SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------------------
FORM 10-K
(Mark One)
[root]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
Transition Period: To
------------------- ---------------------
Commission File Number: 0-19398
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Virginia 54-1534067
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2101 Parks Avenue, Virginia Beach, Virginia 23451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (757) 428-9331
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate value of the Common Stock held by nonaffiliates of the
registrant as of March 13, 1998, computed by reference to the closing price of
such stock on the Nasdaq Stock Market on that date, was $74,467,076. Solely for
purposes of this calculation, the term "affiliate" is deemed to include all
executive officers and directors of the registrant. As of March 13, 1998 there
were issued and outstanding 4,981,874 shares of the Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Parts II and IV)
2. Portions of Proxy Statement for 1998 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
Item 1. Business
General.
The Company. Virginia Beach Federal Financial Corporation (the Company)
was incorporated under the laws of the Commonwealth of Virginia in February
1989, for the purpose of becoming a savings and loan holding company and owning
all of the issued and outstanding Common Stock of First Coastal Bank (the Bank),
which was chartered as Virginia Beach Federal Savings Bank at that time. On June
28, 1991, the Company acquired all of the outstanding Common Stock of the Bank
pursuant to the Amended and Restated Agreement and Plan of Reorganization of the
Bank in connection with the reorganization of the Bank into a savings and loan
holding company structure (the Reorganization). The Reorganization had
originally been approved by the stockholders of the Bank in 1989. Because the
Reorganization was not consummated within one year from the date of such
approval, however, the Reorganization was reauthorized at the April 24, 1991,
annual meeting of the Bank's stockholders.
Prior to the Reorganization, the Company had no assets or liabilities
and engaged in no significant business activities. Subsequent to the
Reorganization, the Company has engaged in no significant activities other than
the ownership of the Common Stock of the Bank and operating as a savings and
loan holding company for the Bank. Accordingly, the information presented
herein, including financial statements and related data, relates primarily to
the Bank and its subsidiaries. References throughout this Report to the Company
include the Bank and its subsidiaries, unless the context otherwise requires.
The Company's principal executive offices are located at 2101 Parks
Avenue, Virginia Beach, Virginia 23451, and its telephone number at that address
is (757) 428-9331.
The Bank. First Coastal Bank was originally chartered in 1935 as a
federal mutual savings and loan association. Since that time, it has been a
member of the Federal Home Loan Bank (FHLB) System, and its deposits have been
federally insured up to applicable limits. On August 29, 1980, the Bank
converted from mutual to stock form. In November 1996, the Bank changed its name
from Virginia Beach Federal Savings Bank to First Coastal Bank. The principal
executive offices of the Bank are located at 2101 Parks Avenue, Virginia Beach,
Virginia 23451 and its telephone number at that address is (757) 428-9331.
The Bank's primary businesses are those of lending to real estate
developers and owners, small businesses and consumers, and accepting deposits
from small businesses and the general public through its network of 14 branch
locations. The Bank conducts its business in the Hampton Roads area of
southeastern Virginia and its markets comprise the communities of Virginia
Beach, Chesapeake, Norfolk, Hampton, Newport News, York County and Williamsburg.
Lending Activities
General. The Bank originates loans directly and through its mortgage
banking subsidiary, First Coastal Mortgage Corp (First Coastal Mortgage), which
was known as Beach Fed Mortgage Corp until November 1996.
The types and amounts of loans which may be made by First Coastal Bank
are prescribed by federal law. The Bank is authorized to make loans secured by
first liens on residential property and by junior liens on residential real
estate. Subject to certain limits, the Bank also engages in secured and
unsecured consumer, commercial, corporate and business lending activities.
1
<PAGE>
Loans Receivable Held for Investment. Set forth below is information
concerning loans receivable held for investment at the specified periods. This
information does not include mortgage-backed securities. Other than as disclosed
below, there were no concentrations of loans at December 31, 1997, which
exceeded 10% of total loans.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
======================================================================================
Type of Loan (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Conventional real
estate loans
Loans on existing
property (1) $373,884 82.27% $398,219 89.48% $395,917 91.32% $413,920 97.52% $370,637 95.73%
Interim construction
loans 41,045 9.03 25,374 5.70 26,824 6.18 8,795 2.07 10,408 2.68
Commercial 24,789 5.45 10,731 2.41 4,343 1.00 1,059 0.25 1,826 0.47
Consumer loans
Deposit account
loans 847 0.19 725 0.16 1,030 0.24 878 0.21 1,484 0.38
Home improvement and
consumer loans 14,489 3.19 12,698 2.85 8,864 2.04 4,966 1.17 7,790 2.02
Equity line of credit 5,102 1.12 3,232 0.73 2,572 0.59 1,726 0.41 1,424 0.37
Less
Discounts and other 1,382 0.30 1,534 0.34 2,020 0.47 2,581 0.61 2,225 0.57
Loan loss reserve 4,297 0.95 4,390 0.99 3,968 0.90 4,328 1.02 4,173 1.08
------------------------------------------------------------------------------------
Total $454,477 100.00 $445,055 100.00% $433,562 100.00% $424,435 100.00% $387,171 100.00%
====================================================================================
Type of Security
Residential real estate
1-to-4 family $315,477 69.41% $322,032 72.36% $332,358 76.66% $336,802 79.35% $297,833 76.92%
Other dwelling units 17,491 3.85 19,940 4.48 5,797 1.33 13,116 3.09 10,010 2.59
Commercial or industrial
real estate 87,063 19.16 84,783 19.05 87,158 20.10 74,523 17.56 74,626 19.28
Commercial 24,789 5.45 10,731 2.41 4,343 1.00 1,059 0.25 1,826 0.47
Deposits 847 0.19 725 0.16 1,030 0.24 878 0.21 1,484 0.38
Other 14,489 3.19 12,768 2.87 8,864 2.04 4,966 1.17 7,790 2.01
Less
Discounts and other 1,382 0.30 1,534 0.34 2,020 0.47 2,581 0.61 2,225 0.57
Loan loss reserve 4,297 0.95 4,390 0.99 3,968 0.90 4,328 1.02 4,173 1.08
------------------------------------------------------------------------------------
Total $454,477 100.00 $445,055 100.00% $433,562 100.00% $424,435 100.00% $387,171 100.00%
====================================================================================
</TABLE>
(1) Includes construction loans converted to permanent loans.
2
<PAGE>
Residential Mortgages. The Bank offers various types of residential
mortgage loans in addition to traditional long-term, fixed-rate loans. Such
loans include 30 and 15-year amortizing mortgage loans with fixed rates of
interest, fixed-rate mortgage loans with terms of 30 years but subject to call
after five, seven or ten years at the option of the Bank and several types of
adjustable-rate mortgage loans.
Adjustable-rate mortgage loans vary with respect to maturity, interest
rate adjustment periods and basis for adjustment. These loans generally have a
fixed rate for an initial one or three year period and then have interest rate
adjustments based on the yield on United States Treasury securities, adjusted to
a constant one-year maturity. The adjustment rates have been generally 2.75% to
3.50% above the index. The loans have annual and lifetime limits on rate
increases of 1 to 2 and 3 to 6 percentage points, respectively.
Commercial Real Estate, Construction, Acquisition and Development Loans.
The Bank's permanent loans secured by commercial real estate have customarily
been 15-year to 20-year amortizing loans with principal and interest due
monthly. These loans typically provide for an interest rate reset or call after
five, seven or ten years at the option of the Bank. Currently, the Bank is
offering adjustable rate commercial real estate loans with interest rates that
typically adjust every one, three or five years based on the one-year,
three-year or five-year United States Treasury rate. The initial interest rate
is a market rate. The Bank's policies permit loans to be made for up to 75% of
the appraised value of the commercial real estate securing the loans. The Bank's
commercial real estate loans are secured primarily by office buildings, strip
shopping centers, motels, warehouses and apartment buildings. As of December 31,
1997, the Bank's commercial real estate loans ranged in size up to $2.3 million.
The Bank makes construction loans for residential properties to
individuals and builders. Loans to individuals are made for six to nine months
at a fixed interest rate of up to two percentage points above the Bank's prime
rate at the time of the loan. Loans to builders are made up to two percentage
points above the Bank's prime rate, adjusted monthly. Residential construction
loans are made at up to 80% loan-to-value ratios. Construction loans on
commercial real estate are made generally for a term of one year at rates
between the Bank's prime rate and up to two percentage points above the Bank's
prime rate, adjusted monthly. Such loans are made with loan-to-value ratios of
up to 75%.
The Bank makes land acquisition and development loans on properties
intended for future development. The Bank lends up to 75% of the appraised value
of the property. Such loans are made for specified periods on an interest only
basis. These periods may be extended, subject to negotiation and the payment of
an extension fee. The Bank's current policy is to make such loans generally at
one to two percentage points above the Bank's prevailing prime rate at the time
the loan is made with interest rates adjusted monthly thereafter.
Commercial real estate and commercial land acquisition and construction
lending are generally considered to involve a higher level of credit risk than
one-to four-family residential lending due to the concentration of principal in
a limited number of loans and borrowers and the potentially adverse effects of
general economic conditions on real estate developers and managers. The Bank's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's sell-out value upon completion of the
project, the estimated cost of the project and the time to complete and/or sell
the project. If the estimated cost of construction or development proves to be
inaccurate, the Bank may be compelled to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project the value of which may appear to be
insufficient to assure full repayment. When loan payments become due, borrowers
may experience cash flow from the project which is not adequate to service total
debt. This cash flow shortage may result in the failure to make loan payments.
In such cases, the Bank may be compelled to modify the terms of the loan. In
addition, the nature of these loans is such that they are generally less
predictable and more difficult to evaluate and monitor.
3
<PAGE>
Commercial Loans. The Bank makes fixed and variable rate commercial
loans to individuals, corporations and small businesses. Fixed rate loans bear
interest rates generally between 175 and 350 basis points above the like term
United States Treasury securities and have maturities of up to 10 years.
Variable rate loans are originated at market rates with adjustments based on the
Bank's prime rate plus 100 to 250 basis points. These loans are generally
secured by business property such as fixed assets, accounts receivable and
inventory.
Consumer Loans. The Bank makes available a variety of direct consumer
loans. The Bank originates property improvement loans through contacts with
contractors and through its branches. It also makes loans secured by deposits.
The Bank also offers home equity lines of credit, automobile loans, boat loans
and unsecured personal loans. Such loans are made at market rates and terms.
Loan Maturity and Repricing Information. The following table sets forth
certain information at December 31, 1997, regarding the dollar amount of loans
maturing or repricing in the Bank's loan and mortgage-backed securities
portfolios based on their maturity or repricing date. Demand loans, loans having
no stated schedule of repayments and no stated maturity, overdrafts and
delinquent loans maturing prior to December 31, 1998, are reported as due in one
year or less. At December 31, 1997, scheduled payments of principal, and
expected prepayments of principal which are based on consensus expected
prepayment speeds obtained from dealers or other sources which management
believes to be reliable, are shown in the period during which such principal
reduction is expected to occur.
Due 1/1/98 Due 1/1/99 - Due After
- 12/31/98 12/31/2002 12/31/2002
=========================================
(In Thousands)
Held or Available-for-sale
Real estate mortgage loans ... $ 304 $ 180 $ 7,986
Mortgage-backed securities ... 43,359 25,849 15,026
--------------------------------------
43,663 26,029 23,012
--------------------------------------
Held-for-investment
Real estate mortgage loans ... 186,966 125,333 53,895
Real estate construction loans 48,630 -- --
Mortgage-backed securities ... 3,019 9,352 11,771
Commercial ................... 13,618 10,787 384
Consumer loans ............... 8,073 8,354 4,011
--------------------------------------
260,306 153,826 70,061
--------------------------------------
Total ............................ $303,969 $179,855 $ 93,073
======================================
4
<PAGE>
The table below sets forth the dollar amount of all loans and
mortgage-backed securities at December 31, 1997, that mature or reprice after
December 31, 1998 which have predetermined interest rates and have floating or
adjustable interest rates.
Predetermined Floating or
Rates Adjustable Rate
==================================
(In Thousands)
Held or Available-for-sale
Real estate mortgage loans $ 7,986 $ 180
Mortgage-backed securities 40,875 --
---------------------------
48,861 180
---------------------------
Held-for-investment
Real estate mortgage loans 126,263 52,965
Mortgage-backed securities 21,123 --
Commercial ............... 11,171 --
Consumer loans ........... 12,365 --
---------------------------
170,922 52,965
---------------------------
Total ..................... $219,783 $ 53,145
===========================
Loan Commitments. The Bank issues commitments to originate loans to
prospective borrowers. At December 31, 1997, the Bank had committed to originate
$40,314,000 in loans, not including loans in process, the majority of which are
secured by property located in its local market area. Making relatively
long-term commitments involves the risk that the interest rate to be received
will be below the market rate at the time the loan is originated.
The Bank's loan commitments also include $15,081,000 in 1-4 family
residential loans that are intended to be sold into the secondary market. The
period of time between issuance of a loan commitment and closing and sale of the
loan generally ranges from 60 to 120 days. In the event that interest rates rise
between the time of a loan commitment and closing and the sale of the loan, the
Bank may be unable to sell the loans without incurring a loss. The Bank attempts
to protect itself from adverse changes in interest rates through a variety of
means including the purchase of best efforts forward delivery commitments,
whereby the Bank commits to sell a loan at the time the borrower commits to an
interest rate with the intent that interest rate risk on the loan has been
assumed by the buyer.
The Bank also purchases mandatory forward delivery commitments and sells
mortgage-backed securities in order to attempt to insulate itself from adverse
interest rate movements. These agreements are fundamentally different from
optional forward delivery commitments due to the fact that the Bank will incur a
loss on the settlement of these agreements if interest rates have fallen and the
Bank fails to deliver the loan or mortgage-backed security committed. See Note
17 of Notes to Consolidated Financial Statements in the 1997 Annual Report to
Stockholders which is attached hereto as Exhibit 13 and incorporated herein by
reference.
