U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB (Mark One)
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended June 30, 1996
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from to
--------------- ---------------
Commission File Number: 0-24674
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SWVA BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Virginia 54-1721629
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) (Identification No.)
302 Second Street, S.W., Roanoke, Virginia 24011-1597
- ------------------------------------------------ --------------------
(Address of Principal Executive Offices) (Zip Code)
(540) 343-0135
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $306,000
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock as of
September 16, 1996, was $7,982,553 (541,190 shares at $14.75 per share).
As of September 16, 1996, the registrant had (541,190 shares of Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of the registrant's Annual Report to Stockholders for
the fiscal year ended June 30, 1996.
2. Part III -- Portions of the registrant's Proxy Statement for Annual Meeting
of Stockholders to be held on October 23, 1996.
<PAGE>
PART I
Item 1. Description of Business.
Business of the Company
SWVA Bancshares, Inc. (the "Company") is a Virginia corporation
organized in June of 1994 at the direction of Southwest Virginia Savings Bank,
FSB (the "Bank") to acquire all of the capital stock that the Bank issued in its
conversion from the mutual to stock form of ownership (the "Conversion"). On
October 7, 1994, the Bank completed the Conversion and became a wholly owned
subsidiary of the Company. In connection with the Conversion, the Company issued
570,590 shares of its Common Stock, par value $.10 per share (the "Common
Stock"). The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided that the Bank retains a specified amount of its
assets in housing-related investments. At June 30, 1996, the Company had total
assets of $67.1 million and stockholders' equity of $8.7 million.
On August 14, 1995, the Company received the necessary approval from the
Office of Thrift Supervision ("OTS") to repurchase up to 5% (or 28,529 shares)
of the Company's Common Stock prior to October 7, 1995. The Company repurchased
27,400 shares of its Common Stock in the open market, at an aggregate purchase
price of approximately $466,000. The amount repurchased represented
approximately 4.8% of the Company's total shares outstanding prior to the
repurchase.
On June 14, 1996, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 5% (or 27,160 shares) of its
outstanding common stock in the open market by October 7, 1996, pursuant to a
stock repurchase program adopted by the Board of Directors. For further details,
reference is made to the Form 8-K dated June 14, 1996, which was filed with the
Securities and Exchange Commission on June 14, 1996, and is incorporated herein
by this reference.
Business of the Bank
General. The Bank is primarily engaged in attracting deposits from the
general public and using those funds to originate real estate loans on one- to
four-family residences and, to a lesser extent, construction, multi-family and
non-residential real estate loans, commercial loans and consumer loans. In
addition, the Bank invests in investment securities and mortgage-backed
securities. The Bank offers its customers both ARMs and fixed-rate mortgage
loans. ARMs are originated for retention in the Bank's portfolio. In recent
years, the Bank sold fixed rate mortgage loans upon origination in the secondary
market. Depending on the level of prevailing interest rates, the Bank may retain
fixed rate mortgage loans for retention in its portfolio. Management of the Bank
determines whether to retain fixed rate mortgage loans in its portfolio on the
basis of whether the interest rate received on the loan would possibly be
beneficial to the profitability of the Bank's loan portfolio over the average
life of the loan. All consumer loans are retained in the Bank's portfolio.
The principal sources of funds for the Bank's lending activities are
deposits and the amortization, repayment and maturity of loans and investment
and mortgage-backed securities. The Bank's primary sources of income are
interest and fees on loans and investment and mortgage-backed securities and
customer service fees and commissions. The Bank's primary expense is interest
paid on deposits.
Market Area. The Bank's primary market area consists of Roanoke County,
the City of Salem, the City of Roanoke, andportions of Botetourt, Bedford, and
Franklin Counties. The Bank regards this area as its "basic" lending area, but
loans are also made in other adjoining counties.
<PAGE>
The Bank's main office is located at 302 Second Street, S.W., in the
City of Roanoke, Virginia. The Bank has one other branch office located in the
City of Roanoke. The Bank has another branch and a loan production office
located in Roanoke County, as well as branch offices in Vinton and Salem,
Virginia.
The Roanoke Valley is equidistant from New York and Atlanta, 230 miles
south of Washington, D.C. and 250 miles west of the Port of Hampton Roads,
Virginia. The population in the Roanoke Valley area has remained relatively
stable over the past thirty years and was 269,100 according to the 1990 U.S.
Census. The Roanoke Valley area enjoys a diversified economy comprised of
services, retail, manufacturing, government offices, finance, insurance, real
estate, wholesale trade, transportation, public utilities, construction, and
agriculture.
The outlying region of the Bank's market area is rural in nature and may
represent limited opportunities for lending and investment growth which could
adversely affect the Bank's ability to achieve asset growth. The Bank is the
only savings bank headquartered in the Roanoke Valley area. This area is also
served by branch offices of regional commercial banks.
Lending Activities
General. The principal lending activity of the Bank is the origination
of adjustable-rate or short-term loans secured by one- to four-family residences
for portfolio purposes and fixed-rate loans which generally are underwritten to
conform to standards required for the sale of such loans in the secondary
mortgage market. The Bank also originates some nonconforming first mortgage
loans to serve community needs which are retained in the Banks's portfolio.
Adjustable-rate loans comprised 72.38% of total loans outstanding on June 30,
1996. For the fiscal year ended June 30, 1996 adjustable-rate loans represented
17.06% of total mortgage loan originations. The Bank also originates
nonresidential and multi-family real estate loans. To a much lesser extent, the
Bank provides financing for construction loans, commercial loans, home equity
loans, and consumer loans. Mortgage loans over $350,000 require approval of the
Board of Directors. The Bank uses OTS guidelines as to loan limits. See "- Loans
to One Borrower." The Bank will continue to strive to increase its consumer
lending on a conservative basis. Consumer loans offer income enhancement through
higher yields and shorter terms and tend to reprice on a more frequent basis
than long-term mortgage loans. The Bank has made a limited amount of these types
of loans on what management believes is a conservatively underwritten basis and
intends to continue these types of lending to meet the area's credit needs as
well as to provide the Bank with short- to intermediate-term investments.
Consumer loans over $200,000 require approval of the Board of Directors. As of
June 30, 1996, the Bank's total portfolio of loans (the "loan portfolio") was
$48.9 million, of which $37.2 million, or 76.00%, was secured by one- to
four-family residential real estate loans, $3.1 million or 6.36% was made up of
multi-family residential loans, $2.8 million or 5.64% was secured by
non-residential real estate and land loans, and $3.7 million or 7.49% were
secured by construction loans. At June 30, 1996, the Bank had $2.2 million in
consumer and other loans.
2
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percent of the respective portfolios at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1996 1995
------ -----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Mortgage loans
<S> <C> <C> <C> <C>
Residential, one to four family... $37,191 76.00% $41,561 79.18%
Residential, multifamily.......... 3,114 6.36 3,866 7.37
Nonresidential and land........... 2,759 5.64 2,372 4.52
Construction...................... 3,663 7.49 3,007 5.73
Non-mortgage loans
Consumer loans
Secured personal................ 783 1.60 711 1.35
Unsecured personal.............. 20 0.04 18 0.03
Auto............................ 116 0.24 157 0.30
Home Impovement................. 73 0.15 72 0.14
Equity line..................... 911 1.86 427 0.81
Other........................... 169 0.35 75 0.14
Commercial
Secured......................... 98 0.20 200 0.38
Unsecured....................... 35 0.07 25 0.05
-------- -------- -------- --------
Total loans recievable........ $48,932 100.00% $52,491 100.00%
====== ======
Less
Deferred loan fees................ 100 160
Unearned discounts................ 0 1
Undisbursed loans in process...... 1,881 1,072
Allowance for credit losses....... 194 194
------- -------
Undisbursed loans in process ..... $46,757 $51,064
====== ======
</TABLE>
3
<PAGE>
The following table sets forth the maturity of the Bank's loan portfolio
at June 30, 1996. The table does not include prepayments or scheduled principal
repayments. Prepayments and scheduled principal repayments on loans totalled
$11.6 million and $14.5 million, for the fiscal years ended June 30, 1996 and
1995, respectively. ARMs are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Residential
1-4 Multi- Non-residential Consumer and
Real Estate(1) Family and Land Construction Other Total
-------------- ------ -------- ------------ ----- -----
(Dollars in Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C> <C>
Within 3 months.............. $ 3 $ 0 $ 0 $1,816 $ 679 $2,498
3 months to 1 Year........... 18 0 0 758 40 816
------ ----- ---- ----- ----- ------
Total due in one year or less 21 0 0 2,574 719 3,314
------ ----- ---- ----- ----- ------
After 1 year:
1 to 3 years............... 149 14 255 1,089 214 1,721
3 to 5 years............... 204 0 113 0 115 432
5 to 10 years.............. 2,622 0 616 0 229 3,467
10 to 20 years............. 9,654 2,676 1,670 0 928 14,928
Over 20 years.............. 24,541 424 105 0 0 25,070
------ ----- ----- ----- ----- ------
Total due after one year.. 37,170 3,114 2,759 1,089 1,486 45,618
------ ----- ----- ----- ----- ------
Total amount due.......... $37,191 $3,114 $2,759 $3,663 $2,205 $48,932
====== ===== ===== ===== ===== ======
Less:
Unearned discounts........... 0
Allowance for loan loss...... 194
Loans in process............. 1,881
Deferred loan fees........... 99
------
Loans receivable, net...... $46,757
======
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 1997, which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In Thousands)
One- to four-family.......... $ 7,498 $29,676 $37,174
Multi-family................. 1,284 1,830 3,114
Non-residential and land..... 1,127 1,632 2,759
Construction................. 487 602 1,089
Consumer and other........... 677 912 1,589
------ ------ ------
Total........................ $11,073 $34,652 $45,725
====== ====== ======
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Bank's primary
market area. At June 30, 1996, the Bank had $37.2 million, or 76.00%, of its
loan portfolio invested in these loans. The Bank also offers home equity lines
of credit secured by one- to four-family residential properties which are
discussed below under "-- Consumer and Other Loans." Management believes that
this policy of focusing on one- to four-family lending has been effective in
contributing to net interest income while reducing credit risk by keeping loan
delinquencies and losses to a minimum.
4
<PAGE>
The Bank offers ARMs that adjust every year and have terms of up to 30
years. Generally, the interest rate adjustments on ARMs are based on the one
year Treasury bill index. These ARMs have interest rate floors of 6%, so that
the interest rate on such loans cannot adjust below such floors. However, during
the fiscal year ended June 30, 1996, the Bank originated some ARMs at interest
rates up to .50% below such floors, although the initial rates are not below the
Bank's costs of funds and do not lead to negative amortization of the balance on
such loans. The ARMs originated for the Bank's portfolio carry interest rate
ceilings of 5.00% above the initial interest rate on the loans. The Bank
considers the market factors and competitive rates on loans as well as its own
cost of funds when determining the rates on the loans that it offers.
The retention of ARMs in the Bank's portfolio greatly helps to reduce
the Bank's exposure to changes in interest rates. However, there are
unquantifiable credit risks which could result from potential increased payments
to the borrower as a result of the repricing of ARMs. It is possible that during
periods of rapidly rising interest rates, the risk of default on ARMs may
increase due to the upward adjustment of interest cost to the borrower.
Currently, the ARMs originated by the Bank provide for initial rates of interest
less than the fully indexed rates that would prevail were the index used for
repricing applied initially. These loans are subject to increased risk of
delinquency or default when the higher, fully-indexed rate of interest
subsequently comes into effect and replaces the lower initial rate.
Generally, during periods of rising interest rates, the risk of default
on ARMs is considered to be greater than the risk of default on a fixed-rate
loan due to the upward adjustment of interest costs to the borrower. To help
reduce such risk, the Bank qualifies loans above 80% loan-to-value at the
maximum second year rate, as opposed to the original interest rate. ARMs may be
made at up to 95% of the loan to value ratio. The Bank does not originate ARMs
with negative amortization.
