $4.4
million and $0.3 million, respectively at September 30, 1996.
The allowance for possible loan losses is maintained for possible but
as yet unidentified loan losses. At September 30, 1996, the Bank's
allowance for possible loan losses was $4.4 million or 1.0% of total loans
receivable held for investment. During the first quarter of 1996 in an
attempt to stimulate sales of certain properties, the Company modified its
strategies with respect to the disposal of certain parcels of foreclosed
real estate and added $300,000 to the foreclosed real estate allowance
during the first quarter of 1996. In addition, re-evaluation of certain
properties produced $184,000 in additional provisions. As a result, $484,000
was added to the foreclosed real estate reserve during the first nine months
of 1996 versus $75,000 during the first nine months of 1995. The Bank will
continue its evaluation of the need for both loan receivable and foreclosed
real estate allowances, and additional allowances will be established as needed.
The following table sets forth the Bank's loan and foreclosed real
estate allowance activity for the periods indicated:
<TABLE>
1996 1995
----------- -----------
<S> <C> <C>
Loans receivable allowance
Balance, January 1 . . . . . . . $3,968,000 $4,328,000
Provision for loan losses. . . . 150,000 75,000
Net recoveries (charges)
to the allowance. . . . . . . 271,000 (380,000)
----------- -----------
Balance, September 30. . . . . $4,389,000 $4,023,000
=========== ===========
Foreclosed real estate allowance
Balance, January 1 . . . . . . $1,599,000 $1,571,000
Provision for losses on
foreclosed real estate . . 484,000 75,000
Net charges to the allowance . (1,829,000) (117,000)
----------- -----------
Balance, September 30. . . . . $ 254,000 $1,529,000
=========== ===========
</TABLE>
On August 2, 1996, U. S. Congress passed the Small Business Job Protection
Act of 1996. This bill, among other things, equalizes the taxation of
thrifts and banks. Previously, thrifts had been able to deduct a portion
of their bad-debt reserves set aside to cover potential loan losses ("bad-
debt reserves"). Furthermore, the bill repeals current law mandating
recapture of thrifts' bad debt reserves if they convert to banks. Bad debt
reserves set aside through 1987 will not be taxed, however, any reserves
taken 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.
<PAGE>
RESULTS OF OPERATION: Three months Ended September 30, 1996 and 1995
NET OPERATING RESULTS
For the three months ended September 30, 1996, the Company recorded a
loss of $1,363,000 or $0.27 per share as compared to net income of $390,000
or $0.08 per share for the same period in 1995. The decrease in pretax
earnings of $2,789,000 during the third quarter of 1996 as compared to the
year earlier period is attributable to a special assessment to recapitalize
the Savings Association Insurance Fund ("SAIF"), which produced a one-time
expense of $3,310,000.
NET INTEREST INCOME
Net interest income during the quarter ended September 30, 1996 was
$4,198,000 as compared to $3,647,000 during the same period of 1995. Even
though total assets have decreased to $604 million at September 30, 1996
from $680 million at September 30, 1995, net interest income increased by
$551,000 as a result of an increased net interest margin. The net interest
margin for the quarter ended September 30, 1996 was 2.80% as compared to
2.20% during the third quarter of 1995.
OTHER INCOME
Other income during the third quarter of 1996 decreased by $606,000
compared with the third quarter of 1995, largely due to reduced loan and
securities sales activity. The reduced loan sales resulted from a reduction
in the Company's mortgage lending activities. Gains on sales of loans were
$239,000 during the 1996 period as compared to $595,000 during the third
quarter of 1995, mainly because the Company sold five of its loan production
offices outside the local retail banking market during the fourth quarter
of 1995. The table below compares the residential loan production during
the quarter ended September 30, 1996 to the same period in 1995 (in thousands):
<TABLE>
For the Three Months
Ended September 30,
-------------------------
1996 1995 Decrease
--------- --------- ----------
<S> <C> <C> <C>
Applications $ 34,565 $ 91,931 $ (57,366)
Closings 29,839 85,173 (55,334)
Fundings 32,242 83,087 (50,845)
Ending Pipeline 33,217 69,946 (36,729)
</TABLE>
OTHER EXPENSE
Other expenses, exclusive of the provision for losses on foreclosed
real estate, increased by $2,774,000 or 64.9% during the third quarter of
1996 as compared to the same period in 1995. The increase is mainly due to
a one-time $3,310,000 special assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"). Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Act") enacted September 30, 1996, the
FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of October 1, 1996. Based on the
Bank's deposits as of March 31, 1995, the date for measuring the amount of
the special assessment pursuant to the Act, the Bank will pay the special
assessment of $3,310,000 on November 27, 1996. The FDIC is expected to
lower the premium for deposit insurance to a level necessary to maintain the
SAIF at its required reserve level. The range of premiums has not been
determined at this time; it is expected, however, that the premiums will
decline.