Collection Procedures and Loan Quality. Collection procedures on
delinquent loans serviced by the Bank provide that when a loan payment is 30
days overdue, the borrower will be contacted by mail and payment requested. If
the delinquency continues, subsequent efforts are made to contact the delinquent
borrower. In certain instances after considering the ability of the borrower to
repay, the nature of the property and the proposed interest rate, the Bank may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his or her financial affairs. If the loan continues in a
delinquent status for 90 days, the Bank generally will initiate foreclosure
proceedings. Any property acquired by the Bank as a result of foreclosure or by
deed in lieu of foreclosure is listed for sale
5
<PAGE>
to attempt to recover all or part of the Bank's investment and is classified as
real estate owned until such time as it is sold. When such property is acquired,
it is recorded on the books of the Bank at the lower of the unpaid principal
balance of the related loan or its fair value less its estimated costs of sale.
Any further write-down of the property is charged to the allowance for losses on
foreclosed real estate. With respect to loans subserviced for the Bank, the
subservicer has been instructed to follow the same procedures as the Bank and is
contacted by the Bank when any loan is 60 days delinquent in order to determine
the status of action being taken.
Impaired Loans and Non-performing Assets. The Company has adopted
Statement of Financial Accounting Standards No. 114 (FAS 114), "Accounting by
Creditors for Impairment of a Loan," and Statement of Financial Accounting
Standards No. 118 (FAS 118), "Accounting by Creditors for Impairment of a Loan
Income Recognition and Disclosures." Management periodically reviews its entire
loan portfolio, particularly each of its classified assets, which includes all
non-performing and loans contractually delinquent 90 days or more, to determine
whether such loans are impaired in accordance with FAS 114. Each of the
Company's impaired loans has been measured based on the value of the loan's
collateral. An allowance for possible loan losses has been established for any
shortfall between the Company's investment in impaired loans and the impaired
loans' collateral values.
6
<PAGE>
The following table sets forth information with respect to the Bank's
non-performing assets at the periods indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1997 1996 1995 1994 1993
==============================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis (1):
Commercial real estate ................................. $ 90 $ 95 $ 99 $2,076 $3,817
Consumer ............................................... -- -- 125 250 --
----------------------------------------------
90 95 224 2,326 3,817
----------------------------------------------
Loans which are contractually past due 90 days or more (2):
Real Estate:
Residential ........................................... 4,397 4,009 3,553 3,507 4,460
Commercial ............................................ 1,693 -- -- 194 267
Land ................................................... 20 -- -- -- --
Consumer ............................................... 47 22 18 77 --
----------------------------------------------
6,157 4,031 3,571 3,778 4,727
----------------------------------------------
Total of non-accrual and
90-days past due loans ................................ $6,247 $4,126 $3,795 $6,104 $8,544
==============================================
Non-accrual and 90-days past
due loans as a percentage
of total loans receivable, net .......................... 1.37% 0.93% 0.88% 1.44% 2.21%
==============================================
Other non-performing assets (3) ........................... $2,382 $2,047 $5,767 $6,828 $9,798
==============================================
</TABLE>
- -------------------------
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on a
non-accrual loan are either applied to the outstanding principal balance or
the allowance for delinquent interest, depending on an assessment of the
collectibility of the loan.
(2) The Bank fully reserves against the interest on all accruing loans 90 days
past due.
(3) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession. This property is initially carried at
the lower of its estimated fair value less cost of disposition or the
carrying value of the related loan at the time of foreclosure.
See Note 5 of Notes to Consolidated Financial Statements in the 1997
Annual Report to Stockholders which is attached hereto as Exhibit 13 and
incorporated herein by reference for information regarding interest income on
non-accrual loans.
As of December 31, 1997, there are no loans not included in the table
above, other than as disclosed elsewhere herein, where known information about
possible credit problems of the borrower caused management to have doubts as to
the ability of the borrower to comply with the present loan repayment terms. See
" -- Impaired Loans" and -- "Regulatory Loan Classification."
7
<PAGE>
Impaired Loans. At December 31, 1997 and 1996, nonperforming loans
included $1,783,000 and $113,000, respectively, of loans which were considered
impaired. The allowance for possible loan losses as of December 31, 1997 and
1996 included $305,000 and $70,000, respectively, related to loans considered to
be impaired.
Other non-performing assets comprise properties acquired by the Bank
through foreclosure or repossession (collectively REO). An analysis of the
activity in REO for the periods shown is set forth below.
Year Ended December 31,
------------------------------
1997 1996 1995
==============================
(In Thousands)
Beginning balance . $ 2,047 $ 5,767 $ 6,828
Foreclosures ...... 2,244 1,316 3,649
Other additions (1) 136 62 1,325
Provision ......... (100) (484) (200)
Dispositions, net . (1,945) (4,614) (5,835)
------------------------------
Ending balance .... $ 2,382 $ 2,047 $ 5,767
==============================
- ---------------------
(1) Consists of improvements and advances in an effort to make the projects
more saleable.
Real Estate Owned (REO). At December 31, 1997 the REO properties
comprised Condominium Campsites, described below, with a carrying value of
$1,487,000 and eleven additional residential properties with an aggregate
carrying value of $895,000 and no individual value greater than $150,000.
Condominium Campsites, Virginia Beach, Virginia. In 1989, the Bank
originated a loan for the purchase of a 254 campsite campground located on over
62 acres of land in the Sandbridge section of Virginia Beach, Virginia. The
campsites were then divided into condominium units by the borrower and marketed
on an individual basis. Prior to the foreclosure by the Bank in 1991, 53 of 254
campsites had been sold. During the third quarter of 1993, the Bank entered into
an agreement with a company which specializes in the development and management
of recreational vehicle parks to develop and market the Bank's interest in this
property. Development of the property was completed during 1996 and major
improvements to the amenities were completed during 1997. A total of 101 lots
have been sold. The Bank anticipates continued marketing of the sites for
several years. No assurance can be given, however, that the property can be sold
for an amount equal to or greater than the carrying value.
Regulatory Loan Classification. Federal regulations require savings
associations to review and classify their assets on a regular basis. In
addition, in connection with examinations of savings associations, regulatory
examiners have authority to identify problem assets and, if appropriate,
classify them. The regulation provides for three asset classification categories
(i.e., substandard, doubtful and loss). The regulations also provide for a
special mention category, described as assets which do not currently expose a
savings association to a sufficient degree of risk to warrant classification but
do possess credit deficiencies or potential weaknesses deserving management's
close attention. Loans classified as substandard or doubtful require the savings
association to establish a specific valuation allowance or a general valuation
allowance for loan losses. If an asset or portion thereof is classified loss,
the savings association must either establish a specific valuation allowance in
the amount of 100% of the portion of the asset classified loss, or charge off
such amount. General valuation allowances established to cover possible losses
related to loans classified substandard or doubtful may be included in
determining a
8
<PAGE>
savings association's risk-based capital, subject to certain limitations, while
specific valuation allowances do not qualify as risk-based capital. Examiners
may disagree with the savings association's classifications and amounts
reserved. At December 31, 1997, the Bank had $1,844,000 in assets classified as
special mention, $10,052,000 classified as substandard, $63,000 classified as
doubtful and $331,000 classified as loss. Substandard assets include non-accrual
and impaired loans, foreclosed real estate, and certain performing loans which
management has classified as substandard.
Allowances for Possible Losses on Loans and Real Estate Owned.
Management of the Bank assesses the adequacy of the allowances for possible
losses on loans and foreclosed real estate on a quarterly basis, and additions
to the allowances for losses on loans and foreclosed real estate are made when
deemed necessary. The Bank's Board of Directors reviews the reserves for loan
and foreclosed real estate losses quarterly. An allowance for loan losses is
provided when collectibility of specific real estate loans is in doubt and the
value of the security property has declined below the outstanding principal of
the related loan. The Bank also provides allowances for accrued interest on
delinquent loans and for estimated losses against the carrying value of
foreclosed real estate when management determines that collectibility of the
interest is in doubt or a decline in the fair value of the foreclosed real
estate has occurred. Additions to the allowances for losses on loans and
foreclosed real estate are charged to earnings through a provision for loan
losses or a provision for losses on foreclosed real estate. The allowances are
reduced when a loss actually is incurred or such allowance is charged-off in
accordance with the accounting principles set forth in FAS 114. See "Impaired
Loans and Non-performing Assets" herein. In certain instances, reserves may also
be reduced when the assumptions under which the reserves were established
indicate that all or a portion of the reserve is no longer necessary.
During the fiscal year ended December 31, 1997, the Bank added $225,000
and $100,000, respectively, to its allowances for possible loan and foreclosed
real estate losses. As of December 31, 1997, the Bank had a total of $4,632,000
in allowances for possible loan and foreclosed real estate losses. Approximately
$635,000 of the loss reserves are general unallocated loan loss reserves. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 5 and 6 of Notes to Consolidated Financial Statements in
the 1997 Annual Report to Stockholders which is attached hereto as Exhibit 13
and incorporated herein by reference.
9
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
========================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ........ $ 4,390 $ 3,968 $ 4,328 $ 4,173 $ 4,651
Net loans (charged-off) recovered:
Real estate-mortgage .............. (226) 272 (535) (120) (1,188)
Real estate- construction ......... -- -- -- -- 110
Consumer .......................... (92) -- -- -- --
------------------------------------------------------
Net (charge-offs) recoveries ........ (318) 272 (535) (120) (1,078)
Provision for loan losses ........... 225 150 175 275 600
------------------------------------------------------
Balance at end of year .............. $ 4,297 $ 4,390 $ 3,968 $ 4,328 $ 4,173
=======================================================
Rates of net (charge-offs) recoveries
during the year to average loans
outstanding during the year ....... (0.07%) 0.06% (0.12%) (0.03%) (0.26%)
=======================================================
</TABLE>
Beginning in 1997, the Bank's evaluation methodologies were performed
on a loan category basis. Within each loan type, allowances for possible loan
losses are developed on a pooled basis for the lowest risk loans based on
historical and expected loss experience for those pools. In addition, reserves
for all classified and non-performing loans are developed on a case-by-case
basis, or on a pooled basis for loans with common characteristics and balances
less than $400,000 individually, with allowances generally in the 0% to 5% range
for special mention assets, 5% to 25% for substandard assets, 40% to 60% for
doubtful assets, and 100% for loss assets. These percentages are increased or
decreased based on management's review of the borrower's overall financial
condition, type of collateral, loan payment history, economic conditions and
trends, guarantors, historical loss experience on similar loans and any other
relevant information.
Prior to 1997, management's evaluation methodologies did not include the
allocation of general reserves to specific loan categories. Accordingly, the
amounts assigned to loan categories in the table below for periods prior to 1997
represent only specific allowances applicable to doubtful or loss assets which
were determined on a case-by-case basis.
The unallocated portion of the allowance for loan losses is management's
estimation of the losses in excess of those estimated by using the methodology
described above, that may be realized over the life of the loans included in its
portfolio at December 31, 1997. Management is unable to estimate the timing or
the amount of related future charge-offs.
10
<PAGE>
The following table sets forth the breakdown for the allowance for
possible loan losses by loan category at the periods indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
==============================================================================================================
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category ategory category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
==============================================================================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unallocated....... $ 635 (.14%) $ 4,390 (0.98%) $ 3,865 (0.92%) $ 3,652 (0.86)% $ 3,923 (1.01)%
Real estate
mortgage:
Residential..... 1,108 61.98 -- 70.42 -- 74.04 -- 80.90 -- 76.24
Commercial...... 1,570 14.64 -- 18.42 -- 16.69 426 16.39 250 19.23
Real estate-
Construction... 388 10.58 -- 6.03 -- 6.32 -- 2.01 -- 2.68
Land........... 119 3.24 -- -- -- -- -- -- -- --
Commercial........ 371 5.23 -- 2.40 -- 0.99 --- 0.25 --- 0.47
Consumer.......... 106 4.47 -- 3.71 103 2.86 250 1.31 --- 2.39
-----------------------------------------------------------------------------------------------------------
Total Allowances
for Loan
Losses......... $ 4,297 100.00% $ 4,390 100.00% $ 3,968 100.00% $ 4,328 100.00% $ 4,173 100.00%
===========================================================================================================
</TABLE>
Investment Activities. Federal savings banks have the authority to
invest in certain types of securities and other investments subject to various
restrictions largely related to limitations on the type of investments as a
percentage of total assets. The Bank's investment activities are within such
restrictions.
The Bank's investment securities, excluding mortgage-backed and related
securities, are described in Note 3 to the Consolidated Financial Statements in
the 1997 Annual Report to Stockholders which is attached hereto as Exhibit 13
and incorporated herein by reference. Debt securities of certain federal
agencies, securities issued by the United States Treasury and federal funds sold
amounting to $8,050,000 at December 31, 1997 are retained to satisfy the Bank's
liquidity requirements. For more information regarding liquidity requirements
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations." See "Regulation" for further information regarding the Bank's
regulatory capital requirements.
11
<PAGE>
The carrying value of the Bank's investment securities portfolio at
December 31, 1997, by maturity is as follows:
Weighted
Amortized Estimated Average
Remaining Maturity Cost Fair Value Rate
===============================================================================
(Dollars in Thousands)
Within one year
U. S. Treasuries ........... $ 2,000 $ 2,000 5.13%
Federal Agencies ........... 5,018 4,796 4.05
----------------------------------
7,018 6,796 4.35
----------------------------------
After one year but within 5 years
U. S. Treasuries ........... 2,987 2,990 5.29
Federal Agencies ........... 2,000 2,003 6.99
----------------------------------
4,987 4,993 5.97
----------------------------------
No stated maturity
Federal Home Loan Bank stock 7,404 7,404 7.25
----------------------------------
$19,409 $19,193 5.87%
==================================
The Bank also invests in mortgage-backed and related securities, subject
to regulations affecting such activities. Federal associations such as the Bank
have no limitations on the purchase of mortgage-backed and related securities if
such securities are issued by GNMA, FNMA or FHLMC or qualify under section
3(a)(41) of the Securities Exchange Act of 1934, as amended, commonly referred
to as Secondary Mortgage Market Enhancement Act or "SMMEA" securities. See Note
4 of the Notes to Consolidated Financial Statements in the 1997 Annual Report to
Stockholders which is attached hereto as Exhibit 13 and incorporated herein by
reference for further information regarding mortgage-backed and related
securities.