The Bank also offers conventional fixed-rate mortgage loans with terms
from 15 to 30 years. A majority of the 15 to 30 year fixed-rate mortgages are
sold in the secondary mortgage market.
Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies, however, generally
limit the maximum loan-to-value ratio to 80% of the appraised value of the
property, based on an independent appraisal. When the Bank makes a mortgage loan
in excess of 80% of the appraised value or purchase price, private mortgage
insurance is required for at least the amount of the loan in excess of 80% of
the appraised value.
The loan-to-value ratio, maturity and other provisions of the
residential real estate loans made by the Bank reflect the policy of making
loans generally below the maximum limits permitted under applicable regulations.
The Bank requires an independent appraisal, title insurance or an attorney's
opinion, flood hazard insurance (if applicable), and fire and casualty insurance
on all properties securing real estate loans made by the Bank. The Bank reserves
the right to approve the selection of which title insurance companies' policies
are acceptable to insure the real estate title in the loan transactions.
While one- to four-family residential real estate loans are normally
originated with 15-30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all of the mortgage loans in the
Bank's loan portfolio contain due-on-sale clauses providing that the Bank may
declare the unpaid amount due and payable upon the sale of the property securing
the loan. The Bank enforces these due-on-sale clauses to the extent permitted by
law. Thus, average loan maturity is a function of, among other factors, the
level
5
<PAGE>
of purchase and sale activity in the real estate market, prevailing interest
rates and the interest rates payable on outstanding loans.
Multi-Family and Non-residential Real Estate Loans. The Bank in the past
has originated non-residential real estate and multi-family loans; however, this
type of lending represents a small portion of the Bank's lending activities.
There were no non-residential real estate loans and no multi-family loans
originated during the fiscal year ended June 30, 1996. At June 30, 1996
outstanding non-residential real estate and multi-family loans amounted to $1.7
million and $3.1 million, respectively.
Non-residential real estate loans consist of permanent loans secured by
small office buildings, churches, shopping centers, and other non-residential
buildings secured by properties. Non-residential real estate and multi-family
secured loans are generally originated in amounts up to 75% of the appraised
value of the property. Such appraised value is determined by an independent
appraiser which has been previously approved by the Bank. Multi-family loans are
generally secured by apartment buildings of 36 or fewer units.
Non-residential real estate and multi-family loans are generally
originated on an adjustable-rate basis with the interest rate adjusting
annually. Some of these loans have an interest rate that is fixed for two to
three years and then adjusts annually. The Bank also makes some fixed rate
non-residential real estate and multi-family mortgages.
Loans secured by multi-family and non-residential real estate generally
involve a greater degree of risk than one- to four-family mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by non-residential and
multi-family real estate is typically dependent upon the successful operation or
management of the related real estate project. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired. The Bank
seeks to minimize these risks in a variety of ways, including limiting the size
of such loans and strictly scrutinizing the financial condition of the borrower,
the quality of the collateral and the management of the property securing the
loan. The Bank also obtains personal guarantees. Substantially all of the
properties securing the Bank's non-residential and multi-family real estate
loans are inspected by the Bank's lending personnel before the loan is made. The
Bank also obtains appraisals on each property in accordance with applicable
regulations. At June 30, 1996, the largest non-residential or multi-family real
estate loan had a balance of $424,000 and was secured by an apartment complex
and was performing. See "-- Loans to One Borrower."
Construction Lending. The Bank engages in construction lending involving
loans to qualified borrowers for construction of one- to four-family residential
properties and, on a limited basis, involving non-residential and multi-family
properties. These properties are located in the Bank's market area.
Construction loans are made to builders on a speculative basis and to
owners for construction of their primary residence. Loans for speculative
housing construction are made to area builders after a background check has been
made. The Bank usually will have no more than four construction loans
outstanding at any time to any single builder. Construction loans on one- to
four-family properties are generally limited to a maximum loan-to-value ratio of
80% and have a maximum maturity of 12 months. Construction loans on
non-residential and multi-family properties are generally limited to a maximum
loan-to-value ratio of 75% and have a maximum maturity of 18 months. Loan
proceeds are disbursed in increments as construction progresses and only after a
physical inspection of the project is made by a representative of the Bank.
Accrued interest on loan disbursements is paid monthly. At June 30, 1996,
6
<PAGE>
the Bank had $2.6 million in construction loans outstanding to builders on a
speculative basis, with $1.1 million in loans in process (funds being held for
construction progress) outstanding and attributed to these loans.
Construction loans to owners have either fixed or adjustable rates and
are underwritten in accordance with the same terms and requirements as the
Bank's permanent mortgages on existing properties except that the builder must
qualify as an approved contractor by the Bank, and the loans generally provide
for disbursement of loan proceeds in stages during the construction period. An
approved contractor is one who has been approved by a title insurance company
that will insure the Bank against mechanics' liens or whose credit, financial
statements and experience have been approved by the Bank. Borrowers are required
to pay accrued interest on the outstanding balance monthly during the
construction phase. At June 30, 1996, there was $1.3 million outstanding in
construction loans to owners with $756,000 outstanding in loans in process
allocated to these projects. There were $544,000 in construction loans
originated on nonresidential and multi-family properties during the fiscal year
ended June 30, 1996. The Bank originated $3.8 million in construction loans on
one- to four-family properties during the fiscal year ended June 30, 1996.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, it may be necessary for the Bank to advance funds beyond the amount
originally committed to permit completion of the construction. If the estimate
of value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with collateral having a value which is insufficient to
assure full repayment. As a result of the foregoing, construction lending often
involves the disbursement of substantial funds with repayment dependent, in
part, on the success of the project. If the Bank is forced to foreclose on a
property prior to or at completion due to a default, there can be no assurance
that the Bank will be able to recover all of the unpaid balance of, and accrued
interest on, the loan as well as related foreclosure and holding costs. The Bank
has sought to minimize this risk by limiting construction lending to qualified
borrowers in the Bank's market area and by limiting the number of construction
loans outstanding at any time.
Consumer and Other Loans. The Bank views consumer lending as an
important component of its lending operations because consumer loans generally
have shorter terms and higher yields, thus reducing exposure to changes in
interest rates. In addition, the Bank believes that offering consumer loans
helps to expand and create stronger ties to its customer base. Consequently, the
Bank has increased its consumer lending by marketing home equity loans to
existing and potential customers. Regulations permit federally-chartered savings
associations to make secured and unsecured consumer loans up to 35% of the
Bank's assets. In addition, the Bank has lending authority above the 35% limit
for certain consumer loans, such as home improvement loans and loans secured by
savings accounts.
Consumer loans consist of personal secured and unsecured loans,
automobile, boat and recreational vehicle loans, savings account loans, home
improvement and home equity loans. As of June 30, 1996, these consumer loans
totaled $2.1 million, or 4.24%, of the Bank's total loan portfolio.
The Bank makes fixed and adjustable rate consumer loans.
The Bank also offers a home equity line of credit, which is a revolving
line of credit secured by a first or second mortgage, and which is accessible to
the customer by either writing a check or
7
<PAGE>
requesting an advance at a branch office of the Bank. The rate on such loans is
adjustable monthly, based on the Wall Street Journal prime rate plus 1.5%, with
a floor of 6% and a ceiling of 18%.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary consideration; however, the underwriting process
also includes a comparison of the value of the security, if any, in relation to
the proposed loan amount.
The Bank is allowed to make secured and unsecured loans for
nonresidential, corporate, business and agricultural purposes, including the
issuance of letters of credit secured by real estate, business equipment,
inventories, accounts receivable and cash equivalents in amounts not exceeding
10% of the Bank's assets. Non-real estate commercial lending by the Bank has
been limited. These loans have generally been made to building contractors and
small business operations. Letters of credit have mostly been provided to
contractors for use in land development. The letters of credit have generally
been secured by real estate and contain personal guarantees of the principals of
the borrowing entity.
The aggregate amount of commercial business loans outstanding may not
exceed 10% of the Bank's assets. In addition, another 10% of total assets may be
invested in commercial equipment leasing. As of June 30, 1996, $133,000 or .27%
of the Bank's loan portfolio was categorized as commercial business loans.
Consumer and commercial loans entail greater credit risk than do
residential mortgage loans, particularly in the case of consumer and commercial
loans which are unsecured or secured by assets that depreciate rapidly, which in
the case of consumer loans include automobiles, mobile homes, boats and
recreational vehicles and in the case of commercial loans include business
equipment, inventories and accounts receivable. In such cases, repossessed
collateral for a defaulted consumer or commercial loan may not provide an
adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In particular, amounts realizable on the sale of repossessed
automobiles or business equipment may be significantly reduced based upon the
condition of the collateral and the lack of demand for used automobiles or
business equipment.
Loan Solicitation, Approval and Processing. The Bank's sources of
mortgage loan applications are referrals from existing or past customers, real
estate brokers, call-in and walk-in customers, builders and also are the result
of advertising.
Any mortgage or construction loan up to $250,000 is reviewed and
approved by the Management Loan Committee. Any mortgage or construction loan
over $250,000 up to $350,000 is reviewed and approved by the Board of Directors'
Loan Committee. The Board of Directors' Loan Committee reviews loans in excess
of $350,000 to be submitted to the Board of Directors for its approval.
Consumer and commercial loans may be approved by two officers for
unsecured loans up to $25,000 and for secured loans up to $100,000. The maximum
consumer or commercial loan to be approved by the Board of Directors Loan
Committee is $200,000 with any loans exceeding that amount requiring Board of
Directors approval.
The Bank uses independent fee appraisers on all real estate related
transactions. Each fee appraiser used must be state licensed or certified and
approved by the Bank's Board of Directors. It is
8
<PAGE>
the Bank's policy to obtain title insurance or an attorney's opinion and
certification of title and fire and casualty insurance for all mortgage loans.
Flood insurance is required for properties located in flood zones.
Loan Originations, Purchase, Sales and Repayments. The following table
sets forth the Bank's loan originations, sales, and principal repayments for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
1996 1995
---- ----
(In Thousands)
Total gross loans receivable at
<S> <C> <C>
beginning of period....................... $52,491 $41,895
Loans originated:
One- to four-family residential........... 23,340 21,377
Multi-family residential.................. 0 0
Non-residential and land.................. 0 788
Construction loans........................ 4,382 5,503
Consumer loans............................ 1,373 706
------ -------
Total loans originated.................. 29,095 28,374
------ ------
Loans purchased:
One- to four-family residential........... 0 0
Multi-family residential.................. 0 0
Non-residential and land.................. 0 0
------- -------
Total loans purchased..................... 0 0
-------
Loans sold.................................. 19,601 5,039
------ -------
Other loan activity:
Loan principal repayments................. (11,673) (14,487)
Other (net)............................... (1,450) 1,748
------ -------
Net other loan activity................... (13,123) (12,739)
------ ------
Total gross loans receivable at
end of period........................... $48,932 $52,491
====== ======
</TABLE>
Loan Purchases and Sales. Prior to 1990 the Bank's loan sales were
insignificant. Any loans sold were individual loans with other financial
institutions. The Bank began originating loans to sell in the secondary market
in 1990. In March 1992, the Bank opened a loan production office separate from
its banking facilities to concentrate more activity for loan sales in the
secondary market. The Bank originates mostly fixed-rate loans for sale in the
secondary market. These loans include 15 to 30 year, 80% loan-to-value
conventional loans (the portion of the loans above 80% are insured with private
mortgage insurance), Federal Housing Administration ("FHA") and Veteran's
Administration ("VA") loans. The Bank uses standard Federal Home Loan Mortgage
Corporation("FHLMC")/Federal National Mortgage Association ("FNMA")
documentation for its conventional loans. During the fiscal year ended June 30,
1996, the Bank sold a total of $19.5 million of mortgage loans.