Pursuant to the Act, the Bank will pay, in addition to its normal
deposit insurance premium as a member of the SAIF, an amount equal to
approximately 6.4 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the
recovery of the savings and loan industry. Members of the Bank Insurance
Fund ("BIF"), by contrast, will pay, in addition to their normal deposit
insurance premium, approximately 1.3 basis points. Based on total deposits
as of September 30, 1996, had the Act been in effect, the Bank's Fico Bond
premium would have been approximately $174,000 in addition to its normal
deposit insurance premium. Beginning no later than January 1, 2000, the
rate paid to retire the Fico Bonds will be equal for members of the BIF and
the SAIF. The Act also provides for the merging of the BIF and the SAIF by
January 1, 1999 provided there are no financial institutions still chartered
as savings associations at that time. Should the insurance funds be merged
before January 1, 2000, the rate paid by all members of this new fund to
retire the Fico Bonds would be equal.
The increase in deposit insurance was partially offset by decreases in
salary, employee benefits and net occupancy expense. The reductions in
salary and employee benefits costs and net occupancy expenses are the direct
result of management's efforts throughout 1995 and 1996 to reduce staff,
control costs and to significantly reduce the infrastructure of the
Company's mortgage lending activities. These reductions in expenses are net
of the cost incurred to staff and operate three additional retail banking
offices opened during 1995, and the start up costs associated with the
Company's "supermarket banking" branch opened during June 1996. During the
quarter ended September 30, 1996, the Company recorded a $50,000 provision
for loan losses, and a provision for possible losses on foreclosed real
estate of $60,000 as compared to a $75,000 provision for each such loss
during the 1995 period. See "Non-performing Assets" for more information
concerning the loans receivable and foreclosed real estate allowances.
<PAGE>
RESULTS OF OPERATION: Nine months Ended September 30, 1996 and 1995
NET OPERATING RESULTS
For the nine months ended September 30, 1996, the Company recorded a
loss of $191,000 or $0.04 per share as compared to net income of $765,000
or $0.16 per share for the same period in 1995. The decrease in pretax
earnings of $1,449,000 during the nine month period as compared to the same
period in 1995 is attributable to a special assessment to recapitalize SAIF
which produced a one-time expense of $3,310,000 during the third quarter of
1996.
NET INTEREST INCOME
Net interest income during the first nine months of 1996 increased by
9.8% to $12,327,000 as compared to $11,223,000 during the same period of
1995. Even though total assets have decreased to $604 million at September
30, 1996 from $680 million at September 30, 1995, net interest income
increased by $1,104,000 as a result of an increased net interest margin.
The net interest margin for the nine months ended September 30, 1996 was
2.71% as compared to 2.18% for the same period in 1995.