It is the Bank's practice to purchase mortgage-backed and related
securities to supplement its loan portfolio and to make efficient use of the
Bank's capital. The Bank may purchase securities for a short period of time
under agreements to resell those same securities at a given date. The Bank's
risk-based capital requirements assign the Bank's mortgage-backed and related
securities to a 20% risk-weighted category.
At December 31, 1997, 1996 and 1995, the Bank had $110,939,000,
$106,621,000 and $137,743,000, respectively, in mortgage-backed and related
securities, at amortized cost.
High Risk Securities. The Company periodically measures its securities
individually to determine if they are "high risk" in accordance with OTS
regulations. At December 31, 1997 the Company had two mortgage-backed securities
in the amount of $3,974,000 which was deemed high risk in accordance with these
regulations.
Source of Funds
Deposits. The primary source of funds for the Bank's lending and other
investment activities has been deposits solicited from the general public. The
Bank solicits retail deposits in its local market area and offers remaining
customers outside its local market, with maturing deposits, renewal rates no
higher than those offered to customers in the Bank's local markets. Currently,
the Bank uses alternate sources,
12
<PAGE>
such as advances from the FHLB of Atlanta and brokered deposits, for its long
term funds if retail deposit rates are judged by management to be unattractive.
Deposit activity is set forth as follows:
<TABLE>
<CAPTION>
Retail Deposits Brokered
Local Area Other Deposits Total
=================================================
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Beginning balance .......... $ 297,583 $ 39,533 $ 86,273 $ 423,389
Deposits purchased ......... -- -- 20,000 20,000
Net cash inflow (outflow) .. 13,386 (9,886) (53,365) (49,865)
Interest credited .......... 10,439 3,480 -- 13,919
-------------------------------------------------
Total ............. $ 321,408 $ 33,127 $ 52,908 $ 407,443
=================================================
Year Ended December 31, 1996
Beginning balance .......... $ 289,162 $ 44,587 $ 159,222 $ 492,971
Deposits purchased ......... -- -- 80 80
Net cash inflow (outflow) .. 494 (7,617) (73,029) (80,152)
Interest credited .......... 7,927 2,563 -- 10,490
-------------------------------------------------
Total ............. $ 297,583 $ 39,533 $ 86,273 $ 423,389
=================================================
Year Ended December 31, 1995
Beginning balance .......... $ 268,488 $ 59,541 $ 177,041 $ 505,070
Deposits purchased ......... -- -- 71,350 71,350
Net cash inflow (outflow) .. 10,807 (18,336) (89,169) (96,698)
Interest credited .......... 9,867 3,382 -- 13,249
-------------------------------------------------
Total ............. $ 289,162 $ 44,587 $ 159,222 $ 492,971
=================================================
</TABLE>
A summary of time deposits $100,000 or greater by maturity follows (in
thousands):
Remaining Maturity Balance
===================================================
Within three months ...... $ 6,500
Three months to six months 6,147
Six months to one year ... 9,432
One year to two years .... 4,535
Two to three years ....... 1,537
Over three years ......... 1,738
-------
Total .................... $29,889
=======
13
<PAGE>
Borrowings. As a member of the FHLB System, the Bank may obtain
additional funds through loans, which are called advances, from the FHLB of
Atlanta. Advances are secured by a blanket floating lien on qualifying 1-4
family first mortgage loans and certain mortgage-backed and related securities.
At December 31, 1997, fixed-rate advances totaled $96,084,000 with a weighted
average maturity of 15 months, and had a weighted average cost of 6.07%.
Variable rate advances totaled $47,000,000 and had a weighted average maturity
of 9 months and a weighted average cost of 5.74%. The interest rates on the
variable rate advances are based on either 1-month LIBOR, 3-month LIBOR or the
Federal funds rate and adjust daily, monthly or quarterly.
The Bank periodically uses repurchase agreements to assist in meeting
short-term cash-flow needs. Repurchase agreements involve a borrowing pursuant
to which the lender agrees to return to the Bank the same securities given as
collateral. The Bank enters into repurchase agreements for a limited term,
usually 30, 60 or 90 days, or due on demand. The repurchase agreements are
repaid by the Bank when excess cash is available. At December 31, 1997, the Bank
had $17,033,000 repurchase agreements outstanding, all of which matured within
90 days. See Note 11 of Notes to Consolidated Financial Statements in the 1997
Annual Report to Stockholders which is attached hereto as Exhibit 13 and
incorporated herein by reference.
Repurchase agreements have certain risks. An increase in market
interest rates could decrease the market value of the securities used by the
Bank as collateral in these transactions, and thus the amount of funds that the
Bank could obtain through such transactions would decrease if additional
collateral is not available. In addition, if the Bank sells securities pursuant
to a repurchase agreement to an entity which subsequently becomes insolvent, the
Bank may experience difficulty obtaining the return of such securities. The
borrowing represented by a repurchase agreement is generally over-
collateralized, i.e., the market value of the securities involved exceeds the
price at which the Bank agrees to sell and repurchase the securities. Thus, if
the Bank has difficulty obtaining the return of the securities, it could lose
the amount of such difference. In order to seek to reduce such risks, the Bank
transacts all of its repurchase agreement borrowings with primary dealers or
regional banks, the financial conditions of which it reviews periodically.
Subsidiary Activities
First Coastal Bank is permitted to invest an amount equal to 2% of its
assets in service corporations. An additional investment of 1% of assets may be
made where such investment is primarily for community, inner-city or community
development purposes. In addition, the Bank can designate a subsidiary as an
operating subsidiary if it engages only in activities that would be permissible
for the Bank to engage in. The Bank has four first tier subsidiaries, First
Coastal Mortgage, VBF Financial Services Corp. (VBFFSC), Princess Anne Service
Corporation (PASC), and Eighth Princess Anne Properties, Inc.
(8thPA).
First Coastal Mortgage is a wholly owned operating subsidiary of the
Bank, and was formed in 1987 for the purpose of engaging in mortgage banking
activities. First Coastal Mortgage solicits loan applicants for a variety of
conventional and government insured mortgage loans secured by residential real
estate. During 1992 through 1994, First Coastal had expended its operations to
include loan production offices through central and northern Virginia and into
Maryland. Late in 1995 the Company sold five of its loan production branches and
presently has three branches operating in the Hampton Roads market contiguous to
the Company's retail banking operations.
Princess Anne Service Corporation and its subsidiaries (collectively
PASC) are service corporations and were formed throughout the 1980s to invest in
a variety of real estate development
14
<PAGE>
projects, and to hold title to or operate certain real estate properties of the
Bank which had been acquired through foreclosure. PASC is a "non-includable
subsidiary" for purpose of compliance with the Bank's regulatory capital
requirements. See "Regulation -- Regulatory Capital Requirements." At December
31, 1997, the Bank had $34,100 of investment in and advances to PASC.
The Bank is presently winding down the activities of PASC. At December
31, 1997, PASC's assets consist of a partnership investment holding one parcel
of undeveloped commercial real estate. At the present time, the Bank does not
intend to make additional investments in PASC and expects that its present
investment will be recovered over the next several years.
Eighth Princess Anne Properties, Inc. (8thPA) was acquired from PASC
during 1994 in order to hold a certain piece of foreclosed real estate located
in Virginia Beach, VA. The foreclosed real estate held by 8thPA was sold during
1995. At December 31, 1997, the Bank had $11,600 of net advances due from 8thPA.
VBF Financial Services Corp. is a wholly owned operating subsidiary of
the Bank and was formed in April 1992 to sell fixed-rate annuities, a range of
mutual funds and tax-advantaged investments on an agency basis for a commission.
At December 31, 1997, the Bank had $195,000 of investment in and advances to VBF
Financial Services Corp.
Competition
First Coastal Bank faces strong competition in the attraction of
deposits, its primary source of lendable funds, and in the origination of real
estate loans. The Bank competes for deposits by offering a wide variety of
accounts, competitive rates and numerous customer services, and competes for
loans principally through the interest rates and loan fees it charges and the
availability of funds to make loan commitments. The Bank's most direct
competition for savings deposits has historically come from commercial banks,
other thrift institutions and credit unions in the Hampton Roads area. The
Bank's competition for real estate loans comes principally from commercial
banks, other thrift institutions, mortgage banking companies, life insurance
companies and other institutional lenders.
Personnel
As of December 31, 1997, the Company had 211 full-time employees and 15
part-time employees. The employees are not represented by a collective
bargaining agreement. The Company believes relationships with its employees are
satisfactory.
Regulation
General. As a federally chartered, Savings Association Insurance Fund
(SAIF) insured savings association, the Bank is subject to extensive regulation
by the Office of Thrift Supervision (the OTS) and the Federal Deposit Insurance
Corporation (the FDIC). Lending activities and other investments must comply
with various federal statutory and regulatory requirements. The Bank is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
15
<PAGE>
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors
of the Bank. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulations, whether by the OTS, the
FDIC or the U. S. Congress could have a material adverse impact on the Company,
the Bank and their operations. The Company is also required to file certain
reports with, and otherwise comply with, the rules and regulations of the OTS
and the Securities and Exchange Commission (SEC).
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The
management of the Bank is unaware of any practice, condition or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
This risk classification is based on an institution's capital group and
supervisory subgroup assignment. In addition, the FDIC is authorized to increase
such deposit insurance rates, on a semi-annual basis, if it determines that such
action is necessary to cause the balance in the SAIF to reach the designated
reserve ratio of 1.25% of SAIF-insured deposits. In addition, the FDIC may
impose special assessments on SAIF members to repay amounts borrowed from the
U.S. Treasury or for any other reason deemed necessary by the FDIC. The Bank's
federal deposit insurance premium expense for the year ended December 31, 1997,
amounted to approximately $333,000.
Prior to September 30, 1996, savings associations paid within a range
of .23% to .31% of domestic deposits and the SAIF was substantially underfunded.
By comparison, prior to September 30, 1996, members of the Bank Insurance Fund
(BIF), predominantly commercial banks, were required to pay substantially lower,
or virtually no, federal deposit insurance premiums. Effective September 30,
1996, federal law was revised to mandate a one-time special assessment on SAIF
members such as the Savings Bank of approximately .657% of deposits held on
March 31, 1995. The Savings Bank recorded a $3,311,000 pre-tax expense for this
assessment at September 30, 1996. Beginning January 1, 1997, deposit insurance
assessments for SAIF members were reduced to approximately .064% of deposits on
an annual basis; this rate may continue through the end of 1999. During this
same period, BIF members are expected to be assessed approximately .013% of
deposits. Thereafter, assessments for BIF and SAIF
16
<PAGE>
members should be the same and the SAIF and BIF may be merged. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank decreased by approximately 70% from rates in effect prior to September 30,
1996.
Examination Fees. In addition to federal deposit insurance premiums,
savings institutions, like the Bank, are required by OTS regulations to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a semi-annual basis and is computed based on total assets of the
institution, including subsidiaries. The Bank's OTS assessment expense for the
year ended December 31, 1997 totalled approximately $135,000.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. The Bank exceeded all three of its
minimum capital requirements at December 1997.
Savings associations with a greater than "normal" level of interest
rate exposure will be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirement. Specifically, interest rate
exposure will be measured as the decline in net portfolio value due to a 200
basis point change in market interest rates. The interest rate risk component to
be deducted from total capital is equal to one-half the difference between an
institution's measured exposure and the "normal" level of exposure which is
defined as two percent of the estimated economic value of its assets.
Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and to Note 15 of Notes to Consolidated
Financial Statements in the 1997 Annual Report to Stockholders which is attached
hereto as Exhibit 13 and incorporated herein by reference for more information
about the Bank's regulatory capital at December 31, 1997.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. OTS
regulations impose limitations upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to shareholders of another institution in a
cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution (Tier 1
institution) and has not been advised by the OTS that it is in need of more than
the normal supervision can, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year equal to the greater of
(i) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (ii) 75% of its net income over the most recent four quarter period. Any
additional capital distributions require prior regulatory approval. In the event
the Bank's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. As of December 31,
1997, the Bank was a Tier 1 institution. However, there can be no assurance that
the OTS will not prohibit any capital distribution by the Bank to the Company.
17
<PAGE>
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Savings
associations that are subsidiaries of holding companies, like the Bank, will
continue to be required to file a notice with OTS prior to making the capital
distribution. The OTS proposed limitations on capital distributions are similar
to the limitations imposed upon national banks. The Bank is unable to predict
whether or when the proposed regulation will become effective.
Qualified Thrift Lender Test. The Home Owners' Loan Act, as amended
(HOLA), requires savings institutions to meet a qualified thrift lender (QTL)
test. The required percentage of qualified thrift investments (QTIs) is 65% of
portfolio assets (defined as all assets minus intangible assets, property used
by the institution in conducting its business and liquid assets equal to 10% of
total assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings associations may include shares of stock
of the FHLBs as qualifying QTIs. Compliance with the QTL test is measured on a
monthly basis. As of December 31, 1997, the Bank was in compliance with its QTL
requirement with 77.0% of its assets invested in QTIs.
Loans-to-One Borrower. Under the HOLA, savings institutions are subject
to the national bank limits on loans-to-one borrower. With respect to the dollar
amount of credit that savings institutions may extend to a single or related
group of borrowers, savings associations are subject, since 1989, to the same
limits as those applicable to national banks, which under current law have
lending limits in an amount equal to 15% of unimpaired capital and unimpaired
surplus on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate. At December 31, 1997, the
Bank's lending limit to one borrower was $7.14 million. Current lending limits
to one borrower may adversely affect the Bank's ability to conduct its
operations, particularly its ability to make real estate development and
construction loans which typically carry large balances. At December 31, 1997,
the Bank's largest aggregate loans and commitments to one borrower was $7.10
million, of which $5.0 million was actually funded as of such date.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1997, the required liquid
asset ratio was 4%. The Bank's liquidity ratio at December 31, 1997 was 5.38%.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each
18
<PAGE>
FHLB serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to the greater of 5% of outstanding advances
or at least 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year. At December 31,
1997, the Bank had $7.4 million in FHLB stock, which was in compliance with this
requirement. Dividends paid to the Bank on FHLB stock totalled $565,000 for the
year ended December 31, 1997.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. The Bank's
reserve requirement at December 31, 1997 was $25,000.