Currently, the Bank sells loans to other lenders who sell directly to
FHLMC, FNMA and Government National Mortgage Association ("GNMA"). The Bank
sells the majority of its loans with servicing released. These loans are sold
without recourse.
9
<PAGE>
During the fiscal year ended June 30, 1996, the Bank did not purchase
any loans from other financial institutions.
Loan Commitments. The Bank issues loan commitments for 60 days or less.
No points are normally charged for these commitments. The Bank will consider
extended commitment periods and may charge fees based on the length and type of
commitment. At June 30, 1996, the Bank had $3.9 million of commitments to
finance real estate acquisitions and construction and had contracted to sell
$2.5 million of such loans. The Bank also had a commitment to purchase mortgage
pool securities of $1.0 million.
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Bank recognizes fees and service charges which consist primarily of
fees charged for loan originations and loans serviced for others and late
charges. The Bank recognized loan servicing fees of $50,000 for the fiscal year
ended June 30, 1996. As of June 30, 1996, the Bank had $23,000 of loan fees
deferred under GAAP. As of June 30, 1996, loans serviced for the Virginia
Housing Development Authority ("VHDA") totalled $729,000 and loans serviced for
FHLMC totalled $459,000.
Loans to One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and retained income if the loan is secured by readily
marketable collateral (generally, financial instruments, not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $1.1 million as of June 30, 1996.
The Bank's largest group of loans to one borrower at June 30, 1996 was
$479,000 which consisted of loans secured by apartment buildings and a consumer
loan partially secured by savings. The second largest group of loans to one
borrower was $478,000 which consisted of loans secured by single family homes,
both completed and under construction, and developed building lots. The next
largest group of loans to one borrower were $434,000 which consisted of loans
secured by single family homes, a mobile home park and developed building lots,
plus an unsecured consumer loan.
Loan Delinquencies. Loans past due more than 90 days are individually
examined for potential losses and the ultimate collectibility of funds due.
Loans are deemed to have no loss exposure if the value of the property securing
the loan exceeds the receivable balance on the loan or collection is probable.
Such loans are kept on an accruing status pending monthly review. Loans that are
deemed to contain a potential loss exposure to the Bank are placed on
non-accrual status by the Bank and all interest past due on such loans is
reserved. Specific reserves are established to recognize losses on non-accruing
loans on a case-by-case basis.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as foreclosed real estate until such time
as it is sold. When foreclosed real estate is acquired, it is recorded at the
lower of fair value or cost. Valuations are periodically performed by management
and subsequent charges to income are taken when it is determined that the
carrying value of the property exceeds the fair value less estimated costs to
sell.
10
<PAGE>
Non-Performing Assets. The following table sets forth information regarding
loans which are 90 days or more delinquent but on which the Bank is accruing
interest at the dates indicated. At June 30, 1996, the Bank had no loans
accounted for on a non-accrual basis and no restructured loans within the
meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
------------------
1996 1995
(In Thousands)
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
<S> <C> <C>
Permanent loans secured by one-to four-family dwelling units .... $ 0 $60
All other mortgage loans ........................................ 0 0
--- ---
Total ............................................................. $ 0 $60
=== ===
Total accruing loans past due 90 days or more ..................... $ 0 $60
--- ---
Foreclosed real estate ............................................ $ 0 $ 0
--- ---
Total non-performing assets ....................................... $ 0 $60
=== ===
Total non-performing loans past due 90 days or more to total loans 0% .12%
Total non-performing loans past due 90 days or more to total assets 0% .09%
=== ===
Total non-performing assets to total assets ....................... 0% .09%
=== ===
</TABLE>
Classified Assets. The Office of Thrift Supervision ("OTS") regulations
provide for a classification system for problem assets of insured institutions
which covers all problem assets. Under this classification system, problem
assets of insured institutions are classified as "substandard," "doubtful," or
"loss." An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
designated "special mention" by management are assets included on the Bank's
internal watchlist because of potential weakness but which do not currently
warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for credit losses
in an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
provision for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which may recommend the establishment of
additional general or specific loss allowances. A portion of general loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for credit losses
generally do not qualify as regulatory capital. At June 30, 1996 the Bank had a
general credit loss allowance of $194,000.
11
<PAGE>
On June 30, 1996, the Bank had approximately $871,000 of problem loans,
all of which were classified as substandard. One loan is on an apartment
building which had a balance of $223,000 on June 30, 1996. The loan payments
were current on this loan as of June 30, 1996 and will be considered for removal
from the classification list if it remains current. Three loans totaling
$277,000 are on land, developed sub-division lots and single family houses under
construction. The developer has turned the project over to his accountant who
has hired a new contractor to complete the houses. They intend to sell a portion
of the properties to liquidate the loans. All other problem loans are secured by
single family homes. Management feels that the loans have adequate equity or
they are covered by PMI insurance.
The following table provides further information regarding the Bank's
classified assets and allowances for credit losses at June 30, 1996.
(In Thousands)
Special Mention...................... $ 0
Substandard.......................... 871
Doubtful assets...................... 0
Loss assets.......................... 0
General loss allowance............... 194
Specific loss allowance.............. 0
Charge-offs.......................... 0
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure, judgment or by deed in lieu of foreclosure is classified as
foreclosed real estate until it is sold. When property is acquired it is
recorded at the lower of the cost or fair value. The Bank held no foreclosed
real estate at June 30, 1996.
Allowances for Credit Losses. The Bank provides valuation allowances for
estimated losses from uncollectible loans. Management's periodic evaluation of
the adequacy of the allowance for credit losses is based on loss experience,
known and inherent risk in the portfolio, prevailing market conditions, and
management's judgment as to collectibility. The allowance for credit losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries).
12
<PAGE>
The following table sets forth the Bank's allowance for credit losses
and related ratios.
<TABLE>
<CAPTION>
At June 30,
----------------------
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
Total loans............................................... $48,932 $52,492
====== ======
Allowance balances (at beginning of period)............... 194 $ 194
Provision ................................................ 0 1
Net Charge-offs .......................................... 0 (1)
------ --------
Allowance balance (at end of period)...................... 194 $ 194
====== =======
Allowance for credit losses as a percentage of total loans .40% .37%
</TABLE>
Investment and Mortgage-backed Securities Activities
Investment Securities. The Bank is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. The Bank has generally
maintained a liquidity portfolio well in excess of regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of future yield levels, as well as management's projections as to
the short-term demand for funds to be used in the Bank's loan origination and
other activities. At June 30, 1996, the Bank had an investment securities
portfolio of approximately $16.2 million, consisting primarily of U.S.
government and agency obligations, FHLB stock, and marketable equity securities.
The Bank will continue to seek high quality investment securities with short to
intermediate maturities from one to five years.
Effective July 1, 1994, the Bank adopted Financial Accounting Standards
Board Statement 115 ("FASB 115"), "Accounting for certain Investments in Debt
and Equity Securities," which resulted in the reclassification of investment
securities and mortgage-backed securities into those which are available for
sale and those which are intended to be held to maturity. The unrealized gain or
loss on the securities classified as available for sale, along with those of the
marketable equity securities, are recognized, net of the expected income tax
effect, as a separate component of retained earnings.
The Financial Accounting Standards Board (FASB) voted to allow each
institution to reconsider the classification of investments per FASB 115 after
November 15, 1995 and before the presentation of the December 31, 1995 financial
reports, without "tainting" any assets which remained in that category. During
this period, the Bank removed $1.2 million from "held to maturity" and
reclassified them to the "available for sale" category.
Beginning in 1992, the Bank expanded its investment portfolio to
incorporate ARM Mutual Funds, primarily short-term investments. These funds,
which primarily invest in adjustable rate mortgage-backed securities, are
available for sale and marked to market at the end of each month with all
adjustments in value reported to the Board of Directors monthly. At June 30,
1996, the Bank had $5.2 million or 32.21% of its investment portfolio in the ARM
Mutual Funds.
13
<PAGE>
Mortgage-backed Securities. The Bank has in the past purchased
mortgage-backed securities guaranteed by participation certificates issued by
the FHLMC and secured by interests in pools of conventional mortgages originated
by other financial institutions.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to thirty
years. However, due to expected repayment terms being significantly less than
the underlying mortgage loan pool contractual maturities, the estimated lives of
these securities could be significantly shorter.
Generally, it is management's intent to hold mortgage-backed securities
until maturity. The Bank did not sell any mortgage-backed securities during the
fiscal years ended June 30, 1996 and 1995.
As of June 30, 1996, mortgage-backed securities amounted to $443,000 or
.66% of total assets.
Investment and Mortgage-Backed Securities Portfolio
The following table sets forth the carrying value of the Bank's
investment securities portfolio, short-term investments, FHLB stock, and
mortgage backed and related securities at the dates indicated. At June 30, 1996,
the market value of the Bank's investment portfolio was $16.7 million.
<TABLE>
<CAPTION>
1996 1995
--------------------------- -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
(Dollars in Thousands)
Available for sale securities:
<S> <C> <C> <C> <C>
Mutual fund - AMF Adjustable Rate
Securities Portfolio............ $ 5,256 $ 5,215 $ 5,256 $ 5,226
FHLB bond......................... 1,245 1,222 1,245 1,222
Federal Home Loan Bank of
Atlanta Stock................... 961 961 961 961
Financial Institution Insurance
Group, LTD Stock................ 50 98 50 77
------- ------- ------- -------
7,512 7,496 7,512 7,486
------- ------- ------- -------
Held to maturity securities:
Interest-bearing deposits (1)..... 8,253 8,253 3,231 3,231
FHLMC participation certificates.. 443 445 577 606
------- ------- ------- -------
8,696 8,698 3,808 3,837
-------- -------- -------- --------
Total investment securities $16,208 $16,194 $11,320 $11,323
======= ======= ======= =======
</TABLE>
- ---------------------
(1) Includes time and overnight deposits which are also cash equivalents.
14
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
portfolio at June 30, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years More than Five Years Total Investment Portfolio
---------------------- --------------------- ----------------------- ---------------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Market
Cost Yield Cost Yield Cost Yield Cost Yield Value
---- ----- ---- ----- ---- ----- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 7,956 5.65% $ 297 5.87% $ 0 0% $ 8,253 5.66% $ 8,253
Federal agency
obligations......... 0 0 1,245 5.45 0 0 1,245 5.45 1,222
Mortgage-backed
securities.......... 0 0 0 0 443 8.00 443 8.00 445
Mutual fund - AMF
Adjustable Rate
securities portfolio 5,256 6.11 0 0 0 0 5,256 6.11 5,215
FHLB Stock............ 961 7.26 0 0 0 0 961 7.26 961
Other securities...... 50 3.35 0 0 0 0 50 3.35 98
------ ---- ------- ------- ------- ------- ------- ---- -------
Total............... $14,223 5.92% $1,542 5.51% $443 8.00% $16,208 5.94% $16,194
====== ==== ===== ==== === ==== ====== ==== ======
</TABLE>
Sources of Funds
General. The major source of the Bank's funds for lending and other
investment purposes are deposits, amortization and prepayment of loans and
mortgage-backed securities, maturities of investment securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions. The Bank has also
utilized advances from the FHLB of Atlanta.
Deposits. Customer deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments including noninterest-bearing demand deposit accounts, negotiable
order of withdrawal ("NOW") accounts, regular savings, money market deposit
accounts, term certificate accounts, individual retirement accounts ("IRAs")
with fixed and variable rates of interest and club accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit and the interest rate.
The interest rates paid by the Bank on deposits are set at the direction of
the asset/liability committee which consists of senior management. The interest
rates on deposit account products are determined by evaluating the following
factors: (i) the Bank's anticipated need for cash and the timing of that desired
cash flow; (ii) the interest rates offered by other local financial
institutions, and the degree of competition the Bank wishes to maintain; (iii)
the cost of borrowing from other sources versus the cost of acquiring funds
through customer deposits; and (iv) the Bank's anticipation of future economic
conditions and related interest rates.