OTHER INCOME
Other income during the first nine months of 1996 decreased by $170,000
compared with the same period of 1995. Earnings for the 1996 period
included no gain or loss related to investment securities available-for-sale
or to derivative contracts accounted for at market value. Gains on sales
of loans were $917,000 during the 1996 period as compared to $1,174,000
during the same period in 1995, even though the Company sold five of its
loan production offices outside the local retail banking market during the
fourth quarter of 1995. The table below compares the residential loan
production during the nine month period ended September 30, 1996 as compared
to the same period in 1995 (in thousands):
<TABLE>
For the Nine Months
Ended September 30,
--------------------------
1996 1995 Decrease
--------- --------- ----------
<S> <C> <C> <C>
Applications $122,143 $285,979 $ (163,836)
Closings 92,218 185,362 (93,144)
Fundings 102,123 171,657 (69,534)
Ending Pipeline 33,217 69,946 (36,729)
</TABLE>
OTHER EXPENSE
Other expenses, exclusive of the provision for losses on foreclosed
real estate, increased by $1,899,000 or 15.0% during the nine month period
ended September 30, 1996 as compared to the same period in 1995. The
increase is mainly due to a one-time $3,310,000 special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF"). Please see
the "Results of Operation: Three Months Ended September 30, 1996 and 1995"
for more information concerning this special assessment. This increase was
partially offset by decreases in salary, employee benefits and net occupancy
expense. The reductions in salary and employee benefits costs and net
occupancy expenses are the direct result of management's efforts throughout
1995 and 1996 to reduce staff, control costs and to significantly reduce the
infrastructure of the Company's mortgage lending activities. These
reductions in expenses are net of the cost incurred to staff and operate
three additional retail banking offices opened during 1995, and the start
up costs associated with the Company's "supermarket banking" branch opened
during June 1996. During the nine-month period ended September 30, 1996,
the Company recorded a $150,000 provision for loan losses, and a provision
for possible losses on foreclosed real estate of $484,000 as compared to a
$75,000 provision for each such loss during the 1995 period. See "Non-
performing Assets" for more information concerning the loans receivable and
foreclosed real estate allowances.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Office of Thrift Supervision ("OTS") has established minimum
liquidity requirements for savings associations. These regulations provide,
in part, that members of the Federal Home Loan Bank System maintain daily
average balances of liquid assets equal to a certain percentage of net
withdrawable deposits and current borrowings (payable in one year or less).
Current regulations require a liquidity level of at least 5%. The Bank's
liquidity ratio at September 30, 1996 was 6.61% and exceeded 5% at each
measurement date during the first nine months of 1996.
REGULATORY CAPITAL STANDARDS
The OTS has established the regulatory capital requirements for savings
institutions. The following table sets forth the capital position of the
Bank in accordance with the requirements.
<TABLE>
Capital Amount as of
Measure September 30, 1996 Requirement Excess
- -------- ------------------ ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Tangible $40,206,000 6.6% $ 9,120,000 1.5% $31,086,000 5.1%
Core 40,206,000 6.6% 18,241,000 3.0% 21,965,000 3.6%
Risk-based 44,204,000 12.3% 28,635,000 8.0% 15,569,000 4.3%
</TABLE>
On August 31, 1993, the OTS issued a final rule effective January 1,
1994, which sets forth the methodology for calculating an interest rate risk
("IRR") component which is added to the risk-based capital requirements for
OTS regulated thrift institutions. Under the final rule, savings
associations with a greater than "normal" level of interest rate exposure
will be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirement. Specifically, interest
rate exposure will be measured as the decline in net portfolio value due to
a 200 basis point change in market interest rates. The IRR component to be
deducted from total capital is equal to one-half the difference between an
institution's measured exposure and the "normal" level of exposure which is
defined as two percent of the estimated economic value of its assets.
The final rule establishes a three quarter "lag" between the reporting
date that is used to calculate the IRR component and the effective date of
each quarter's IRR component. Under the final rule, the Director of the OTS
may waive or defer an institution's IRR component, but not decrease it
unless it is as the result of an appeal. The OTS intends to make an appeals
process available to institutions under certain circumstances.
Implementation of giving effect to the IRR component has been delayed until
OTS finalizes the appeals process and establishes an effective
implementation date.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Inapplicable
ITEM 2 - CHANGES IN SECURITIES
Inapplicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Inapplicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
Date: Nov. 14, 1996 \s\ John A. B. Davies, Jr.
------------------------- --------------------------
John A. B. Davies, Jr.
President/Chief Executive Officer
Date: Nov. 14, 1996 \s\ Dennis R. Stewart
------------------------- --------------------------
Dennis R. Stewart
Executive Vice President/
Chief Financial Officer