Holding Company Regulation. General. The Company is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As such,
the Company is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
As a unitary savings and loan holding company, the Company generally is
not be subject to activity restrictions, provided the Bank satisfies the QTL
test. If the Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured savings association) would become
subject to restrictions applicable to bank holding companies unless such other
associations each also qualify as a QTL and were acquired in a supervisory
acquisition.
The Company must obtain approval from the OTS before acquiring control
of any other SAIF- insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. The
Federal Reserve Board may approve an application by a bank holding company to
acquire control of a savings association. A bank holding company that controls a
savings association may merge or consolidate the assets and liabilities of the
savings association with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. Federal savings associations are
permitted to acquire or be acquired by any insured
19
<PAGE>
depository institution. As a result of these provisions, there have been a
number of acquisitions of savings associations by bank holding companies and
other financial institutions in recent years.
A bill has been introduced to the House Banking Committee that would
consolidate the OTS with the Office of the Comptroller of the Currency. The
resulting agency would regulate all federally chartered commercial banks and
thrift institutions. In addition, the bill would abolish the current authority
of a unitary savings and loan holding company (i.e., a holding company with only
one thrift institution subsidiary) that has a thrift institution subsidiary
which meets the qualified thrift lender test from investing in activities other
than those permitted for bank holding companies. Under current regulations, a
savings and loan holding company, such as the Company, which has only one thrift
subsidiary which meets the qualified thrift lender test, such as the Bank, has
broad investment authority. The proposed limitation on investment activities by
unitary savings and loan holding companies, if enacted, would restrict the
ability of the Company to engage in certain non-banking and other business
activities. As of December 31, 1997, the Company was not engaged in any material
amount of such activities.
Executive Officers of the Registrant
Set forth below is current information concerning the Company's
executive officers.
<TABLE>
<CAPTION>
Name Position Age
=====================================================================================
<S> <C> <C>
John A.B. Davies, Jr. President and Chief Executive Officer 46
Dennis R. Stewart Executive Vice President 48
John M. Chattleton Executive Vice President of the Bank 49
John M. Reddecliff Executive Vice President of the Bank 36
</TABLE>
John A. B. Davies, Jr. has served as Chief Executive Officer of the
Company and the Bank since June 1991. Previously, he was employed with First
American Bank of Virginia as a Senior Vice President/Retail Administration.
Dennis R. Stewart has served as Chief Financial Officer of the Company
since April 1990. He is responsible for the accounting, regulatory, tax,
treasury, investment, interest rate risk management and financial management
activities of the Company and the Bank.
John M. Chattleton has served as Chief Retail Officer of the Bank since
he joined the Bank in August 1992. From 1990 to 1992, Mr. Chattleton was Senior
Vice President of Small Business and Consumer Lending at the Bank of Maryland,
in Baltimore, Maryland.
John M. Reddecliff has served as Chief Lending Officer of the Bank
since 1997. Prior thereto he was head of the commercial lending activities at
the Bank since 1992. Previously he was employed by NationsBank in the commercial
real estate lending area.
Item 2. Properties
The Bank engages in its business from its home office and branch
offices, which are located throughout the Hampton Roads area in Virginia. The
Bank's principal executive office contains approximately 40,000 square feet and
is leased for a term of ten years, with two five-year renewal options. This
office is located at 2101 Parks Avenue, Virginia Beach, Virginia 23451. For
further
20
<PAGE>
information regarding the Company's locations, refer to the outside back cover
of the 1997 Annual Report to Stockholders which is attached hereto as Exhibit 13
and incorporated herein by reference.
Item 3. Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party to legal
proceedings incident to its business, including foreclosures.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The information contained under the section captioned "Corporate
Information--Common Stock" on the inside back cover of the 1997 Annual Report to
Stockholders which is attached hereto as Exhibit 13 and is incorporated herein
by reference.
Item 6. Selected Financial Data
The information contained in the section captioned "Five Year Financial
Summary" on page 11 of the 1997 Annual Report to Stockholders which is attached
hereto as Exhibit 13 and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 12 through 20 of the 1997 Annual Report to Stockholders which is attached
hereto as Exhibit 13 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements together with the report thereon of KPMG Peat
Marwick LLP dated January 30, 1998 appear on pages 21 to 46 of the accompanying
1997 Annual Report to Stockholders which is attached hereto as Exhibit 13 and is
incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
The registrant has not had any disagreements with its accountants on
any matter of accounting principles or practices or financial statement
disclosure.
21
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Election of
Directors" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders (the Proxy Statement) is incorporated herein by
reference. Information regarding executive officers is contained in the section
captioned "Executive Officers of the Registrant" under Part I hereof and is
incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the section captioned "Election of
Directors" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership by Management
Information required by this item is incorporated herein by
reference to the section captioned "Election of Directors" and
"Voting Securities and Principal Holders Thereof" in the Proxy
Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the registrant.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
22
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>
Page in
Annual
Report*
----------
<S> <C> <C>
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements
Report of Independent Auditors .......................................................... 21
Virginia Beach Federal Financial Corporation
o Consolidated Statement of Financial Condition
December 31, 1997 and 1996............................................................ 22
o Consolidated Statement of Operations for the three years ended
December 31, 1997, 1996 and 1995...................................................... 23
o Consolidated Statement of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995...................................................... 24 - 25
o Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 1997, 1996 and 1995...................................................... 26
o Notes to Consolidated Financial Statements............................................ 27 - 46
</TABLE>
* Incorporated by reference from the indicated pages of the 1997
Annual Report to Stockholders.
2. Financial Statement Schedules
(None)
All schedules have been omitted as they are not applicable or the
required information is shown in the Notes to Consolidated Financial
Statements.
Exhibits
(3.1) Restated Articles of Incorporation of Virginia Beach
Federal Financial Corporation (Incorporated by
reference to Post-Effective Amendment No. 1 to the
Registrant's Form S-4 Registration Statement dated
March 21, 1991, File No. 33-27398).
(3.2) Bylaws of Virginia Beach Federal Financial
Corporation (Incorporated by reference to
Post-Effective Amendment No. 1 to the Registrant's
Annual Report on Form S-4 Registration Statement
dated March 21, 1991, File No. 33-27398).
(10.1) Virginia Beach Federal Financial Corporation 1981
Stock Option Plan, as amended (Incorporated by
reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year Ended December 31, 1984).
23
<PAGE>
(10.2) Lease between the Runnymede Corporation and Virginia
Beach Federal Savings Bank, dated April 20, 1989
(Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended
December 31, 1989).
(10.3) Virginia Beach Federal Financial Corporation - 1991
Stock Option Plan (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1990).
(10.4) Amended and Restated Agreement and Plan of
Reorganization, dated February 21, 1991, by and
between Virginia Beach Federal Savings Bank, Virginia
Beach Federal Financial Corporation and Virginia
Beach Federal Interim Savings Bank (Incorporated by
reference to Post-Effective Amendment No. 1 to the
Registrant's Form S-4 Registration Statement dated
March 21, 1991, File No. 33-27398).
(10.5) Employment Agreement with John A. B. Davies, Jr.,
President and Chief Executive Officer of the
Corporation, Dennis R. Stewart, Executive Vice
President and Chief Financial Officer of the
Corporation, John M. Chattleton, Executive Vice
President of the Bank and John M. Reddecliff,
Executive Vice President of the Bank.
(10.6) Employee Stock Purchase Plan. (Incorporated by
reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
(10.7) Virginia Beach Federal Financial Corporation 1997
Directors Stock Compensation Plan.
(13) Virginia Beach Federal Financial Corporation 1997
Annual Report to Stockholders. Except for those
portions of the Annual Report incorporated by
reference in this Form 10-K, such Annual Report shall
not be deemed to be filed with the SEC.
(21) Subsidiaries.
(23.1) Consent of Independent Auditors - KPMG Peat Marwick
LLP
(99.1) Annual Report on Form 11-K for the fiscal year ended
December 31, 1997.
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, the Registrant filed no
current reports on Form 8-K.
(c) The exhibits set forth above are either filed herewith or incorporated
by reference herein.
(d) All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
<S> <C>
Dated: March 25, 1998 By: /s/ John A. B. Davies, Jr.
------------------------------- -------------------------------------------------------------------
John A. B. Davies, Jr.
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John A. B. Davies, Jr. By: /s/ Charles P. Fletcher
----------------------------------- --------------------------------------------------
John A. B. Davies, Jr. Charles P. Fletcher
President and Director Chairman of the Board
(Principal Executive
Officer)
Date: March 25,1998 Date: March 25,1998
By: /s/ Dennis R. Stewart By: /s/ Floyd E. Kellam, Jr.
----------------------------------- --------------------------------------------------
Dennis R. Stewart Floyd E. Kellam, Jr.
Executive Vice President/ Vice Chairman of the Board
Chief Financial Officer
(Principal Financial
Officer)
Date: March 25,1998 Date: March 25,1998
By: /s/ Edward E. Brickell By: /s/ Robert H. DeFord, Jr.
----------------------------------- --------------------------------------------------
Edward E. Brickell Robert H. DeFord, Jr.
Director Director
Date: March 25,1998 Date: March 25,1998
By: /s/ Betty Anne Huey By: /s/ Rufus S. Kight, Jr.
----------------------------------- --------------------------------------------------
Betty Anne Huey Rufus S. Kight, Jr.
Director Director
Date: March 25,1998 Date: March 25,1998
By: /s/ Ivan D. Mapp By: /s/ George R. C. McGuire
----------------------------------- --------------------------------------------------
Ivan D. Mapp George R. C. McGuire
Director Director
Date: March 25,1998 Date: March 25,1998
</TABLE>
25
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
(3.1) Restated Articles of Incorporation of Virginia Beach Federal
Financial Corporation (Incorporated by reference to
Post-Effective Amendment No. 1 to the Registrant's Form S-4
Registration Statement dated March 21, 1991, File No. 33-27398).
(3.2) Bylaws of Virginia Beach Federal Financial Corporation
(Incorporated by reference to Post-Effective Amendment No. 1 to
the Registrant's Form S-4 Registration Statement dated March 21,
1991, File No. 33-27398).
(10.1) Virginia Beach Federal Financial Corporation 1981 Stock Option
Plan, as amended (Incorporated by reference to the Registrant's
Annual Report on Form 10-K for the Fiscal Year Ended December
31, 1984).
(10.2) Lease between the Runnymede Corporation and Virginia Beach
Federal Savings Bank, dated April 20, 1989 (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1989).
(10.3) Virginia Beach Federal Financial Corporation - 1991 Stock Option
Plan (Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the Fiscal Year Ended December 31,
1990).
(10.4) Amended and Restated Agreement and Plan of Reorganization, dated
February 21, 1991, by and between Virginia Beach Federal Savings
Bank, Virginia Beach Federal Financial Corporation and Virginia
Beach Federal Interim Savings Bank (Incorporated by reference to
Post-Effective Amendment No. 1 to the Registrant's Form S-4
Registration Statement dated March 21, 1991, File No. 33-27398).
(10.5) Employment Agreement with John A. B. Davies, Jr., President and
Chief Executive Officer of the Corporation, Dennis R. Stewart,
Executive Vice President and Chief Financial Officer of the
Corporation, John M. Chattleton, Executive Vice President of the
Bank and John M. Reddecliff, Executive Vice President of the
Bank.
(10.6) Employee Stock Purchase Plan. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995)
(10.7) Virginia Beach Federal Financial Corporation 1997 Directors
Stock Compensation Plan.
(13) Virginia Beach Federal Financial Corporation 1997 Annual Report
to Stockholders. Except for those portions of the Annual Report
incorporated by reference in this Form 10-K, such Annual Report
shall not be deemed to be filed with the SEC.
(21) Subsidiaries.
(23.1) Consents of Independent Auditors - KPMG Peat Marwick LLP
(99.1) Annual Report on Form 11-K for the Fiscal Year Ended December
31, 1997.
26
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 31st day of December, 1997 ("Effective
Date"), by and between First Coastal Bank (the "Bank") and John A.B. Davies, Jr.
(the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
President and Chief Executive Officer and is experienced in all phases of the
business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the President
and Chief Executive Officer of the Bank. The Employee shall render such
administrative and management services to the Bank and Virginia Beach Federal
Financial Corporation ("Parent") as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee shall also promote, to the extent permitted by law, the business of the
Bank and Parent. The Employee's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors") may from time to time
reasonably direct, including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the term
of this Agreement a salary at the rate of $203,000 per annum, payable in cash
not less frequently than monthly; provided, that the rate of such salary shall
be reviewed by the Board of Directors not less often than annually, and Employee
shall be entitled to receive annually an increase at such percentage or in such
an amount as the Board of Directors in its sole discretion may decide at such
time.
3. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
Additionally, Employee's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent. The cost of
premiums for participation in the medical coverage or reimbursement plan for the
Employee and such dependent family shall be 100% paid by the Bank and 0% paid by
the Employee.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, an appropriate
automobile allowance, and any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Bank shall reimburse Employee for all reasonable out-of-pocket
expenses which Employee shall incur in connection with his service for the Bank.
<PAGE>
4. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending twenty-four (24)
months thereafter. Additionally, on each annual anniversary date from the
Effective Date, the term of employment under this Agreement shall be extended
for an additional one year period beyond the then effective expiration date upon
a determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
term of such Agreement shall be extended. To the extent possible, the Board
shall furnish the Employee with not less than sixty (60) days notice of any
intention not to renew such Agreement.
5. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Paragraph 5 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
(c) For a period of twelve (12) months following the voluntarily
termination by Employee of his employment hereunder, other than pursuant to
Section 11(b) of this Agreement, Employee will not accept employment with any
financial institution or entity offering similar products and services as the
Bank within the geographic area generally known as Hampton Roads, Virginia.
6. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors. The Bank will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.
7. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to
2
<PAGE>
accumulate unused vacation from one fiscal year to the next, except in either
case to the extent authorized by the Board of Directors for senior management
employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
8. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the third calendar month subsequent to the
month in which Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement, except as specified at Section 8(c) hereinafter.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. Termination for "Just Cause" shall
include termination because of the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit, failure
to perform stated duties, willful violation of any law, rule or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, an extreme fiscal exigency affecting the Bank (such as insolvency) or
material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 11 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, for a period of
twelve (12) months thereafter, without regard to the term of this Agreement.
Additionally, Employee shall be compensated or reimbursed for the cost of
Employee obtaining all health, life, disability, and other benefits which the
Employee and his dependents would be eligible to participate in for a period of
one-year based upon the benefit
3
<PAGE>
levels substantially equal to those being provided Employee at the date of
termination of employment. At the election of the Employee, such compensation to
be paid hereunder shall be paid in a lump-sum amount within 30 days of such
termination discounted in accordance with Section 11(a) herein; in which case
the benefit continuations noted above shall not be applicable, except to the
extent as may be required by law or the policies of the Savings Bank.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all
obligations under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 11(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 U.S.C. ss.1828(k) and any regulations
promulgated thereunder.
9. Suspension of Employment. If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended and (ii) reinstate any of its obligations which were suspended.
4
<PAGE>
10. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits which may be payable to Employee under the
provisions of disability insurance coverage in effect for Bank employees and any
payments under the Federal Social Security Act, but in no event less than 100%
of pay for a period of 12 months and 65% for the remainder of the term of the
Agreement, if applicable. Upon returning to active full-time employment, the
Employee's full compensation as set forth in this Agreement shall be reinstated
as of the date of commencement of such activities. In the event that the
Employee returns to active employment on other than a full-time basis, then his
compensation (as set forth in Paragraph 2 of this Agreement) shall be reduced in
proportion to the time spent in said employment, or as shall otherwise be agreed
to by the parties.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any change in control of the Bank or Parent, Employee shall be paid an amount
equal the product of 2.99 times the Employee's prior calendar year's cash
compensation paid as reflected on Form W-2, excluding any commission payments
paid, but in no event in an amount in excess of the product of 2.99 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination discounted to the present
value of such payment using as the discount rate the "prime rate" as published
in the Wall Street Journal Eastern Edition as of the date of such payment, or in
periodic payments over the next 36 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 8 of
this Agreement. The term "control" shall refer to the ownership, holding or
power to vote more than 25% of the Parent's or Bank's voting stock, the control
of the election of a majority of the Parent's or Bank's directors, the exercise
of a controlling influence over the management or policies of the Parent or Bank
by any person or by persons acting as a group within the meaning of Section
13(d) of the Securities Exchange Act of 1934. The term "person" means an
individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntary terminate his employment under this Agreement within
twenty-four (24) months following a change in control of the Bank or Parent, and
Employee shall thereupon be entitled to receive the payment described in Section
11(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his
5
<PAGE>
personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the Board
of the Bank; (iii) if the Bank or Parent should fail to maintain existing
employee benefits plans, including material fringe benefit, stock option and
retirement plans; (iv) if Employee would be assigned duties and responsibilities
other than those normally associated with his position as referenced at Section
1, herein; (v) if Employee would not be elected or reelected to the Board of
Directors of the Bank; or (vi) if Employee's responsibilities or authority have
in any way been materially diminished or reduced.
12. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or Parent which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
14. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Virginia, except to the extent that Federal law
shall be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
FIRST COASTAL BANK
ATTEST: By: /s/Charles P. Fletcher
--------------------------------------
Charles P. Fletcher, Chairman
/s/Allene S. Cheatham
- -------------------------------
Secretary
WITNESS:
/s/John A.B. Davies, Jr.
- ------------------------------- --------------------------------------
John A.B. Davies, Jr., Employee
7
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 31st day of December, 1997 ("Effective
Date"), by and between First Coastal Bank (the "Bank") and John M. Chattleton
(the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
Executive Vice President - Retail Administration and Lending and is experienced
in all phases of the business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the Executive
Vice President - Retail Administration and Lending of the Bank. The Employee
shall render such administrative and management services to the Bank and
Virginia Beach Federal Financial Corporation ("Parent") as are currently
rendered and as are customarily performed by persons situated in a similar
executive capacity. The Employee shall also promote, to the extent permitted by
law, the business of the Bank and Parent. The Employee's other duties shall be
such as the Board of Directors for the Bank (the "Board of Directors") may from
time to time reasonably direct, including normal duties as an officer of the
Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the term
of this Agreement a salary at the rate of $117,600 per annum, payable in cash
not less frequently than monthly; provided, that the rate of such salary shall
be reviewed by the Board of Directors not less often than annually, and Employee
shall be entitled to receive annually an increase at such percentage or in such
an amount as the Board of Directors in its sole discretion may decide at such
time.
3. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
Additionally, Employee's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent. The cost of
premiums for participation in the medical coverage or reimbursement plan for the
Employee and such dependent family shall be 100% paid by the Bank and 0% paid by
the Employee.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, an appropriate
automobile allowance, and any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Bank
<PAGE>
shall reimburse Employee for all reasonable out-of-pocket expenses which
Employee shall incur in connection with his service for the Bank.
4. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending twenty-four (24)
months thereafter. Additionally, on each annual anniversary date from the
Effective Date, the term of employment under this Agreement shall be extended
for an additional one year period beyond the then effective expiration date upon
a determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
term of such Agreement shall be extended. To the extent possible, the Board
shall furnish the Employee with not less than sixty (60) days notice of any
intention not to renew such Agreement.
5. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Paragraph 5 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
(c) For a period of twelve (12) months following the voluntarily
termination by Employee of his employment hereunder, other than pursuant to
Section 11(b) of this Agreement, Employee will not accept employment with any
financial institution or entity offering similar products and services as the
Bank within the geographic area generally known as Hampton Roads, Virginia.
6. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors. The Bank will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.
7. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Bank.
2
<PAGE>
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
8. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the third calendar month in which
Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement, except as specified at Section 8(c) hereinafter.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. Termination for "Just Cause" shall
include termination because of the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit, failure
to perform stated duties, willful violation of any law, rule or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, an extreme fiscal exigency affecting the Bank (such as insolvency) or
material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 11 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, for a period of
twelve (12) months thereafter, without regard to the term of this Agreement.
Additionally, Employee shall be compensated or reimbursed for the cost of
Employee obtaining all health, life, disability, and other benefits which the
Employee and his
3
<PAGE>
dependents would be eligible to participate in for a period of six months based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment. At the election of the Employee, such
compensation to be paid hereunder shall be paid in a lump-sum amount within 30
days of such termination discounted in accordance with Section 11(a) herein; in
which case the benefit continuations noted above shall not be applicable, except
to the extent as may be required by law or the policies of the Savings Bank.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all
obligations under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 11(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 U.S.C. ss.1828(k) and any regulations
promulgated thereunder.
9. Suspension of Employment. If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended and (ii) reinstate any of its obligations which were suspended.
4
<PAGE>
10. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits which may be payable to Employee under the
provisions of disability insurance coverage in effect for Bank employees and any
payments under the Federal Social Security Act, but in no event less than 100%
of pay for a period of 12 months and 60% for the remainder of the term of the
Agreement, if applicable. Upon returning to active full-time employment, the
Employee's full compensation as set forth in this Agreement shall be reinstated
as of the date of commencement of such activities. In the event that the
Employee returns to active employment on other than a full-time basis, then his
compensation (as set forth in Paragraph 2 of this Agreement) shall be reduced in
proportion to the time spent in said employment, or as shall otherwise be agreed
to by the parties.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any change in control of the Bank or Parent, Employee shall be paid an amount
equal the product of two times the Employee's prior calendar year's cash
compensation paid as reflected on Form W-2, excluding any commission payments
paid, but in no event in an amount in excess of the product of 2.99 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination discounted to the present
value of such payment using as the discount rate the "prime rate" as published
in the Wall Street Journal Eastern Edition as of the date of such payment, or in
periodic payments over the next 24 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 8 of
this Agreement. The term "control" shall refer to the ownership, holding or
power to vote more than 25% of the Parent's or Bank's voting stock, the control
of the election of a majority of the Parent's or Bank's directors, or the
exercise of a controlling influence over the management or policies of the
Parent or Bank by any person or by persons acting as a group within the meaning
of Section 13(d) of the Securities Exchange Act of 1934. The term "person" means
an individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntary terminate his employment under this Agreement within
twenty-four (24) months following a change in control of the Bank or Parent, and
Employee shall thereupon be entitled to receive the payment described in Section
11(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his
5
<PAGE>
personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the
President of the Bank; (iii) if the Bank or Parent should fail to maintain
existing employee benefits plans, including material fringe benefit, stock
option and retirement plans; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (v) if Employee's responsibilities or
authority have in any way been materially diminished or reduced.
12. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or Parent which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
14. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Virginia, except to the extent that Federal law
shall be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
FIRST COASTAL BANK
ATTEST: By: /s/John A.B. Davies, Jr.
--------------------------------------
John A.B. Davies, Jr., President
/s/Allene S. Cheatham
- ---------------------------------
Secretary
WITNESS:
/s/John M. Chattleton
- -------------------------------- -------------------------------------
John M. Chattleton, Employee
7
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 31st day of December, 1997 ("Effective
Date"), by and between First Coastal Bank (the "Bank") and John M. Reddecliff
(the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
Executive Vice President - Retail Administration and Lending and is experienced
in all phases of the business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as Executive Vice
President--Chief Lending Officer of the Bank. The Employee shall render such
administrative and management services to the Bank and Virginia Beach Federal
Financial Corporation ("Parent") as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee shall also promote, to the extent permitted by law, the business of the
Bank and Parent. The Employee's other duties shall be such as the Board of
Directors and President and Chief Executive Officer of the Bank (the "Board of
Directors") may from time to time reasonably direct, including normal duties as
an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the term
of this Agreement a salary at the rate of $110,164 per annum, payable in cash
not less frequently than monthly; provided, that the rate of such salary shall
be reviewed by the Board of Directors not less often than annually, and Employee
shall be entitled to receive annually an increase at such percentage or in such
an amount as the Board of Directors in its sole discretion may decide at such
time.
3. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
Additionally, Employee's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent. The cost of
premiums for participation in the medical coverage or reimbursement plan for the
Employee and such dependent family shall be 100% paid by the Bank and 0% paid by
the Employee.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, an appropriate
automobile allowance, and any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Bank
<PAGE>
shall reimburse Employee for all reasonable out-of-pocket expenses which
Employee shall incur in connection with his service for the Bank.
4. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending twenty-four (24)
months thereafter. Additionally, on each annual anniversary date from the
Effective Date, the term of employment under this Agreement shall be extended
for an additional one year period beyond the then effective expiration date upon
a determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
term of such Agreement shall be extended. To the extent possible, the Board
shall furnish the Employee with not less than sixty (60) days notice of any
intention not to renew such Agreement.
5. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Paragraph 5 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
(c) For a period of twelve (12) months following the voluntarily
termination by Employee of his employment hereunder, other than pursuant to
Section 11(b) of this Agreement, Employee will not accept employment with any
financial institution or entity offering similar products and services as the
Bank within the geographic area generally known as Hampton Roads, Virginia.
6. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors. The Bank will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.
7. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Bank.
2
<PAGE>
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
8. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the third calendar month in which
Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement, except as specified at Section 8(c) hereinafter.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. Termination for "Just Cause" shall
include termination because of the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit, failure
to perform stated duties, willful violation of any law, rule or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, an extreme fiscal exigency affecting the Bank (such as insolvency) or
material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 11 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, for a period of
twelve (12) months thereafter, without regard to the term of this Agreement.
Additionally, Employee shall be compensated or reimbursed for the cost of
Employee obtaining all health, life, disability, and other benefits which the
Employee and his
3
<PAGE>
dependents would be eligible to participate in for a period of six months based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment. At the election of the Employee, such
compensation to be paid hereunder shall be paid in a lump-sum amount within 30
days of such termination discounted in accordance with Section 11(a) herein; in
which case the benefit continuations noted above shall not be applicable, except
to the extent as may be required by law or the policies of the Savings Bank.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all
obligations under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 11(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 U.S.C. ss.1828(k) and any regulations
promulgated thereunder.
9. Suspension of Employment. If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended and (ii) reinstate any of its obligations which were suspended.
4
<PAGE>
10. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits which may be payable to Employee under the
provisions of disability insurance coverage in effect for Bank employees and any
payments under the Federal Social Security Act, but in no event less than 100%
of pay for a period of 12 months and 60% for the remainder of the term of the
Agreement, if applicable. Upon returning to active full-time employment, the
Employee's full compensation as set forth in this Agreement shall be reinstated
as of the date of commencement of such activities. In the event that the
Employee returns to active employment on other than a full-time basis, then his
compensation (as set forth in Paragraph 2 of this Agreement) shall be reduced in
proportion to the time spent in said employment, or as shall otherwise be agreed
to by the parties.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any change in control of the Bank or Parent, Employee shall be paid an amount
equal the product of two times the Employee's prior calendar year's cash
compensation paid as reflected on Form W-2, excluding any commission payments
paid, but in no event in an amount in excess of the product of 2.99 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination discounted to the present
value of such payment using as the discount rate the "prime rate" as published
in the Wall Street Journal Eastern Edition as of the date of such payment, or in
periodic payments over the next 24 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 8 of
this Agreement. The term "control" shall refer to the ownership, holding or
power to vote more than 25% of the Parent's or Bank's voting stock, the control
of the election of a majority of the Parent's or Bank's directors, or the
exercise of a controlling influence over the management or policies of the
Parent or Bank by any person or by persons acting as a group within the meaning
of Section 13(d) of the Securities Exchange Act of 1934. The term "person" means
an individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntary terminate his employment under this Agreement within
twenty-four (24) months following a change in control of the Bank or Parent, and
Employee shall thereupon be entitled to receive the payment described in Section
11(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his
5
<PAGE>
personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the
President of the Bank; (iii) if the Bank or Parent should fail to maintain
existing employee benefits plans, including material fringe benefit, stock
option and retirement plans; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (v) if Employee's responsibilities or
authority have in any way been materially diminished or reduced.
12. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or Parent which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
14. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Virginia, except to the extent that Federal law
shall be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
FIRST COASTAL BANK
ATTEST: By: /s/John A.B. Davies, Jr.
--------------------------------------
John A.B. Davies, Jr., President
/s/Allene S. Cheatham
- --------------------------------
Secretary
WITNESS:
/s/John M. Reddecliff
- -------------------------------- --------------------------------------
John M. Reddecliff, Employee
7
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 31st day of December, 1997 ("Effective
Date"), by and between First Coastal Bank (the "Bank") and Dennis R. Stewart
(the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
Executive Vice President and Chief Financial Officer and is experienced in all
phases of the business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the Executive
Vice President and Chief Financial Officer of the Bank. The Employee shall
render such administrative and management services to the Bank and Virginia
Beach Federal Financial Corporation ("Parent") as are currently rendered and as
are customarily performed by persons situated in a similar executive capacity.
The Employee shall also promote, to the extent permitted by law, the business of
the Bank and Parent. The Employee's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors") may from time to time
reasonably direct, including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the term
of this Agreement a salary at the rate of $138,258 per annum, payable in cash
not less frequently than monthly; provided, that the rate of such salary shall
be reviewed by the Board of Directors not less often than annually, and Employee
shall be entitled to receive annually an increase at such percentage or in such
an amount as the Board of Directors in its sole discretion may decide at such
time.
3. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
Additionally, Employee's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent. The cost of
premiums for participation in the medical coverage or reimbursement plan for the
Employee and such dependent family shall be 100% paid by the Bank and 0% paid by
the Employee.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, an appropriate
automobile allowance, and any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Bank
<PAGE>
shall reimburse Employee for all reasonable out-of-pocket expenses which
Employee shall incur in connection with his service for the Bank.
4. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending twenty-four (24)
months thereafter. Additionally, on each annual anniversary date from the
Effective Date, the term of employment under this Agreement shall be extended
for an additional one year period beyond the then effective expiration date upon
a determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
term of such Agreement shall be extended. To the extent possible, the Board
shall furnish the Employee with not less than sixty (60) days notice of any
intention not to renew such Agreement.
5. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Paragraph 5 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
(c) For a period of twelve (12) months following the voluntarily
termination by Employee of his employment hereunder, other than pursuant to
Section 11(b) of this Agreement, Employee will not accept employment with any
financial institution or entity offering similar products and services as the
Bank within the geographic area generally known as Hampton Roads, Virginia.
6. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors. The Bank will provide Employee with the
working facilities and staff customary for similar executives and necessary for
him to perform his duties.
7. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Bank.
2
<PAGE>
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
8. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the third calendar month in which
Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement, except as specified at Section 8(c) hereinafter.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. Termination for "Just Cause" shall
include termination because of the Employee's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit, failure
to perform stated duties, willful violation of any law, rule or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, an extreme fiscal exigency affecting the Bank (such as insolvency) or
material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 11 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, for a period of
twelve (12) months thereafter, without regard to the term of this Agreement.
Additionally, Employee shall be compensated or reimbursed for the cost of
Employee obtaining all health, life, disability, and other benefits which the
Employee and his
3
<PAGE>
dependents would be eligible to participate in for a period of six months based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment. At the election of the Employee, such
compensation to be paid hereunder shall be paid in a lump-sum amount within 30
days of such termination discounted in accordance with Section 11(a) herein; in
which case the benefit continuations noted above shall not be applicable, except
to the extent as may be required by law or the policies of the Savings Bank.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all
obligations under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 11(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 U.S.C. ss.1828(k) and any regulations
promulgated thereunder.
9. Suspension of Employment. If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended and (ii) reinstate any of its obligations which were suspended.
4
<PAGE>
10. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits which may be payable to Employee under the
provisions of disability insurance coverage in effect for Bank employees and any
payments under the Federal Social Security Act, but in no event less than 100%
of pay for a period of 12 months and 60% for the remainder of the term of the
Agreement, if applicable. Upon returning to active full-time employment, the
Employee's full compensation as set forth in this Agreement shall be reinstated
as of the date of commencement of such activities. In the event that the
Employee returns to active employment on other than a full-time basis, then his
compensation (as set forth in Paragraph 2 of this Agreement) shall be reduced in
proportion to the time spent in said employment, or as shall otherwise be agreed
to by the parties.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any change in control of the Bank or Parent, Employee shall be paid an amount
equal the product of two times the Employee's prior calendar year's cash
compensation paid as reflected on Form W-2, excluding any commission payments
paid, but in no event in an amount in excess of the product of 2.99 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination discounted to the present
value of such payment using as the discount rate the "prime rate" as published
in the Wall Street Journal Eastern Edition as of the date of such payment, or in
periodic payments over the next 24 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 8 of
this Agreement. The term "control" shall refer to the ownership, holding or
power to vote more than 25% of the Parent's or Bank's voting stock, the control
of the election of a majority of the Parent's or Bank's directors, or the
exercise of a controlling influence over the management or policies of the
Parent or Bank by any person or by persons acting as a group within the meaning
of Section 13(d) of the Securities Exchange Act of 1934. The term "person" means
an individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntary terminate his employment under this Agreement within
twenty-four (24) months following a change in control of the Bank or Parent, and
Employee shall thereupon be entitled to receive the payment described in Section
11(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his
5
<PAGE>
personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the
President of the Bank; (iii) if the Bank or Parent should fail to maintain
existing employee benefits plans, including material fringe benefit, stock
option and retirement plans; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; or (v) if Employee's responsibilities or
authority have in any way been materially diminished or reduced.
12. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or Parent which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
13. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
14. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Virginia, except to the extent that Federal law
shall be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
FIRST COASTAL BANK
ATTEST: By: /s/John A.B. Davies, Jr.
--------------------------------------
John A.B. Davies, Jr., President
/s/Allene S. Cheatham
- ---------------------------------
Secretary
WITNESS:
/s/Dennis R. Stewart
- --------------------------------- --------------------------------------
Dennis R. Stewart, Employee
7
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
1997 DIRECTORS STOCK COMPENSATION PLAN
1. Purpose of the Plan. The Plan shall be known as the Virginia Beach
Federal Financial Corporation ("Company") 1997 Directors Stock Compensation Plan
(the "Plan"). The purpose of the Plan is to retain and reward qualified
personnel for positions of substantial responsibility as members of the Board of
Directors of the Company or any present or future parent or subsidiary of the
Company to promote the success of the business. The Plan is intended to provide
for the grant of Stock Options that are not "Incentive Stock Options," within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Definitions. The following words and phrases when used in this Plan
with an initial capital letter, unless the context clearly indicates otherwise,
shall have the meaning as set forth below. Wherever appropriate, the masculine
pronoun shall include the feminine pronoun and the singular shall include the
plural.
(a) "Award" means the grant by the Committee or in accordance with
the terms of the Plan of a Stock Option.
(b) "Board" shall mean the Board of Directors of the Company, or any
successor or parent corporation thereto.
(c) "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Company; (ii) the merger or
recapitalization of the Company whereby the Company is not the surviving entity;
(iii) a change in control of the Company, as otherwise defined or determined by
the Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Company by any
person, trust, entity or group. This limitation shall not apply to the purchase
of shares by underwriters in connection with a public offering of Company stock,
or the purchase of shares of up to 25% of any class of securities of the Company
by a tax-qualified employee stock benefit plan. The term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Committee as
to whether a Change in Control has occurred shall be conclusive and binding.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and regulations promulgated thereunder.
(e) "Committee" shall mean the Board or the Stock Option Committee
appointed by the Board in accordance with Section 5(a) of the Plan.
(f) "Common Stock" shall mean the common stock of the Company, or
any successor or parent corporation thereto.
1
<PAGE>
(g) "Company" shall mean the Virginia Beach Federal Financial
Corporation, the parent corporation of the Savings Bank, or any successor or
Parent thereof.
(h) "Director" shall mean a member of the Board of the Company, or
any successor or parent corporation thereto.
(i) "Director Emeritus" shall mean a person serving as a director
emeritus, advisory director, consulting director, or other similar position as
may be appointed by the Board of Directors of the Savings Bank or the Company
from time to time.
(j) "Disability" means any physical or mental impairment which
renders the Participant incapable of continuing in the employment or service of
the Savings Bank or the Parent in his then current capacity as determined by the
Committee.
(k) "Effective Date" shall mean December 11, 1997.
(l) "Employee" shall mean any person employed by the Company or any
present or future Parent or Subsidiary of the Company. "Non-Employee" shall mean
an individual not employed by the Company or any present or future Parent or
Subsidiary of the Company.
(m) "Fair Market Value" shall mean: (i) if the Common Stock is
traded otherwise than on a national securities exchange, then the Fair Market
Value per Share shall be equal to the mean between the last bid and ask price of
such Common Stock on such date or, if there is no bid and ask price on said
date, then on the immediately prior business day on which there was a bid and
ask price. If no such bid and ask price is available, then the Fair Market Value
shall be determined by the Committee in good faith; or (ii) if the Common Stock
is listed on a national securities exchange (including the NASDAQ National
Market System), then the Fair Market Value per Share shall be not less than the
average of the highest and lowest selling price of such Common Stock on such
exchange on such date, or if there were no sales on said date, then the Fair
Market Value shall be not less than the mean between the last bid and ask price
on such date.
(n) "Option" or "Stock Option" shall mean an Award granted pursuant
to this Plan providing the holder of such Option with the right to purchase
Common Stock.
(o) "Optioned Stock" shall mean stock subject to an Option granted
pursuant to the Plan.
(p) "Optionee" shall mean any person who receives an Option or Award
pursuant to the Plan.
(q) "Parent" shall mean any present or future corporation which
would be a "parent corporation" as defined in Sections 424(e) and (g) of the
Code.
(r) "Participant" means any director of the Company or any Parent or
Subsidiary of the Company or any other person providing a service to the Company
who is selected by the Committee to receive an Award, or who by the express
terms of the Plan is granted an Award.
2
<PAGE>
(s) "Plan" shall mean the Virginia Beach Federal Financial
Corporation 1997 Directors Stock Compensation Plan.
(t) "Savings Bank" shall mean First Coastal Bank, Virginia Beach,
Virginia, or any successor corporation thereto.
(u) "Share" shall mean one share of the Common Stock.
(v) "Subsidiary" shall mean any present or future corporation which
constitutes a "subsidiary corporation" as defined in Sections 424(f) and (g) of
the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 11 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 25,000 Shares.
Such Shares may either be from authorized but unissued shares or shares
purchased in the market for Plan purposes. If an Award shall expire, become
unexercisable, or be forfeited for any reason prior to its exercise, new Awards
may be granted under the Plan with respect to the number of Shares as to which
such expiration has occurred.
4. Six Month Holding Period.
------------------------
Except in the event of the death or disability of the Optionee or a
Change in Control of the Company, a minimum of six months must elapse between
the date of the grant of an Option and the date of the sale of the Common Stock
received through the exercise of such Option.
5. Administration of the Plan.
--------------------------
(a) Composition of the Committee. The Plan shall be administered by
the Board of Directors of the Company or a Committee which shall consist of not
less than two Directors of the Company appointed by the Board and serving at the
pleasure of the Board. All persons designated as members of the Committee shall
meet the requirements of a "Non-Employee Director" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended, as found at 17 CFR
ss.240.16b-3.
(b) Powers of the Committee. The Committee is authorized (but only
to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Company and such other officers as shall be
designated by the Committee are hereby authorized to execute written agreements
evidencing Awards on behalf of the Company and to cause them to be delivered to
the Participants. Such agreements shall set forth the Option exercise price, the
number of shares of Common Stock subject to such Option, the expiration date
3
<PAGE>
of such Options, and such other terms and restrictions applicable to such Award
as are determined in accordance with the Plan or the actions of the Committee.
(c) Effect of Committee's Decision. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
6. Eligibility for Awards and Limitations.
--------------------------------------
(a) The Committee shall from time to time determine the
Participants who shall be granted Awards under the Plan and the number of Awards
to be granted to each such persons. In selecting Participants and in determining
the number of Shares of Common Stock to be granted to each such Participant, the
Committee may consider the nature of the prior and anticipated future services
rendered by each such Participant, each such Participant's current and potential
contribution to the Company and such other factors as the Committee may, in its
sole discretion, deem relevant. Participants who have been granted an Award may,
if otherwise eligible, be granted additional Awards.
(b) In no event shall Shares subject to Options granted to any
Participant exceed more than 12.5% of the total number of Shares authorized for
delivery under the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of ten
(10) years from the Effective Date, unless the Plan is terminated by the Board
in accordance with the Plan.
8. Terms and Conditions of Stock Options. Stock Options may be granted or
awarded only to Participants. Each Stock Option granted pursuant to the Plan
shall be evidenced by an instrument in such form as the Committee shall from
time to time approve. Each Stock Option granted pursuant to the Plan shall
comply with, and be subject to, the following terms and conditions:
(a) Option Price. The price per Share at which each Stock Option
granted by the Committee under the Plan may be exercised shall not, as to any
particular Stock Option, be less than the Fair Market Value of the Common Stock
on the date that such Stock Option is granted.
(b) Payment. Full payment for each Share of Common Stock purchased
upon the exercise of any Stock Option granted under the Plan shall be made at
the time of exercise of each such Stock Option and shall be paid in cash (in
United States Dollars), Common Stock or a combination of cash and Common Stock.
Common Stock utilized in full or partial payment of the exercise price shall be
valued at the Fair Market Value at the date of exercise. The Company shall
accept full or partial payment in Common Stock only to the extent permitted by
applicable law. No Shares of Common Stock shall be issued until full payment has
been received by the Company, and no Optionee shall have any of the rights of a
stockholder of the Company until Shares of Common Stock are issued to the
Optionee.
(c) Term of Stock Option. The term of exercisability of each Stock
Option granted pursuant to the Plan shall be not more than ten (10) years from
the date each such Stock Option is granted.