The Bank relies primarily on its service and longstanding relationship with
customers to obtain deposits and does not accept brokered deposits. It is not
the general policy of the Bank to offer premiums to attract deposits. It is the
intent of the Bank's management to increase deposits through advertising and
marketing. Products emphasized are checking accounts and certificates of
deposit.
15
<PAGE>
Noninterest-bearing demand deposit accounts, NOW accounts, money market
accounts, regular savings and club accounts constituted $17.2 million, or 29.92%
of the Bank's deposit portfolio at June 30, 1996. At that date, certificates of
deposit constituted $40.4 million or 70.08% of the deposit portfolio, including
certificates of deposit with principal amounts of $100,000 or more, which
constituted $4.0 million or 6.89% of the deposit portfolio. The Bank generally
negotiates retail rates for certificates of deposit of $95,000 or more.
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average interest rates on
each category presented.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1996 1995
-------------------------------- -------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ----
(Dollars in Thousands)
Demand accounts:
Noninterest-bearing
<S> <C> <C> <C> <C> <C> <C>
demand deposit............ $ 791 1.37% 0% $ 421 .77% 0%
NOW......................... 5,467 9.48 2.15 3,877 7.10 2.50
Money market................ 3,607 6.26 2.96 3,637 6.66 3.00
Regular savings............. 7,319 12.70 3.00 6,997 12.80 3.00
Club........................ 65 0.11 2.00 65 0.12 2.00
------ ----- ------ -----
Total.................... 17,249 29.92 14,997 27.45
------ ----- ------ -----
Certificate accounts:
Fixed rates of interest:
7 to 91 days............. 115 0.20 3.00 115 .21 3.00
Over 91 to 180 days...... 5,091 8.83 4.56 5,003 9.15 4.93
Over 181 to 365 days..... 14,679 25.47 5.30 11,388 20.84 5.37
Over 1 year to 3 years... 8,517 14.78 5.18 5,896 10.79 4.60
Over 3 years and up...... 945 1.64 5.13 1,015 1.86 5.11
Other.................... 3,869 6.71 4.65 4,166 7.62 5.41
Variable rates of interest
Up to 1 year............. 0 0 0 0 0 0
Over 1 year............ 6,144 10.66 5.92 5,648 10.34 6.03
Negotiable rate............... 1,034 1.79 5.09 6,414 11.74 5.19
----- ----- ------ -------
Total................ 40,394 70.08 39,645 72.55
------ ----- ------ -------
Total deposits....... $57,643 100.00% 4.22% $54,642 100.00% 3.96%
====== ====== ==== ======= ====== ====
</TABLE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
As of June 30,
------------------------
1996 1995
---- ----
(In Thousands)
Interest Rate:
<S> <C> <C>
2.99% or less.................... $ 0 $ 10
3.00-4.00%....................... 407 2,833
4.01-5.00%....................... 13,147 13,277
5.01-6.00%....................... 26,702 15,704
6.01-7.00%....................... 135 7,816
7.01-8.00%....................... 3 5
--------
Total.......................... $40,394 $39,645
====== ======
</TABLE>
16
<PAGE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1996.
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------------------------------------
After
June 30, June 30, June 30, June 30,
1997 1998 1999 2000 Total
-----------------------------------------------------------------------
(In Thousands)
<C> <C> <C> <C> <C> <C>
3.00-4.00%............ $ 407 $ 0 $ 0 $ 0 $ 407
4.01-5.00%............ 11,759 1,274 113 1 13,147
5.01-6.00%............ 21,310 4,756 512 124 26,702
6.01-7.00%............ 35 0 0 100 135
7.01-8.00%............ 0 0 3 0 3
-------- ------- ---- ---- --------
Total............... $33,511 $6,030 $628 $225 $40,394
====== ===== === === ======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits $100,000 or more by time remaining until
maturity as of June 30, 1996.
Certificates
of Deposits
-----------
(In Thousands)
Within three months........... $ 823
Three through six months...... 953
Six through twelve months..... 1,431
Over twelve months............ 763
-------
$ 3,970
=======
The following table presents the deposit activity of the Bank for the
periods indicated.
Year Ended June 30,
-------------------
1996 1995
---- ----
(In Thousands)
Net increase (decrease)
before interest credited.... $1,253 $3,080
Interest credited............. 1,748 1,533
------ -----
Net increase (decrease)
in savings deposits......... $3,001 $4,613
====== =====
17
<PAGE>
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank may also obtain advances from the FHLB of Atlanta to supplement its supply
of lendable funds. Advances from the FHLB of Atlanta would typically be secured
by a pledge of the Bank's stock in the FHLB of Atlanta and a portion of the
Bank's first mortgage loans and certain other assets. The Bank, if the need
arises, may also access the Federal Reserve Bank discount window to supplement
its supply of lendable funds and to meet deposit withdrawal requirements. At
June 30, 1996, the Bank had no outstanding advances from FHLB. The Bank had a
$1.5 million note payable due to the Company at June 30, 1996.
Competition
The Bank encounters strong competition both in the attraction of
deposits and origination of real estate and other loans. Competition for
deposits comes primarily from numerous credit unions, commercial banks and
savings institutions with offices in the Bank's market area. Competition for
loans comes primarily from branches of commercial banks and mortgage companies
that operate in the areas which comprise the Bank's primary market area. Due to
their size, many of the Bank's competitors possess greater financial and
marketing resources. The Bank competes for savings accounts by offering
depositors competitive interest rates and a high level of personal service. The
Bank competes for loans primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers, real
estate brokers and contractors.
Thrift institutions can offer a wide range of services to the public,
such as demand deposits, trust services and consumer and commercial lending.
These factors, combined with increasingly sophisticated depositors, have
dramatically increased competition for savings dollars among thrift institutions
and other types of investment entities, as well as with commercial banks in
regard to loans, checking accounts and other types of financial services. In
addition, large conglomerates and investment banking firms compete in the market
for financial services.
Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of June 30, 1996, the Bank was authorized to invest up to approximately $1.3
million in the stock of, or loans to, service corporations (based upon the 2%
limitation). As of June 30, 1996, the net book value of the Bank's investment in
its service corporation was approximately $12,000.
The Bank has one subsidiary, Southwest Virginia Service Corporation,
Inc. which was incorporated in 1975 in the Commonwealth of Virginia and is
engaged in the sale of annuities. The service corporation previously offered
credit life and disability insurance to the borrowers of the Bank. The income
from this subsidiary was $3,000 for the fiscal year ended June 30, 1996.
Employees
As of June 30, 1996, the Bank had 30 full-time employees. None of the
Bank's employees are represented by a collective bargaining group. The Bank
believes that its relationship with its employees is good.
18
<PAGE>
Regulation
Set forth below is a brief description of certain laws which are related
to the regulation of the Company and the Bank. The following description does
not purport to be complete and is qualified in its entirety by reference to all
applicable laws and regulations.
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, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. 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.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("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.
Restrictions on Acquisitions. 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.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
Subject to appropriate regulatory approvals, a bank holding company can
acquire control of a savings association, and if it controls a savings
association, 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. Generally, federal savings
associations can acquire or be acquired by any insured depository institution.
19
<PAGE>
Federal Securities Law. The Company is subject to filing and reporting
requirement by virtue of having its common stock registered under the Securities
Exchange Act of 1934. Furthermore, company stock held by persons who are
affiliates (generally officers, directors, and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Bank Regulation
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and 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 Board of Governors of the Federal Reserve System
("FRB").
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 are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
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.
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). 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 FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system, SAIF members pay within a range of 23 cents to 31 cents per
$100 of domestic deposits, depending upon the institution's risk classification.
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 within a reasonable
period of time. The FDIC also may impose special assessments on SAIF members to
repay amounts borrowed from the U.S.
20
<PAGE>
Treasury or for any other reason deemed necessary by the FDIC. By comparison,
most members of the Bank Insurance Fund ("BIF") (e.g., commercial banks) pay a
substantially lower insurance premium.
The Bank expects a one-time assessment of approximately 68 basis points
on every $100 of deposits. If the assessment was applied to the Bank's deposits
at June 30, 1996, the Bank would experience a one time cost of approximately
$300,000 (net of taxes). If the Bank is required to pay the proposed special
assessment, future deposit insurance premiums are expected to be reduced.
Management of the Bank is unable to predict whether this proposal or any similar
proposal will be enacted or whether ongoing SAIF premiums will be reduced to a
level comparable to that of BIF premiums.
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
fiscal year ended June 30, 1996 totalled approximately $26,000.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
("PMSRs") valued at the lower of the maximum percentage established by the OTS
or the amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock, and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The OTS leverage ratio regulation establishes a core capital ratio of at
least 3% for those savings associations in the strongest financial and
managerial condition. In the future, other savings associations may be required
to maintain minimum core capital of at least 4% of total adjusted assets, with a
maximum core capital ratio requirement of 5%. In determining the required
minimum core capital ratio, the OTS may assess the quality of risk management
and the level of risk in each savings association on a case-by-case basis.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The portion of the
allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings association must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an association with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital. As a result, such an
association will be required to maintain additional capital in order to comply
with the risk-based capital requirement. An association with a
21
<PAGE>
greater than "normal" interest rate risk is defined as an association that would
suffer a loss of net portfolio value exceeding 2.0% of the estimated economic
value of its assets in the event of a 200 basis point increase or decrease (with
certain minor exceptions) in interest rates. The interest rate risk component
will be calculated, on a quarterly basis, as one-half of the difference between
an association's measured interest rate risk and 2.0% multiplied by the economic
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an association's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an association's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994
the Director of the OTS indicated that the OTS would waive the capital
deductions for associations with a greater than "normal" risk until the OTS
publishes an appeals process. The OTS has recently indicated that no savings
association will be required to make deductions from capital for interest rate
risk until further notice.
The Bank's regulatory capital exceeded all minimum regulatory capital
requirements applicable to it as of June 30, 1996. See Note 13 to the Notes to
the Consolidated Financial Statements.
Prompt Corrective Action. Legislation requires the banking regulators to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization. Under
the OTS final rule implementing the prompt corrective action provisions, an
institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio (core
or leverage capital to risk-weighted assets) of 6.0% or more, has a leverage
capital of 5.0% or more and is not subject to any order or final capital
directive to meet and maintain a specific capital level for any capital measure,
(ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0%
or more, a Tier I risked-based ratio of 4.0% or more and a leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of well capitalized, (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage capital ratio that is less than 4.0%
(3.0% in certain circumstances), (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage capital ratio that is less
than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0% In addition, under
certain circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
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. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account established in connection
with the Conversion.
22
<PAGE>
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. As of
June 30, 1996, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
undercapitalized (not meet any one of its minimum regulatory capital
requirements).
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an appropriate level of Qualified Thrift Investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Atlanta. The required
percentage of 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, FNMA and FHLMC as
qualifying QTIs. As of June 30, 1996, the Bank was in compliance with its QTL
requirement with 79.24% of its assets invested in QTIs. No assurances can be
given that the Bank will be able to maintain this level of QTIs or that the QTIs
will remain above 65% of portfolio assets.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA requires the OTS, in connection with its examination of a
23
<PAGE>
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution. The OTS evaluates an institution's CRA
performance utilizing a four-tiered system. The Bank received a "satisfactory"
rating as a result of its last evaluation in July 1995.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate that is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
Regulations govern the Bank's authority to extend credit to its
officers, directors, and 10% shareholders, as well as to entities that such
persons control and require such loans to be made on terms substantially similar
to those offered to unaffiliated individuals, place limits on the amount of
loans the Bank may make to such persons based, in part, on the Bank's capital
position, and require certain approval procedures to be followed.
Branching by Federal Savings Associations. Through its Policy Statement
on Branching by Federal Savings Associations, the OTS permits interstate
branching to the full extent permitted by statute (which is essentially
unlimited). However, the OTS will evaluate a branching applicant's record of
compliance with the CRA. A poor CRA record may be the basis for denial of a
branching application.
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 June 30, 1996, the required liquid asset
ratio was 5.00%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term U.S. Government obligations) and long-term assets (e.g., U.S.
Government obligations of more than one and less than five years and state
agency obligations with a maximum remaining term of 24 months). Monetary
penalties may be imposed upon associations for violations of liquidity
requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
24
<PAGE>
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At June 30, 1996, the Bank had $961,000 in FHLB
stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended June 30, 1996, dividends paid by the
FHLB of Atlanta to the Bank totalled approximately $70,000.
Federal Reserve System. The FRB 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 FRB may be used to satisfy the liquidity
requirements that are imposed by the OTS. At June 30, 1996, the Bank met the FRB
reserve requirements.
Savings associations have authority to borrow from the FRB "discount
window," but FRB policy generally requires savings associations to exhaust all
FHLB sources before borrowing from the FRB. The Bank had no borrowings from the
FRB at June 30, 1996.
Subject to appropriate regulatory approvals, a bank holding company can
acquire control of a savings association, and if it controls a savings
association, 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 FRB. Generally, federal savings associations can acquire
or be acquired by any insured depository institution.
Executive Officers of the Company
The following individuals hold the executive offices in the Company set
forth below opposite their names.
<TABLE>
<CAPTION>
Name Age (1) Positions Held With the Company
---- ------- -------------------------------
<S> <C> <C>
B.L. Rakes 63 Director and President
Barbara C. Weddle 59 Director, Senior Vice President and Secretary
Mary G. Staples 42 Controller/Treasurer
</TABLE>
- --------------------
(1) At June 30, 1996.
25
<PAGE>
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers have
received remuneration from the Company.
Biographical Information
The principal occupation of each executive officer of the Company is set
forth below. All executive officers have held their present positions with the
Company since June 1994 and have been employed by the Bank in the same
capacities for at least five years.
B.L. Rakes has been President, Chief Executive Officer and Chief
Financial Officer of the Bank since 1977 and has been employed by the Bank since
1959. He served as Vice President and Treasurer from 1973 to 1977, and as
Secretary from 1974 to 1977. He is a member and past President of the Rotary
Club of Roanoke and an arbitrator for the Roanoke Better Business Bureau.
Barbara C. Weddle has been Senior Vice President of the Bank since 1985,
in which capacity she oversees the savings, accounting and personnel
departments. She has served as Secretary of the Bank since 1977. She has been
employed by the Bank since 1965 in various capacities and served as a Vice
President from 1977 until 1985.
Mary G. Staples has been Controller and Treasurer of the Bank since
1990, and has been employed by the Bank since 1972.
Recent Legislation - Recapture of Post-1987 Bad-Debt Reserves
The Small Business Job Protection Act of 1996 was signed into law in
August 1996, and will among other things, equalize the taxation of thrifts and
banks. Thrifts are no longer allowed a choice between the percentage of taxable
income method and the experience method in determining additions to their bad
debt reserves. Smaller thrifts with $500 million of assets or less would only be
allowed to use the experience method, which is generally available to small
banks currently. Larger thrifts would be forced into using the specific charge
off method regarding its bad debts. Any reserve amounts added after 1987 will be
taxed over a six year period beginning in 1996; however, bad debt reserves set
aside through 1987 will generally not be taxed. Institutions can delay these
taxes related to post - 1987 bad debt reserves for two years if they meet a
residential-lending test. At June 30, 1996, the Bank had $347,000 of post 1987
bad debt reserves. Any recapture of the Bank's bad-debt reserves may have an
adverse effect on net income. The Bank is currently evaluating the legislation
to determine its effect.
Item 2. Description of Property.
(a) Properties.
The Bank conducts its business through a main office, four branch
offices and one loan origination office. The Bank believes that the current
facilities are adequate to meet the present and
26
<PAGE>
immediately foreseeable needs of the Bank. The following table provides
information regarding the Bank's offices as of June 30, 1996.
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR OWNED OR
LOCATION ACQUIRED LEASED
-------- -------- ------
MAIN OFFICE
-----------
302 Second Street
<S> <C> <C>
Roanoke, VA (2) 1970 OWN
BRANCH OFFICES:
---------------
1006 Hardy Road
Vinton, VA (3) 1992 OWN
2133 Electric Road
Roanoke, VA 1977 OWN
1611 Hershberger Road
Roanoke, VA 1979 OWN
40 W. Main Street
Salem, VA 1981 OWN
LOAN PRODUCTION OFFICE
----------------------
Building D, Suite 101
2847 Penn Forest Blvd
Roanoke, VA (4) 1993 LEASE(1)
</TABLE>
- ------------------
(1) Lease date - December 1, 1993. Lease Termination Date - November 30, 1996.
(2) Bank chartered as Southwest Virginia Building & Loan in 1927 at another
location in the City of Roanoke.
(3) Branch office originally opened in 1965 at another location in the Town of
Vinton.
(4) Loan production office originally opened in 1992 in another leased building
in the same area.
The Bank obtains rental income through the leasing of space in its main
office building. During the fiscal year ended June 30, 1996, such rental income
was $93,000.
In the opinion of the management of the Bank, the properties listed
above are adequately covered by insurance.
(b) Investment Policies. See "Item 1. Description of Business" above for
a general description of the Bank's investment policies and any regulatory or
Board of Directors' percentage of assets limitations regarding certain
investments. All of the Bank's investment policies are reviewed and approved by
the Board of Directors of the Bank, and such policies, subject to regulatory
restrictions (if any), can be changed without a vote of stockholders. The Bank's
investments are primarily acquired to produce income.
27
<PAGE>
(1) Investments in Real Estate or Interests in Real Estate. See
"Item 1. Description of Business -- Lending Activities," "Item 1. Description of
Business -- Regulation -- Bank Regulation" and "Item 2. Description of Property
- -- (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1.
Description of Business -- Lending Activities" and "Item 1. Description of
Business -- Regulation -- Bank Regulation."
(3) Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities. See "Item 1. Description of
Business -- Lending Activities," "Item 1. Description of Business -- Regulation
- -- Bank Regulation" and "Item 1. Description of Business -- Subsidiary
Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings.
The Bank, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to the business of the Bank. In the opinion of management,
the resolution of these lawsuits would not have a material adverse effect on the
financial condition or results of operations of the Bank or the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information contained under the section captioned "Stock Price
Information" on pages 1 and 2 of the Company's Annual Report to Stockholders for
the fiscal year ended June 30, 1996 (the "Annual Report"), is incorporated
herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 6-10 of the Annual Report is incorporated herein by reference.
28
<PAGE>
Item 7. Financial Statements.
Financial Statements of the Company are incorporated by reference to the
following indicated pages of the Annual Report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors................................................... 14
Statement of Financial Condition as of the Fiscal Years Ended
June 30, 1996 and 1995......................................................... 15
Statement of Operations for the Fiscal Years Ended
June 30, 1996 and 1995......................................................... 17
Statement of Changes in Stockholders' Equity
for the Fiscal Years Ended June 30, 1996 and 1995.............................. 16
Statement of Cash Flows for the Fiscal Years
Ended June 30, 1996 and 1995................................................... 18
Notes to Financial Statements.................................................... 20
</TABLE>
The remaining information appearing in the Annual Report is not deemed
to be filed as part of this report, except as expressly provided herein.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the last fiscal year.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The information contained under the section captioned "Proposal I --
Election of Directors" in the Company's definitive proxy statement for the
Company's Annual Meeting of Stockholders to be held on October 23, 1996 (the
"Proxy Statement") is incorporated herein by reference.
Additional information concerning executive officers is included in this
report under "Item 1. -- Description of Business -- Executive Officers of the
Company" and included in the Proxy Statement in the section captioned "Filing of
Beneficial Ownership Reports."
Item 10. Executive Compensation.
The information contained in the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
29
<PAGE>
Item 11. 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 of Management
Information required by this item is incorporated herein by
reference to the chart in the section captioned "Voting
Securities and Principal Holders Thereof" and to the first chart
in the section captioned "Proposal I -- Election of Directors" in
the Proxy Statement.
(c) 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 Company.
Item 12. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Certain Relationships and Related Transactions" in the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C> <C>
3.1 Articles of Incorporation of SWVA Bancshares, Inc.*
3.2 Bylaws of SWVA Bancshares, Inc.*
10.1 Employment Agreement with B.L. Rakes*
10.2 Supplemental Executive Retirement Plan for B.L. Rakes**
10.3 Supplemental Executive Retirement Plan for Barbara C. Weddle**
13 Annual Report to Stockholders for the fiscal year ended June 30, 1996
21 Subsidiaries of the Company**
23 Consent of Cherry Bekaert & Holland L.L.P.
27 Financial Data Schedule
</TABLE>
- -----------------
* Pursuant to Rule 12b-32 under the General Rules and Regulations of the
1934 Act, these documents are incorporated herein by reference to the
Registrant's Form S-1 Registration Statement No. 33-80434 filed with the
SEC on June 17, 1994 (See Exhibits 3.1, 3.2, and 10).
** Incorporated herein by reference to the Registrant's Form 10-KSB filed
with the SEC for the fiscal year ended June 30, 1996.
(b) In the last quarter of the fiscal year ended June 30, 1996,
reports on Form 8-K were filed by the Registrant with the SEC on
May 10, 1996 and June 14, 1996. Items 5 and 7 (exhibits) were
reported on both Forms 8-K.
30
<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.
SWVA BANCSHARES, INC.
By: /s/ B.L. Rakes
B.L. Rakes
President, Chief Executive Officer,
Chief Financial Officer, and Director
(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 indicated as of September 26, 1996.
<TABLE>
<CAPTION>
<S> <C>
/s/ Barbara C. Weddle /s/ B.L. Rakes
Barbara C. Weddle B.L. Rakes
Senior Vice President and Secretary President, Chief Executive Officer,
Chief Financial Officer, and Director
(Principal Executive and Financial Officer)
/s/ Mary G. Staples /s/ John L. Hart
Mary G. Staples John L. Hart
Principal Accounting Officer Chairman of the Board
/s/ F. Courtney Hoge /s/ James H. Brock
F. Courtney Hoge James H. Brock
Director Director
/s/ Glen C. Combs /s/ Michael M. Kessler
Glen C. Combs Michael M. Kessler
Director Director
</TABLE>
EXHIBIT 13
Annual Report to Stockholders for Fiscal Year
Ended June 30, 1996
<PAGE>
[** LOGO **]
SWVA BANCSHARES, INC.
1996
ANNUAL REPORT
<PAGE>
SWVA BANCSHARES, INC.
1996 ANNUAL REPORT
- --------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------
Corporate Profile and Related Information................................1
Stock Market Information.................................................1
Selected Financial and Other Data........................................3
President's Message......................................................4
Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................6
Report of Independent Auditors..........................................14
Consolidated Financial Statements.......................................15
Notes to Consolidated Financial Statements..............................20
Office Locations........................................................47
Directors and Executive Officers........................................47
Other Corporate Information.............................................47
<PAGE>
SWVA BANCSHARES, INC.
Corporate Profile and Related Information
SWVA Bancshares, Inc. (the "Company") is the parent company for
Southwest Virginia Savings Bank, FSB ("Southwest Virginia Savings" or the
"Savings Bank"). The Company was formed as a Virginia corporation in June 1994
at the direction of the Savings Bank to acquire all of the capital stock that
the Savings Bank issued upon its conversion from the mutual to the stock form of
ownership (the "Conversion") in connection with a $5.7 million initial public
offering completed on October 7, 1994. The Company is a unitary savings and loan
holding company which, under existing laws, generally is not restricted in the
types of business activities in which it may engage provided that the Savings
Bank retains a specified amount of its assets in housing-related investments. At
the present time, since the Company does not conduct any active business, the
Company does not intend to employ any person other than officers but utilizes
the support staff and facilities of the Savings Bank from time to time.