(d) Exercise Generally. Except as otherwise provided by the terms of
the Plan or by action of the Committee at the time of the grant of the Options,
the Options granted will be first exercisable as of the date of grant of such
options and shall remain exercisable during such periods of service as a
Director or Director Emeritus.
4
<PAGE>
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Stock Option for at least six months may
engage in the "cashless exercise" of the Option. Upon a cashless exercise, an
Optionee shall give the Company written notice of the exercise of the Option
together with an order to a registered broker-dealer or equivalent third party,
to sell part or all of the Optioned Stock and to deliver enough of the proceeds
to the Company to pay the Option exercise price and any applicable withholding
taxes. If the Optionee does not sell the Optioned Stock through a registered
broker-dealer or equivalent third party, the Optionee can give the Company
written notice of the exercise of the Option and the third party purchaser of
the Optioned Stock shall pay the Option exercise price plus any applicable
withholding taxes to the Company.
(f) Transferability. An Stock Option granted pursuant to the Plan
shall be exercised during an Optionee's lifetime only by the Optionee to whom it
was granted and shall not be assignable or transferable otherwise than by will
or by the laws of descent and distribution.
9. Awards to Directors.
-------------------
As of December 11, 1997, Stock Options to purchase 3,125 shares of
Common Stock shall be granted to each Director of the Company that is not on
that date an employee of the Company or the Savings Bank. Such Options shall be
exercisable at a price equal to the Fair Market Value of the Common Stock as of
the date of grant of such Options. Such Options will be first exercisable as of
the Date of Grant. Such Options shall continue to be exercisable for a period of
ten years following the date of grant without regard to the continued services
of such Director as an Employee, Director or Director Emeritus. In the event of
the Optionee's death, such Options may be exercised by the personal
representative of his estate or person or persons to whom his rights under such
Option shall have passed by will or by the laws of descent and distribution.
Unless otherwise inapplicable, or inconsistent with the provisions of this
paragraph, the Options to be granted to Directors hereunder shall be subject to
all other provisions of this Plan.
10. Withholding Tax. The Company shall have the right to deduct from all
amounts paid in cash with respect to the cashless exercise of Options under the
Plan any taxes required by law to be withheld with respect to such cash
payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option, the Company shall have the right to
require the Participant or such other person to pay the Company the amount of
any taxes which the Company is required to withhold with respect to such Shares,
or, in lieu thereof, to retain, or to sell without notice, a number of such
Shares sufficient to cover the amount required to be withheld.
11. Recapitalization, Merger, Consolidation, Change in Control and Other
----------------------------------------------------------------------
Transactions.
------------
(a) Adjustment. Subject to any required action by the stockholders
of the Company, within the sole discretion of the Committee, the aggregate
number of Shares of Common Stock for which Options may be granted hereunder, the
number of Shares of Common Stock covered by each outstanding Option, and the
exercise price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
5
<PAGE>
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a Change in Control of the Company, as
determined by the Committee. In the event of such a Change in Control, the
Committee and the Board of Directors will take one or more of the following
actions to be effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent
options shall be substituted, ("Substitute Options") by the acquiring or
succeeding corporation (or an affiliate thereof), provided that: the shares of
stock issuable upon the exercise of such Substitute Options shall constitute
securities registered in accordance with the Securities Act of 1933, as amended,
("1933 Act") or such securities shall be exempt from such registration in
accordance with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively,
"Registered Securities"), or in the alternative, if the securities issuable upon
the exercise of such Substitute Options shall not constitute Registered
Securities, then the Optionee will receive upon consummation of the Change in
Control transaction a cash payment for each Option surrendered equal to the
difference between (1) the Fair Market Value of the consideration to be received
for each share of Common Stock in the Change in Control transaction times the
number of shares of Common Stock subject to such surrendered Options, and (2)
the aggregate exercise price of all such surrendered Options, or
(ii) in the event of a transaction under the terms of which the
holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment (the "Merger Price") for each share of Common Stock
exchanged in the Change in Control transaction, to make or to provide for a cash
payment to the Optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such Options held by each
Optionee (to the extent then exercisable at prices not in excess of the Merger
Price) and (B) the aggregate exercise price of all such surrendered Options in
exchange for such surrendered Options.
(c) Extraordinary Corporate Action. Notwithstanding any provisions
of the Plan to the contrary, subject to any required action by the stockholders
of the Company, in the event of any Change in Control, recapitalization, merger,
consolidation, exchange of Shares, spin-off, reorganization, tender offer,
partial or complete liquidation or other extraordinary corporate action or
event, the Committee, in its sole discretion, shall have the power, prior or
subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock
subject to each Option, the Option exercise price per Share of Common Stock, and
the consideration to be given or received by the Company upon the exercise of
any outstanding Option;
(ii) cancel any or all previously granted Options, provided
that appropriate consideration is paid to the Optionee in connection therewith;
and/or
(iii) make such other adjustments in connection with the Plan
as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable.
(d) Acceleration. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan.
(e) Non-recurring Dividends. Upon the payment of a special or
non-recurring cash dividend that has the effect of a return of capital to the
stockholders, the Option exercise price per share shall be adjusted
proportionately and in an equitable manner.
6
<PAGE>
Except as expressly provided in Sections 11(a), 11(b) and 11(e) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 11.
12. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date specified in accordance with the Plan
or the date on which the Committee makes the determination of granting such
Option. Notice of the grant of an Option shall be given to each individual to
whom an Option is so granted within a reasonable time after the date of such
grant in a form determined by the Committee.
13. Modification of Options. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Option, provided no such modification,
extension or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on the Optionee by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 14 hereof.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Action by the Board. The Board may alter, suspend or discontinue
the Plan.
(b) Change in Applicable Law. Notwithstanding any other provision
contained in the Plan, in the event of a change in any federal or state law,
rule or regulation which would make the exercise of all or part of any
previously granted Option unlawful or subject the Company to any penalty, the
Committee may restrict any such exercise without the consent of the Optionee or
other holder thereof in order to comply with any such law, rule or regulation or
to avoid any such penalty.
15. Conditions Upon Issuance of Shares; Limitations on Option Exercise;
---------------------------------------------------------------------
Cancellation of Option Rights.
- -----------------------------
(a) Shares shall not be issued with respect to any Option granted under
the Plan unless the issuance and delivery of such Shares shall comply with all
relevant provisions of applicable law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities laws and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) The inability of the Company to obtain any necessary authorizations,
approvals or letters of non-objection from any regulatory body or authority
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares issuable hereunder shall relieve the Company of any liability with
respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the termination
of employment or service of an Optionee by the Company or its Subsidiaries for
"cause" within the sole discretion of the Board, all Options held by such
Participant shall cease to be exercisable as of the date of such termination of
employment or service.
7
<PAGE>
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in part, in lieu of the
delivery of shares of Common Stock. Such cash payment to be paid in lieu of
delivery of Common Stock shall be equal to the difference between the Fair
Market Value of the Common Stock on the date of the Option exercise and the
exercise price per share of the Option. Such cash payment shall be in exchange
for the cancellation of such Option. Such cash payment shall not be made in the
event that such transaction would result in liability to the Optionee or the
Company under Section 16(b) of the Securities Exchange Act of 1934, as amended,
and regulations promulgated thereunder.
16. Reservation of Shares. During the term of the Plan, the Company will
reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
17. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
18. No Employment Rights. No Director, Employee or other person shall have
a right to be selected as a Participant under the Plan. Neither the Plan nor any
action taken by the Committee in administration of the Plan shall be construed
as giving any person any rights of employment or retention as an Employee,
Director or in any other capacity with the Company, the Savings Bank or other
Subsidiaries.
19. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of Virginia, except to the extent that
federal law shall be deemed to apply.
8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Five-Year Financial Summary
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
(Dollars in thousands, except per share data) -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------
Selected Statement of Operations Data 1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
At or for the year ended December 31,
------------------------------------------------------------------------
Selected Financial Ratios and Other Data 1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Freddie Mac, Fannie Mae and Ginnie Mae 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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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).
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
==== ==== ====
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
=============================================================================
</TABLE>
(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
<PAGE>
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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
<PAGE>
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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 bill, among other things, equalizes the taxation of
thrifts and banks. For tax years up through 1995, thrifts had been able to
deduct a portion of their bad-debt reserves set aside to cover potential loan
losses ("bad-debt reserves"). Under the bill, large thrifts must change to the
specific charge-off method for computing their bad debt deduction for 1996 and
future years. Furthermore, the bill repeals current law 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
<PAGE>
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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
<PAGE>
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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
<PAGE>
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- --------------------------------------------------------------------------------
Consolidated Statement of Financial Condition
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
(Dollars in thousands, except share data) -------------------------
<S> <C> <C>
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
=========================
</TABLE>
The notes to consolidated financial statements are an integral part of this
statement
22
<PAGE>
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- --------------------------------------------------------------------------------
Consolidated Statement of Operations
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1996 1995
(Dollars in thousands, except per share data) --------------------------------------
<S> <C> <C> <C>
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
</TABLE>
The notes to consolidated financial statements are an integral part of this
statement
23
<PAGE>
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- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996 1995
(Dollars in thousands) ------------------------------------------
<S> <C> <C> <C>
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
------------------------------------------
</TABLE>
(continued)
24
<PAGE>
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- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996 1995
(Dollars in thousands) -----------------------------------------
<S> <C> <C> <C>
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
</TABLE>
The notes to consolidated financial statements are an integral part of this
statement
25
<PAGE>
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Consolidated Statement of
Stockholders' Equity
Virginia Beach Federal Financial Corporation
<TABLE>
<CAPTION>
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) -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
=====================================================================================
</TABLE>
The notes to consolidated financial statements are an integral part of this
statement
26
<PAGE>
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- --------------------------------------------------------------------------------
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 hedges 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
<PAGE>
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- --------------------------------------------------------------------------------
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 hedges of specific mortgage loan rate commitments ("rate
locks") and closed loans are
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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):
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
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
=======================================================
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
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
=======================================================
</TABLE>
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 4 - MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
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
=====================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
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
=====================================================
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 6 - FORECLOSED REAL ESTATE (continued)
Changes in the allowance for losses on foreclosed real estate follows (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
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
================================
</TABLE>
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
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 --
</TABLE>
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
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
=================================
</TABLE>
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
Mark-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
Mark-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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 14 - STOCK OPTION PLANS (continued)
<TABLE>
<CAPTION>
1997 1996 1995
In thousands except per share data ----------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= =======
</TABLE>
The following table summarizes information about fixed price stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Total Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Outstanding Life Price Exercisable Price
Exercise Prices ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$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
======= =======
</TABLE>
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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).
<TABLE>
<CAPTION>
Minimum To Be Well
Requirements For Capitalized Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------------------------------------------
Estimated Estimated
Notional Carrying Fair Notional Carrying Fair
Amount Value Value Amount Value Value
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 -- --
</TABLE>
41
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION (continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
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
======================================
</TABLE>
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
NOTE 19 - QUARTERLY CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
1997 Quarter ended
------------------------------------------------------------
March 31 June 30 September 30 December 31
(in thousands, except per share data) ------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1996 Quarter ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
(1) Quarterly amounts are independently calculated and may not total to the
annual amounts.
46
<PAGE>
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
corporate
information
<TABLE>
<CAPTION>
<S> <C>
Securities and
Regulatory Counsel
Malizia, Spidi, Sloane & Fisch, 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, Suite 400, P.O. Box 848, Virginia Following are the high and low closing
Beach, VA 23451. 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 mark-up,
Federal Financial Corporation will be held mark-down or commission and may not necessarily
on April 29, 1998 at 2:00 p.m. at the Clarion represent actual transactions.
Hotel, 4453 Bonney Road, Virginia Beach, VA.
</TABLE>
<TABLE>
<CAPTION>
1997 1996
high low dividend high low dividend
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
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 (757) 428-9331.
</TABLE>
<PAGE>
branches
FIRST COASTAL BANK
AND ATMs
<TABLE>
<CAPTION>
<S> <C> <C>
Executive and Additional ATM locations
Administrative Offices Wal-Mart ATM McDonalds ATM
2101 Parks Avenue 1521 Sam's Circle 908 General Booth Boulevard
Virginia beach, Virginia 23451 Chesapeak Virginia Beach
Wal-Mart ATM McDonald's ATM
Executive and Administrative 4107 Portsmouth Blvd. 16th Street and Atlantic
Offices Peninsula Chesapeake Virginia Beach
601 Thimble Shoals Blvd.
Newport News Firginia 23606 Wal-Mart ATM McDonald's ATM
12401 Jefferson Aenue 21st Street and Pacific
Chesapeake Newport News Virginia Beach
Cedar Road Financial Center
1000 Cedar Road Wal-Mart ATM McDonalds ATM
1170 N. Military Highway 28th Street and Atlantic
Greenbrier Financial Norfolk Virginia Beach
and Mortgage Center
1172 Greenbrier Parkway Wal-Mart ATM McDonald's ATM
657 Phoenix Drive 2057 General Booth Boulevard
Greenbrier MarketCenter Virginia Beach Virginia Beach
Inside Harris Teeter Supermarket
1216 Greenbrier Parkway Selden Arcade ATM McDonalds ATM
210 East Main Street 1507 Atlantic Avenue
Norfolk Virginia Beach
Newport News
Denbigh Crossing Financial Center Sam's Club ATM
12705 Jefferson Avenue 1501 Sam's Circle
Chesapeake
Oyster Point Financial
and Mortgage Center Sam's Club ATM
601 Thimble Shoals Blvd. 12407 Jefferson Avenue
Newport News
Virginia Beach Other Virginia ATM locations
Aragona Financial Center Sam's Club ATM Wal-Mart ATM
4860 Virginia Beach Blvd. 901 Wal-Mart Way 640 Highway 58 East
Midlothian Norton
Courthouse Financial Center Sam's Club ATM Wal-Mart ATM
2400 Princess Anne Road 9400 West Broad Street 126 Sandy Court
Richmond Danville
Fairfield Financial Center Wal-Mart ATM Wal-Mart ATM
5224 Providence Road 900 Wal-Mart Way 1000 Memorial Drive
Midlothian 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 Harris Teeter Supermarket 1077 East Stuart Drive 1121 East Atlantic Street
HQ Plaza, 3333 Virginia Beach Blvd. Galax South Hill
Lynnhaven Financial Center
230 N. Lynnhaven Road
Pavilion Financial
and Mortgage Center
2101 Parks Avenue
Shore Drive Financial Center
3037 Shore Drive
Williamsburg
Five Forks Financial Center FIRST COASTAL BANK
215 Ingram Road -------------------------------
Solution Banking
</TABLE>
EXHIBIT (21)
SUBSIDIARIES
State of Incorporation
================================================================================
First Tier Subsidiaries of the Company
First Coastal Bank United States
(formerly Virginia Beach Federal Savings Bank)
First Tier Subsidiaries of the Bank (1)
Princess Anne Service Corporation Virginia
First Coastal Mortgage Corp Virginia
(formerly Beach Fed Mortgage Corp)
VBF Financial Services Corp. Virginia
Eighth Princess Anne Properties, Inc. Virginia
Second Tier Subsidiaries of the Bank (2)
First Princess Anne Properties, Inc. Virginia
Third Princess Anne Properties, Inc. Virginia
Fourth Princess Anne Properties, Inc. Virginia
Fifth Princess Anne Properties, Inc. Virginia
Ninth Princess Anne Properties, Inc. Virginia
Tenth Princess Anne Properties, Inc. Virginia
Eleventh Princess Anne Properties, Inc. Virginia
Twelfth Princess Anne Properties, Inc. Virginia
Thirteenth Princess Anne Properties, Inc. Virginia
(1) Wholly-owned by the Bank.