Southwest Virginia Savings is a federally chartered stock savings bank
headquartered in Roanoke, Virginia. The Savings Bank was founded in 1927 as
Southwest Virginia Building and Loan Association and originally chartered by the
Commonwealth of Virginia. In 1990, a federal charter was obtained and the name
was changed to Southwest Virginia Savings Bank, FSB. Its deposits have been
federally insured since 1945. The Savings Bank is a community oriented savings
institution offering a variety of financial services to meet the needs of the
communities that it serves. Southwest Virginia Savings conducts its business
from its main office in Roanoke, Virginia, four full service branch offices, one
of which is also located in the City of Roanoke, one in the City of Salem and
two in the County of Roanoke, and a loan production office in Roanoke County.
The Savings Bank is primarily engaged in the business of attracting
deposits from the general public and originating loans secured by first
mortgages on one- to four-family residences in the Savings Bank's market area.
The Savings Bank also makes nonresidential and multi-family real estate loans,
construction loans, consumer loans and other loans.
Stock Market Information
Since its issuance in October 1994, the Company's common stock has been
traded over-the-counter with trades reported in the National Daily Quotation
System "pink sheets" under the trading symbol of "SWVB". The following table
reflects stock price as furnished by Wheat First Butcher Singer, Roanoke,
Virginia. This information reflects inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual trades.
HIGH LOW
---- ---
October 7 - December 31, 1994 .. 10.26 8.375
January 1, 1995 - March 31, 1995 10.75 8.250
April 1, 1995 - June 30, 1995 .. 12.00 10.188
July 1 - September 30, 1995 .... 17.40 11.500
October 1 - December 31, 1995 .. 17.75 15.500
January 1 - March 31, 1996 ..... 17.50 16.400
April 1 - June 30, 1996 ........ 17.40 14.600
July 1 - August 31, 1996 ....... 15.60 14.600
1
<PAGE>
The number of shareholders of record of common stock as of the record
date of September 9, 1996 was approximately 254. This does not reflect the
number of persons or entities who held stock in "street" name through various
brokerage firms. At September 9, 1996, there were 541,190 shares outstanding.
Declarations of dividends by the Board of Directors of the Company
depend upon a number of factors, including the amount of cash and liquid assets
held by the Company, investment opportunities available to the Company or the
Savings Bank, capital requirements, regulatory limitations, the Company's and
the Savings Bank's results of operations and financial condition, tax
considerations and general economic conditions. Certain of these restrictions
are discussed in notes 11 and 13 to the consolidated financial statements.
Dividends Declared and Paid
<TABLE>
<CAPTION>
Amount Per
Date Declared Common Share Record Date Date Payable
- ------------- ------------ ----------- ------------
<S> <C> <C> <C>
February 1, 1995 $0.15 March 1, 1995 March 31, 1995
July 28, 1995 $0.15 August 31, 1995 September 30, 1995
February 21, 1996 $0.15 March 11, 1996 March 31, 1996
August 21, 1996 $0.15 September 9, 1996 September 30, 1996
</TABLE>
2
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
Financial Condition (Dollars in Thousands)
<TABLE>
<CAPTION>
At June 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 66,987 $66,265 $ 54,878 $ 54,995 $ 57,337
Loans receivable, net 46,757 51,064 40,401 39,533 42,918
Mortgage-backed & investment securities 7,939 7,048 7,108 7,423 3,761
Interest-bearing deposits 3,841 3,061 2,757 2,268 2,268
Cash and cash equivalents 5,262 830 874 2,216 5,684
Savings deposits 57,643 54,642 50,029 50,397 52,579
Borrowed funds -- 1,800 -- -- 1,000
Equity capital/stockholders' equity 8,675 9,313 4,169 3,691 3,209
- --------------------------------------------------------------------------------------------------------------------------
Summary of Operations (Dollars in Thousands)
Year Ended June 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Interest income $ 4,906 $ 4,539 $ 3,848 $ 4,186 $ 4,844
Interest expense 2,622 2,314 1,753 2,073 3,043
Net interest income 2,284 2,225 2,095 2,113 1,801
Provision for credit losses -- 1 2 91 103
------- ------- ------- ------- -------
Net interest income after provision for
credit losses 2,284 2,224 2,093 2,022 1,698
Noninterest income 455 315 545 554 394
------- ------- ------- ------- -------
Noninterest expense 2,242 2,045 1,881 1,825 1,635
------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 497 494 757 751 457
Provision for income taxes 191 190 276 269 181
------- ------- ------- ------- -------
Net income before cumulative effect of
change in accounting principle 306 304 481 482 276
Cumulative effect of change in
accounting principles -- -- 87 -- --
------- ------- ------- ------- -------
Net income $ 306 $ 304 $ 568 $ 482 $ 276
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
Other Selected Data
Year Ended June 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.46% 0.47% 0.87% 0.85% 0.48%
Return on average equity 3.50 3.77 11.85 13.98 8.99
Interest rate spread 3.17 3.37 4.28 4.00 3.40
Non-performing loans to total loans 0.00 0.12 0.73 0.02 0.00
Non-performing loans to total assets 0.00 0.09 0.53 0.02 0.00
Allowance for credit losses to total loans 0.40 0.37 0.48 0.47 0.23
- --------------------------------------------------------------------------------------------------------------------------
Per share data
Year Ended June 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Net income $ .60 $ .57 N/A N/A N/A
Stockholders' equity 15.97 16.32 N/A N/A N/A
Dividends .30 .15 N/A N/A N/A
Dividend payout ratio 50% 26% N/A N/A N/A
</TABLE>
3
<PAGE>
President's Message
Dear Shareholder:
The growth of assets in the second year of the Savings Bank's operation
as a federally chartered stock savings bank was not comparable to the growth in
the first year.
The assets of the Company (the Savings Bank is its only subsidiary)
increased by 20.75% during the first year and 1% for the second year. The slower
growth was caused by consumers accepting fixed rate mortgage loans over
adjustable rate mortgage loans (ARMs). The Savings Bank's policy of selling the
majority of its originated fixed rate mortgages and the lower amount of ARM loan
originations to put in its portfolio caused asset growth to slow.
During the coming fiscal year, the Savings Bank expects to put a larger
portion of its originated fixed rate loans in its portfolio and to purchase
mortgage backed securities if the market and interest rates meet our
expectations. The growth is expected to be funded with deposit growth and/or
borrowings.
The Board has continued to take steps toward enhancing shareholder
value. The Board declared and the Company paid a second semi-annual dividend of
$0.15 per share on September 30, 1995, and a third semi-annual dividend of $0.15
per share was paid on March 31, 1996. A fourth semi-annual dividend of $0.15 per
share has been declared and is payable on September 30, 1996 to shareholders of
record on September 9, 1996. On July 19, 1995, the Board approved a stock
buy-back of 5% of outstanding shares and on September 14, 1995, the Company
announced it had received the necessary approval from the Office of Thrift
supervision ("OTS") to repurchase up to 5% (28,529 shares) of the Company's
common stock. Again on May 15, 1996, the Board approved a stock buy-back of 5%
of outstanding shares and on June 14, 1996, the Company announced it had
received the necessary approval from the OTS to purchase up to 5% (27,160
shares) of the Company's Common Stock. As of September 9, 1996, the Company has
repurchased a total of 49,377 shares of its stock.
Stock trades have been reported in the National Daily Quotation System
"pink sheets" since the initial issuance on October 7, 1994. The Board of
Directors has considered listing the stock on the Nasdaq SmallCap Market. In
determining whether to pursue a listing on the Nasdaq SmallCap Market, the Board
of Directors considered a number of factors, including the requirements for
listing on Nasdaq, the results of informal discussions by management with the
Company's financial advisor and representatives of Nasdaq, and the potential
effect of the pending stock buy-back program on the ability of the Company to
continue to meet the ongoing requirements for listing on Nasdaq. After
considering these factors, the Board of Directors determined not to pursue a
Nasdaq listing at this time.
Federal law requires that the FDIC maintain the reserve level of the
Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF")
at 1.25% of insured deposits. Reserves are funded through insurance premium
payments by insured institutions. The BIF has met its reserve level thereby
permitting the FDIC to substantially lower insurance premiums for most banks.
The FDIC is asking Congress for the authority to impose a one-time special
assessment on thrifts to bring the reserves for the SAIF to within Federal
requirements. Such an assessment would adversely affect our earnings, but it
should lower deposit insurance premiums in the future. The reduction would
reduce operating expenses and, therefore, should increase profits.
4
<PAGE>
At our last Annual Stockholders' Meeting we discussed ways in which our
stockholders could help the growth of our Company. The main idea conveyed was
that our stockholders could enhance our growth by doing their banking business
with our Bank and inviting their friends and neighbors to do the same.
We want to convey this message to all of our stockholders and ask each
of you to consider doing business with us. Southwest Virginia Savings Bank, FSB
is a "community bank" poised to serve your banking needs in a friendly,
courteous manner in person or by mail.
Please come to see us or call and allow our staff to have the
opportunity to show you how well we can serve your banking needs.
As we begin a new fiscal year, we look forward to serving you.
The directors, officers, and staff of SWVA Bancshares, Inc., and
Southwest Virginia Savings Bank, FSB appreciate your support.
Sincerely yours,
/s/B.L. Rakees
B.L. Rakes
President
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The business of the Savings Bank consists of receiving monetary deposits
from the general public and reinvesting those funds primarily in its primary
market area in the form of mortgage loans secured by one- to four-family
residences. To a lesser extent, the Savings Bank originates nonresidential real
estate, multi-family, construction, commercial, and consumer loans. The Savings
Bank also purchases U.S. government and federal agency securities,
mortgage-backed and mortgage-related securities and invests in interest-bearing
deposits with other insured financial institutions.
Currently, the Savings Bank's primary market area consists of Roanoke
County, the City of Salem, the City of Roanoke, and portions of Botetourt,
Bedford, and Franklin Counties. The Savings Bank regards this area as its
"basic" lending area, but loans are also made in other adjoining counties.
The largest component of the Savings Bank's net income is net interest
income, which is the difference between interest income and interest expense.
Consequently, the Savings Bank's earnings are dependent on its net interest
income, which is determined by the difference ("interest rate spread") between
rates of interest earned on interest-earning assets and rates of interest paid
on interest-bearing liabilities, and the relative amounts of interest-earning
assets and interest-bearing liabilities. The Savings Bank's net income is also
affected by its provision for losses on loans and investments, as well as the
amount of noninterest income and noninterest expense, such as compensation and
related expenses, federal deposit insurance premiums, data processing costs,
occupancy expenses, and income taxes. Earnings of the Savings Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities and demand for financing of real estate and other
types of loans.
Management Strategy
The Savings Bank's goal is to serve its local community as an
independent community savings bank. Its consumer-oriented philosophy is
dedicated to financing home ownership and providing financial services to its
customers. The principal components of the Savings Bank's management strategy,
which are designed to achieve its goal, are discussed below.
The Savings Bank has been a traditional lender for one- to four-family
residential loans since its founding in 1927. Financing homes for its community
continues to be the Savings Bank's primary goal. These loans either are held in
the Savings Bank's portfolio or sold in the secondary market. These types of
loans make up 76.00% of the Savings Bank's total loan portfolio.
The Savings Bank historically has maintained good asset quality. Its
emphasis on one- to four-family mortgages and its related underwriting policies
and practices are intended to maintain this quality. At June 30, 1996, the
Savings Bank had no non-performing assets. The Savings Bank's ratio of
classified assets to total assets at June 30, 1996 was 1.30%.
6
<PAGE>
The policy of the Savings Bank historically has been to limit asset
growth to the amount which can be adequately capitalized in a changing
regulatory environment. The Savings Bank also seeks to be responsive to changes
in market and economic conditions.