(2) Wholly-owned by Princess Anne Service Corporation.
EXHIBIT (23.1)
--------------
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
Virginia Beach Federal Financial Corporation:
We consent to incorporation by reference in Registration Statement No. 33-46154
on Form S-8, in Registration Statement No. 33-76678 on Form S-8, and in
Registration Statement No. 333-22399 on Form S-3 of Virginia Beach Federal
Financial Corporation of our report dated January 30, 1998, relating to the
consolidated statement of financial condition of Virginia Beach Federal
Financial Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for the years then ended, which report appears in the
December 31, 1997 annual report on Form 10-K of Virginia Beach Federal Financial
Corporation.
KPMG PEAT MARWICK LLP
- ---------------------
Richmond, Virginia
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,236
<INT-BEARING-DEPOSITS> 194
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,044
<INVESTMENTS-CARRYING> 35,375
<INVESTMENTS-MARKET> 34,566
<LOANS> 467,130
<ALLOWANCE> 4,297
<TOTAL-ASSETS> 616,188
<DEPOSITS> 407,443
<SHORT-TERM> 160,117
<LIABILITIES-OTHER> 4,479
<LONG-TERM> 0
0
0
<COMMON> 50
<OTHER-SE> 44,099
<TOTAL-LIABILITIES-AND-EQUITY> 616,188
<INTEREST-LOAN> 40,037
<INTEREST-INVEST> 6,898
<INTEREST-OTHER> 1,664
<INTEREST-TOTAL> 48,599
<INTEREST-DEPOSIT> 19,728
<INTEREST-EXPENSE> 29,637
<INTEREST-INCOME-NET> 18,962
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 15,981
<INCOME-PRETAX> 6,657
<INCOME-PRE-EXTRAORDINARY> 6,657
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,103
<EPS-PRIMARY> .82
<EPS-DILUTED> .81
<YIELD-ACTUAL> 8.24
<LOANS-NON> 90
<LOANS-PAST> 6,157
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,783
<ALLOWANCE-OPEN> 4,390
<CHARGE-OFFS> 340
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 4,297
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,297
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
ANNUAL REPORT
Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
COMMISSION FILE NUMBER: 0-19398
A. Full title of the Plan and the address of the Plan:
First Coastal Bank
Employee Stock Purchase Plan
c/o Human Resources Department
First Coastal Bank
Pavilion Center Office
2101 Parks Avenue,
Virginia Beach, Virginia 23451
B. Name of issuer of the securities held pursuant to the Plan and the
address of its principal executive office:
Virginia Beach Federal Financial Corporation
2101 Parks Avenue, Suite 400
Virginia Beach, Virginia 23451
<PAGE>
REQUIRED INFORMATION
--------------------
PAGE
---------------
(a) Financial Statements
Independent Auditors' Report........................ 1
Statement of Financial Condition.................... 2
Statement of Income and Changes in Plan Equity...... 3
Notes to Financial Statements....................... 4 - 7
(b) Consent of Independent Auditors .................... 8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Board
of Directors has duly caused this annual report to be signed by the undersigned
thereunto duly authorized.
FIRST COASTAL BANK
EMPLOYEE STOCK PURCHASE PLAN
March 25, 1998 /s/ John A. B. Davies, Jr.
- ---------------------------- ------------------------------------------------
Date John A. B. Davies, Jr.
President/Chief Executive Officer
March 25, 1998 /s/ Dennis R. Stewart
- ---------------------------- ------------------------------------------------
Date Dennis R. Stewart
Executive Vice President/Chief Financial Officer
9
<PAGE>
Independent Auditors' Report
----------------------------
To the Participants and Plan Administrator of the
First Coastal Bank Employee Stock Purchase Plan
We have audited the accompanying statement of financial condition of First
Coastal Bank Employee Stock Purchase Plan as of December 31, 1997 and 1996, and
the related statement of income and changes in plan equity for each of the years
in the three-year period ended December 31, 1997. These financial statements are
the responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the First Coastal Bank Employee
Stock Purchase Plan as of December 31, 1997 and 1996, and the results of its
operations and changes in plan equity 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
March 9, 1998
1
<PAGE>
First Coastal Bank Employee Stock Purchase Plan
Statement of Financial Condition
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------------
Assets:
<S> <C> <C>
Investments, at fair value -
Virginia Beach Federal Financial Corporation Common Stock
20,741 shares in 1997 - Cost $195,695;
18,563 shares in 1996 - Cost $160,303 (Note 4) ...... $381,116 $175,188
Contributions receivable ..................................... 2,811 2,968
-------------------
Total Assets ........................................ $383,927 $178,156
===================
Plan equity .................................................. $383,927 $178,156
===================
</TABLE>
See accompanying Notes to Financial Statements
2
<PAGE>
First Coastal Bank Employee Stock Purchase Plan
Statement of Income and Changes in Plan Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Contributions to the plan:
Employee ................................. $ 70,558 $ 80,115 $ 144,569
Employer ................................. 3,715 4,217 7,267
Dividend income ............................... 3,780 2,761 3,818
-----------------------------------
Total ................................ 78,053 87,093 155,654
Unrealized appreciation of investments (Note 4) 170,536 23,115 18,087
Withdrawals - distributions to participants ... (42,818) (127,526) (90,028)
-----------------------------------
Net increase (decease) in plan equity ......... 205,771 (17,318) 83,713
Plan equity - beginning of year ............... 178,156 195,474 111,761
-----------------------------------
Plan equity - end of year ..................... $ 383,927 $ 178,156 $ 195,474
===================================
Net asset value per unit ...................... $ 18.51 $ 9.60 $ 7.90
===================================
Number of units outstanding at end of year .... 20,741 18,563 24,741
===================================
</TABLE>
See accompanying Notes to Financial Statements
3
<PAGE>
First Coastal Bank Employee Stock Purchase Plan
Notes to Financial Statements
Note 1 - Plan Description
The First Coastal Bank Employee Stock Purchase Plan (the Plan; formerly the
Virginia Beach Federal Savings Bank Employee Stock Purchase Plan) was
established April 1, 1994 for the purpose of offering employees a way to
commence or increase their ownership of Virginia Beach Federal Financial
Corporation (the Corporation) common stock.
The Plan is not qualified under Section 401(a) of the Internal Revenue Code and
is exempt from the provisions of the Employee Retirement Income Security Act of
1974, as amended (ERISA). First Coastal Bank's (the Bank) Board of Directors
(Board of Directors) has appointed American Stock Transfer & Trust Company (Plan
Administrator) to administer the Plan and make purchases of common stock of (the
Corporation) as agent for the participants. The Board of Directors has the
authority to make changes in the Plan and to appoint or to remove the Plan
Administrator, at any time.
All employees are eligible to participate in the Plan on a voluntary basis up to
a maximum of $900 per pay period. Once an employee is enrolled as a participant
in the Plan, payroll deductions are made and such funds are used to purchase
common stock of the Corporation in the open-market, or directly from the
Corporation under the terms of the Plan. The Plan grants participants options to
purchase common stock of the Corporation at 95% of the current market price
during a thirty day investment period. The Bank contributes the remaining 5%.
The participant pays no brokerage commissions or service charges for purchases
made under the Plan. Certain charges, such as brokerage commissions and transfer
taxes, may be incurred upon a participant's withdrawal from the Plan or upon
termination of the Plan. The Plan Administrator may deduct expenses from the
Plan to the extent such expenses have not been paid directly by the Bank;
provided that not less than 15 days written notice of such intent to make such
deductions is furnished to the Bank.
The Plan Administrator holds and acts as custodian of shares purchased under the
Plan. The Plan Administrator may establish such procedures and make such other
provisions for the administration and operation of the Plan as it deems
appropriate to give effect to the Plan's purpose.
Cash dividends paid on shares credited to a participant's account will be
retained in the participant's account and invested in common stock as soon as
practicable following the dividend payment date.
A participant may withdraw from the Plan at any time to be effective as of the
first day of any calendar quarter. Upon termination of employment with the Bank,
participation under the Plan shall immediately cease and no unexercised options
to purchase common stock under the Plan
4
<PAGE>
Notes to Financial Statements (Continued)
shall be deemed exercisable. Termination of employment shall include termination
as a result of death or disability of the participant.
Upon written request to the Plan Administrator, a participant may request the
distribution of shares held under the Plan in stock certificates of not less
than 100 share increments on a quarterly basis. Alternatively, a participant may
request that such distribution be made in the form of cash, in which case such
distribution of cash will be made in accordance with established procedures,
with the proceeds from the sale of such shares, less any brokerage commissions
and any taxes, if applicable, remitted to the participant. Such distribution of
Plan shares shall not be deemed a "Withdrawal" under the Plan.
Each participant has the authority to direct the Plan Administrator in the
manner of voting the number of whole shares (units) and fractional shares of
common stock held in his or her account. The aggregate number of remaining
shares representing shares for which no participant voting instructions are
received in a timely manner shall not be voted by the Plan Administrator.
Note 2 - Summary of Significant Accounting Policies
The financial statements are prepared on the accrual basis of accounting whereby
Plan contributions and withdrawals are recognized as incurred; dividend income
is recognized when earned; and unrealized appreciation or depreciation of
investments is recognized as it occurs.
The common shares of the Corporation are valued at fair value based upon the
last traded market price at year end.
Contributions receivable represent amounts withheld from participants prior to
year-end, and which were scheduled for payment to the Plan for investment
subsequent to the Plan's year end.
Note 3 - Tax Status
The Plan was established to qualify as an Employee Stock Purchase Plan as
defined in Section 423 of the Internal Revenue Code.
The following is a brief summary of the tax consequences of the Plan.
Participants should consult their tax advisors as to the tax consequences of
their individual transactions.
(1) The grant of an option to purchase stock under the Plan will not, by
itself, result in the recognition of taxable income to the participant or
entitle the Bank to a deduction at the time of such grant.
(2) The exercise of an option generally will not, by itself, result in the
recognition of taxable income to the participant or entitle the Bank to a
deduction at the time of such exercise. Provided that the participant
holds such shares received under the Plan for at least one year after
acquisition of the shares or two years after the grant of the
5
<PAGE>
Notes to Financial Statements (Continued)
option, whichever is later, the participant will recognize taxable income
upon sale of such common stock as follows:
a) with respect to the 5% purchase discount, the difference between the
amount paid by the participant for such common stock (the option
exercise price) and the Plan purchase price of the common stock will
be taxable as ordinary income upon the sale of the common stock;
b) the participant will recognize capital gain upon the sale of the
common stock received upon the exercise of options to purchase such
stock under the Plan, to the extent that the sale price of such
common stock exceeds the Plan purchase price of such common stock;
c) if the sale price of such common stock is below the Plan purchase
price of such common stock, the participant shall recognize a
long-term capital loss upon the sale of such common stock.
(3) The sale of the common stock acquired within two years of the date of
grant of such option or one year of such acquisition, whichever is later,
will result in the recognition of ordinary income by the participant on
the date of sale in an amount equal to the difference between the exercise
price of such option (i.e., 95% of the market price of the stock
purchased) and the sale proceeds of such common stock.
(4) Receipt of cash dividends on stock held under the Plan will result in
taxable income to the participant in the year received without regard to
the reinvestment of such dividends for the purchase of additional common
stock under the Plan.
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Note 4 - Unrealized Appreciation of Investments
The following table summarizes the unrealized appreciation (depreciation) of the
Plan's investments in common stock for the years ended December 31, 1997, 1996
and 1995.
1997 1996 1995
----------------------------------
Fair value .......................... $ 381,116 $ 175,188 $ 191,742
Less: prior year accumulated
unrealized appreciation
depreciation)................. 14,885 (8,230) (26,317)
Less: cost........................... 195,695 160,303 199,972
-----------------------------------
Current year unrealized appreciation $ 170,536 $ 23,115 $ 18,087
===================================
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CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Virginia Beach Federal Financial Corporation
We consent to incorporation by reference in Registration Statement No. 33-76678
on Form S-8 of Virginia Beach Federal Financial Corporation of our report dated
March 9, 1998, relating to the statement of financial condition of First Coastal
Bank Employee Stock Purchase Plan as of December 31, 1997 and 1996, and the
related statement of income and changes in plan equity for each of the years in
the three-year period ended December 31, 1997, which report is included in the
December 31, 1997 annual report on Form 11-K of the First Coastal Bank Employee
Stock Purchase Plan.
\s\ KPMG Peat Marwick LLP
Richmond, Virginia
March 25, 1998
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