One of the reasons the Savings Bank converted to a stock Savings Bank
was to support growth in savings and lending activities as market conditions
warrant, which would also leverage the Savings Bank's existing branch network,
facilities, and personnel resources. The assets of the Savings Bank increased
$11.4 million, or 20.75%, from $54.9 million at June 30, 1994, to $66.3 million
at June 30, 1995. The increase was due primarily to the conversion and an
increase in loans receivable of $10.7 million, from $40.4 million at June 30,
1994, to $51.1 million at June 30, 1995.
For fiscal year 1995-96, the Bank's asset growth was 1%. This slower
growth was caused by consumers accepting fixed-rate mortgage loans over
adjustable-rate mortgage loans (ARMs). The Bank's policy of selling the majority
of its originated fixed-rate mortgage loans and the lower amount of ARM loan
originations to put in its portfolio caused asset growth to slow.
The Bank expects to put a larger portion of its originated fixed-rate
loans in its portfolio and to purchase mortgage-backed securities during the
fiscal year 1996-97 to enhance asset growth. The growth is expected to be funded
with deposit growth or borrowings. The Savings Bank expects that its asset
growth policy of retaining a greater portion of fixed-rate loans will increase
its interest rate risk.
Asset and Liability Management
The Savings Bank continues to manage interest rate risk. It has managed
this risk on the asset side of its balance sheet with adjustable-rate mortgage
("ARM") loans, mutual funds holding adjustable rate mortgage-backed securities
("ARM Mutual Funds") and government-related securities with maturities of five
years or less. On the liability side of its balance sheet, the Savings Bank has
emphasized certificate of deposit ("CDs") with terms of one year, and has
managed interest rates paid for deposits. Historically, the Savings Bank has
limited its borrowings and relied primarily upon the cash flows from its savings
deposits and mortgage repayments as its primary source of funds. The Savings
Bank expects to possibly use borrowings as a means to leverage its growth in the
future.
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread which can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates over a period of time. A gap is
considered positive when the amount of interest-rate sensitive assets maturing
or repricing over a specific period of time exceeds the amount of interest-rate
sensitive liabilities maturing or repricing within that period and is considered
negative when the amount of interest-rate sensitive liabilities maturing or
repricing over a specified period of time exceeds the amount of interest-rate
sensitive assets maturing or repricing within that period. Generally, during a
period of rising interest rates, a negative gap within a given period of time
would adversely affect net interest income, while a positive gap within a given
period of time would result in an increase in net interest income. During a
period of falling interest rates, a negative gap within a given period of time
would result in an increase in net interest income, while a positive gap within
a given period of time would have the opposite effect. However, despite the
information shown on the following table, depending on the circumstances, the
experience of the Savings Bank has been that net interest income could decline
with increases in interest rates and that net interest income could increase
with decreases in interest rates.
7
<PAGE>
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1996, which are expected to
reprice or mature in each of the time periods shown. Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability. Adjustable-rate
loans and mortgage-backed securities are adjusted for scheduled repayments and
prepayments based on assumptions provided by a major wall street brokerage
house. The Savings Bank's passbook accounts and money market accounts have been
aged in accordance with the assumptions provided by the OTS. The interest rate
sensitivity of the Savings Bank's assets and liabilities illustrated in the
table could vary substantially if different assumptions were used.
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------------------------------------
3 Months 4-6 7-12 13-36 37-60 Over 60
or Less Months Months Months Months Months TOTAL
------- ------ ------ ------- ------ ------ -----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans (1) ................. $ 6,497 $ 30,923 $ 750 $ 2,862 $ 3,584 $ 4,007 $ 48,623
Other loans ........................ 178 166 300 650 0 0 1,294
Mortgage-backed securities:
Held to maturity, at cost ........ 0 0 0 0 0 443 443
Available for sale, FMV (2) ...... 0 0 0 6,250 0 1,246 7,496
Other Investments (3) .............. 5,299 780 1,877 297 0 0 8,253
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets .... $ 11,974 $ 31,869 $ 2,927 $ 10,059 $ 3,584 $ 5,696 $ 66,109
======== ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing demand accounts .... $ 482 $ 538 $ 906 $ 1,874 $ 501 $ 1,110 $ 5,411
Non-interest-bearing demand accounts 101 90 151 313 84 184 923
Regular savings & club accounts ..... 339 324 604 1,923 1,254 3,005 7,449
Money market deposit accounts ....... 1,165 789 895 397 189 172 3,607
Certificates of deposit ............. 9,586 6,532 18,968 4,942 225 0 40,253
Borrowed funds ...................... 0 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Total Interest-bearing liabilities $ 11,673 $ 8,273 $ 21,524 $ 9,449 $ 2,253 $ 4,471 $ 57,643
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap per period .. $ 301 $ 23,596 ($18,597) $ 610 $ 1,331 $ 1,225 $ 8,466
-------- -------- -------- -------- -------- -------- --------
Cumulative interest sensitivity gap .. $ 301 $ 23,897 $ 5,300 $ 5,910 $ 7,241 $ 8,466
-------- -------- -------- -------- -------- --------
Cumulative net interest-earning assets
as a percentage of net interest
bearing liabilities ................. 102.58% 219.81% 112.78% 111.61% 113.62% 114.69%
-------- -------- -------- -------- -------- --------
Cumulative interest sensitivity gap
as a percentage of total assets ..... 0.45% 35.67% 7.91% 8.82% 10.81% 12.64%
-------- -------- -------- -------- -------- --------
</TABLE>
- ----------------------
(1) Includes loans held for sale, home equity loans and non-accrual loans.
(2) Fair Market Value ("FMV").
(3) Includes FHLB Overnight Account.
8
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Savings Bank's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month end balances instead of daily
average balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
For the Year Ended June 30
------------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net (1) $49,879 $ 4,071 8.16% $49,498 $3,840 7.76%
Investments and mortgage-backed securities:
Held to maturity, at cost 495 40 8.08 1,903 110 5.79
Available for sale, FMV (2) 5,527 332 6.01 5,377 306 5.69
Other investments (3) 7,502 463 6.16 4,153 283 8.81
------ ----- ------ ------
Total interest-earning assets 63,403 4,906 7.74 60,931 4,539 7.45
----- ------
Non-interest earning assets 3,415 4,367
Total assets $66,818 $65,298
======= ======
Interest-bearing liabilities:
Interest-bearing demand accounts $ 4,872 110 2.25 $ 4,265 108 2.44
Regular savings & club accounts 7,274 216 2.97 8,821 225 2.61
Money market deposit accounts 3,761 111 2.96 3,958 116 2.94
Certificates of deposit 40,167 2,133 5.31 36,727 1,773 4.80
Borrowed funds 750 52 6.92 1,938 95 4.90
------ ----- ------ ------
Total interest-bearing liabilities 56,824 2,622 4.57 55,529 2,314 4.08
-----
Non-interest-bearing demand accounts 573 1,212
Non-interest bearing liabilities 684 472
Equity 8,737 8,085
------ ------
Total liabilities and equity $66,818 $65,298
======= ======
Net-interest income $2,284 $ 2,225
===== ======
Interest rate spread (4) 3.17 3.37
Net yield on interest-earning assets (5) 3.60 3.65
Ratio of average interest-earning assets to average
interest-bearing liabilities 110.47 107.38
Average equity to average total assets 13.08 12.38
</TABLE>
(1) Includes loans held for sale and non-accrual loans.
(2) Calculations based on historical data.
(3) Includes FHLB Overnight Account.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest- bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Savings Bank for the periods
indicated. For each category of interest-earning and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rate
multiplied by old average volume); (iii) and changes in rate volume (changes in
rate multiplied by the change in volume).
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
For the Year Ended June 30,
--------------------------------------------------- ---------------------------------------------
1996 vs. 1995 1995 vs. 1994
(In Thousands)
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net $ 30 $200 $ 1 $231 $890 $(284) $ (76) $530
Mortgage backed securities
and investments:
Held to maturity, at cost (81) 43 (32) (70) (16) 76 (4) 56
Available for sale, FMV 8 17 1 26 174 (45) (40) 89
----
Other investments 228 (27) (21) 180 (17) 50 (17) 16
--- --- --- --- ----- ---- ----
Total interest-earning assets 185 233 (51) 367 1,031 (203) (137) 691
--- --- --- --- ----- ---- ---- ----
Interest expense:
Deposits:
Interest-bearing demand 14 (8) (1) 5 6 4 0 10
accounts
Regular savings & club (35) 31 (5) (9) 26 (33) (4) (11)
accounts
Money market deposit (6) 1 (0) (5) (25) (7) 1 (31)
accounts
Certificates of deposit 166 177 17 360 153 317 28 498
Borrowed funds (58) 39 (24) (43) 0 0 95 95
--- --- --- ----- ---- ---- ----
81 240 (13) 308 160 281 120 561
--- --- --- --- ----- ---- ---- ----
Net change in interest income $104 $ (7) $(38) $ 59 $ 871 $(484) $(257) $ 130
=== ==== === === ===== ==== ==== ====
</TABLE>
10
<PAGE>
Comparison of Financial Condition for
Fiscal Years Ended June 30, 1996 and June 30, 1995
Total assets at June 30, 1996 were $67.0 million as compared to $66.3
million at June 30, 1995, an increase of $700,000. The increase was due to an
increase in cash and investments offset by a decrease in loans receivable. Cash
and cash equivalents increased from $830,000 at June 30, 1995 to $5.3 million at
June 30, 1996, an increase of $4.5 million. Interest bearing deposits and
investments increased from $11.1 million at June 30, 1995 to $11.8 million at
June 30, 1996, an increase of $700,000. The increases were due mainly to an
increase in savings deposits, loan paybacks, and a reduction in loan
originations for the Bank. Net loans receivable decreased $4.3 million from
$51.1 million at June 30, 1995 to $46.8 million at June 30, 1996, due primarily
to a net decrease of $3.7 million in one- to four-family adjustable-rate
mortgage "ARM" loans. This was due to a softening of mortgage loan rates,
thereby slowing the origination of "ARM" loans. On the liability side, deposits
increased $3.0 million to $57.6 million at June 30, 1996 from $54.6 million at
June 30, 1995. At June 30, 1996, there were no advances outstanding from the
Federal Home Loan Bank of Atlanta, a decrease of $1.8 million from June 30,
1995. This was due to an increase in cash available during the year.
The Savings Bank has generally depended on higher rate certificates of
deposits of 12 months or less over lower rate core deposits in order to fund its
lending operations. This is done to manage interest rate risk. This trend is
likely to continue and could have an adverse effect on the Savings Bank's
earnings and interest rate spread during periods of rapidly rising interest
rates. Management, however, may use borrowings rather than certificates of
deposit to fund operations if such borrowings are available at lower rates than
certificates of deposit.
Net Income. Net income for the year ended June 30, 1996 was $306,000 as
compared to $304,000 for the year ended June 30, 1995, an increase of $2,000.
Per share earnings for the year ended June 30, 1996 was $0.60.
Interest Income. Interest income increased $400,000 from $4.5 million at
June 30, 1995 to $4.9 million at June 30, 1996. The increase was mainly a result
in the interest rates earned on adjustable-rate mortgages and the increase in
earnings on a larger investment base.
Interest Expense. Interest expense for the year ended June 30, 1996 was
$2.6 million as compared to $2.3 million for the year ended June 30, 1995, an
increase of $300,000. The increase was due mainly to an increase in deposits.
Net Interest Income. Net interest income increased slightly for the year
ended June 30, 1996. This resulted mainly from an increase in the interest rates
earned on adjustable-rate mortgages, offset by an increase in deposits and the
increase in rates paid on those deposits.
Provision for Credit Losses. The Savings Bank made no provision for
credit losses for the year ended June 30, 1996. Management reviews the Savings
Bank's loan portfolio. Future additions may become necessary based upon changing
economic conditions, increased loan portfolio, or changes in the underlying
collateral of the loan portfolio.
11
<PAGE>
Noninterest Income. Noninterest income increased $140,000 from $315,000
for the year ended June 30, 1995 to $455,000 for the year ended June 30, 1996.
This was due primarily to a $158,000 increase on gain on loans sold in the
secondary market from $50,000 for the year ended June 30, 1995 to $208,000 for
the year ended June 30, 1996.
Noninterest Expense. Noninterest expense increased from $2.0 million for
the year ended June 30, 1995 to $2.2 million for the year ended June 30, 1996,
an increase of $200,000. This was mainly due to an increase in personnel costs
associated with the ESOP and Stock Benefit Plan, and the increased costs
associated with being a stock company. Noninterest expense could further
increase as a result of greater benefit plan expense in future periods.
Provision for Income Taxes. The provision for income taxes for the year
ended June 30, 1996 was $191,000 as compared to $190,000 for the year ended June
30, 1995. The slight increase was due to the increase in income for the 1996
fiscal year. The effective tax rate was 38.47% for the year ended June 30, 1996
and 38.57% for the year ended June 30, 1995.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are deposits and proceeds
from principal and interest payments on loans and mortgage-backed securities.
Additional sources of liquidity are advances from the FHLB of Atlanta and other
borrowings. The Savings Bank has and may utilize FHLB of Atlanta borrowing in
the future during periods when management of the Savings Bank believes that such
borrowings provide a lower cost source of funds than deposit accounts and the
Savings Bank desires liquidity in order to help expand its lending operations.
The Savings Bank's most liquid assets are cash and cash-equivalents,
which include investments in highly liquid, short-term investments, such as
overnight investments in the Federal Home Loan Bank of Atlanta. At June 30,
1996, cash and cash equivalents totaled $5.3 million.
At June 30, 1996, the Savings Bank had $33.5 million in certificates of
deposits due within one year and $6.7 million due in two to three years.
Management estimates that the Savings Bank will retain the deposits or replace
them with new deposits. At June 30, 1996, the Savings Bank had $3.9 million in
outstanding commitments to originate mortgages. The Savings Bank intends to fund
these commitments with present liquidity, proceeds from loan repayments, and
loan sales in the secondary market.
Regulations require that the Savings Bank maintain specified levels of
liquidity. The liquidity is measured as a ratio of cash and certain investments
to withdrawable savings. At June 30, 1996, the minimum level of liquidity
required by regulations was 5.00%. The Savings Bank's liquidity ratio at June
30, 1996 was 12.29%.
The Savings Bank is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and regulations promulgated by the OTS. The capital standards
generally require the maintenance of regulatory capital sufficient to meet a
tangible capital requirement, a core capital requirement and a risk-based
capital requirement. At June 30, 1996, the Savings Bank's tangible and core
capital totaled $7.5 million. This amount exceeded the tangible capital
requirement of $1.0 million by $6.5 million and the core capital requirement of
$2.0
12
<PAGE>
million by $5.5 million on that date. At June 30, 1996, the Savings Bank's
risk-based capital totaled $7.7 million, which exceeded its risk-based capital
requirement of $2.8 million by $4.9 million.
Impact of Inflation and Changing Prices
The financial statements and related data have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services since such
goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Savings Bank's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
13
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
SWVA Bancshares, Inc.
Roanoke, Virginia
We have audited the accompanying consolidated statements of financial condition
of SWVA Bancshares, Inc. and Subsidiaries (the "Company"), as of June 30, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 SWVA Bancshares,
Inc. and Subsidiaries, as of June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-period period
ended June 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 8 to the financial statements, the Company changed
its method of accounting for income taxes by adopting Statement of Financial
Accounting Standards No. 109, effective July 1, 1993. The Company also changed
its method of accounting for debt and equity securities by adopting Statement of
Financial Accounting Standards No. 115, effective July 1, 1994.
Lynchburg, Virginia
July 26, 1996, except for Note 21 as to
which the date is August 21, 1996
14
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $ 5,262 $ 830
Interest-bearing deposits 3,841 3,061
Investment and mortgage-backed securities
Held to maturity, at amortized cost 443 1,822
Available for sale, at fair value 7,496 6,264
Loans held for sale 985 859
Loans receivable, net 46,757 51,064
Property and equipment, net 1,662 1,714
Accrued interest receivable 343 341
Prepaid expenses and other assets 198 310
-------- --------
Total assets $ 66,987 $ 66,265
======== ========
Liabilities and stockholders' equity
Liabilities
Deposits $ 57,643 $ 54,642
Advances from Federal Home Loan Bank -- 1,800
Advances from borrowers for taxes and insurance 146 201
Other liabilities and deferred income 523 309
-------- --------
Total liabilities 58,312 56,952
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.10. Authorized 275,000 shares, none issued -- --
Common stock, par value $.10. Authorized 2,225,000 shares, 543,190 and
570,590 shares outstanding for 1996 and 1995, respectively 54 57
Additional paid-in capital 4,750 5,185
Retained earnings, substantially restricted 4,636 4,484
Unrealized holding loss on securities available for sale (12) (2)
Less unearned ESOP shares, 36,517 for 1996 and 41,083 shares for 1995 (365) (411)
Less unearned MSBP shares, 22,812 shares (388) --
-------- --------
Total stockholders' equity 8,675 9,313
-------- --------
Total liabilities and stockholders' equity $ 66,987 $ 66,265
======== ========
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1996, 1995 and 1994
(In thousands, except shares outstanding)
<TABLE>
<CAPTION>
Unrealized
Common Stock (Loss) on
------------------------------ Additional Securities Unearned Unearned
Shares Paid-in Retained Available ESOP MSBP
Outstanding Amount Capital Earnings For Sale Shares Shares Total
----------- -------- --------- ------ --- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 - $ - $ - $ 3,691 $ - $ - $ - $ 3,691
Net income - - - 568 - - - 568
Change in unrealized loss on
marketable equity securities - - - - (90) - - (90)
------ ------ ------- ------- ----- ------- ----- -------
Balance, June 30, 1994 - - - 4,259 (90) - - 4,169
Net income - - - 304 - - - 304
Change in unrealized loss on
marketable equity securities - - - - 88 - - 88
Sale of stock 570,590 57 5,180 - - (456) - 4,781
Allocated/earned ESOP shares - - 5 - - 45 - 50
Dividends declared and paid
($.15 per share) - - - (79) - - - (79)
-------- ----- ------ ------- ----- ------ ----- -------
Balance, June 30, 1995 570,590 57 5,185 4,484 (2) (411) - 9,313
Net income - - - 306 - - - 306
Change in unrealized loss on
marketable equity securities - - - - (10) - - (10)
Purchase of unearned MSBP
shares - - - - - - (388) (388)
Repurchase of common stock (27,400) (3) (463) - - - - (466)
Allocated/earned ESOP shares - - 28 - - 46 - 74
Dividends declared and paid
($.30 per share) - - - (154) - - - (154)
-------- ----- ------ ------- ------ ----- -------- -------
Balance, June 30, 1996 543,190 $ 54 $ 4,750 $ 4,636 $ (12) $ (365) $ (388) $ 8,675
======== ===== ====== ======== ====== ====== ======= ======
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1996, 1995 and 1994
(In thousands, except per-share data)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----
Interest income
<S> <C> <C> <C>
Loans $ 4,071 $ 3,840 $ 3,310
Mortgage-backed and related securities 360 348 292
U.S. government obligations including agencies 71 71 31
Other investments, including overnight deposits 404 280 215
--------- --------- --------
Total interest income 4,906 4,539 3,848
--------- --------- --------
Interest expense
Deposits 2,570 2,219 1,753
Borrowed funds 52 95 -
--------- --------- ----
Total interest expense 2,622 2,314 1,753
--------- --------- --------
Net interest income 2,284 2,225 2,095
Provision for credit losses - 1 2
--------- --------- --------
Net interest income after provision for credit losses 2,284 2,224 2,093
--------- --------- --------
Noninterest income
Loan and other customer service fees 154 161 183
Gain on sale of mortgage loans 208 50 276
Gross rental income 93 92 85
Other - 12 1
--------- --------- --------
Total noninterest income 455 315 545
--------- --------- --------
Noninterest expenses
Personnel 1,258 1,124 1,064
Office occupancy and equipment 314 310 305
Net cost of (gain on) operation of foreclosed real estate - - (1)
Data processing 127 133 129
Federal insurance of accounts 126 121 116
Advertising 74 89 43
Other 343 268 225
--------- --------- --------
Total noninterest expenses 2,242 2,045 1,881
--------- --------- --------
Income before income taxes and cumulative effect of change
in accounting principle 497 494 757
Provision for income taxes 191 190 276
--------- --------- --------
Net income before cumulative effect of change in
accounting principle 306 304 481
Cumulative effect at July 1, 1993, of change in accounting
for income taxes - - 87
--------- --------- --------
Net income $ 306 $ 304 $ 568
========= ========= =======
Primary earnings per share $ .60 $ .57 N/A
Fully diluted earnings per share $ .60 $ .57 N/A
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Page 1
1996 1995 1994
--------- -------- ---------
Operating activities
<S> <C> <C> <C>
Net income $ 306 $ 304 $ 568
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
ESOP shares allocated 74 -- --
Cumulative effect of change in accounting principle -- -- (87)
Provision for credit losses -- 1 2
Provision for depreciation and amortization 101 100 102
Provision for deferred income tax (6) 39 36
Federal Home Loan Bank stock dividend -- -- (37)
Loans originated for sale (19,516) (5,747) (17,587)
Proceeds from sales of loans originated for sale 19,601 5,039 19,042
Gain on sale of loans (208) (50) (276)
Gain on sale of real estate -- -- (1)
Net (increase) decrease in other assets 110 (49) (164)
Net increase (decrease) in other liabilities 159 (131) (204)
Loss on sale of investments available for sale -- 3 --
-------- -------- --------
Net cash provided by (used in) operating activities 621 (491) 1,394
-------- -------- --------
Investing activities
Proceeds from maturity of investments and interest-bearing deposits 3,950 3,837 6,465
Proceeds from sale of investments, available for sale -- 207 --
Purchase of investments and interest-bearing deposits (4,730) (4,141) (8,271)
Purchase of investments, available for sale -- (45) --
Proceeds from sale of foreclosed real estate -- -- 77
Purchase of foreclosed real estate -- -- (76)
Purchase of property and equipment (49) (50) (29)
Net (increase) decrease in loans 4,304 (10,664) (828)
Purchase of loans -- -- (42)
Principal repayments on mortgage-backed securities 143 188 336
-------- -------- --------
Net cash provided by (used in) investing activities 3,618 (10,668) (2,368)
-------- -------- --------
</TABLE>
(continued)
18
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Page 2
1996 1995 1994
-------- -------- --------
Financing activities
<S> <C> <C> <C>
Proceeds from advances $ 200 $ 4,950 $ --
Curtailment of advances and other borrowings (2,000) (3,150) --
Net increase (decrease) in savings deposits 3,001 4,613 (368)
Proceeds from sale of stock -- 5,237 --
Loan to ESOP for purchase of stock -- (456) --
Repurchase of stock (466) -- --
Purchase of stock for MSBP (388) -- --
Dividends paid (154) (79) --
-------- -------- --------
Net cash provided by (used in) financing activities 193 11,115 (368)
-------- -------- --------
(Increase) decrease in cash and cash equivalents 4,432 (44) (1,342)
Cash and cash equivalents at beginning of year 830 874 2,216
-------- -------- --------
Cash and cash equivalents at end of year $ 5,262 $ 830 $ 874
======== ======== ========
Supplemental disclosures:
Cash paid for
Interest on deposits and borrowed funds $ 2,620 $ 2,300 $ 1,771
======== ======== ========
Income taxes $ 159 $ 191 $ 403
======== ======== ========
Other non-cash activities
Gross unrealized gain (loss) on securities, available for sale $(16) $ 89 $ (90)
Deferred income taxes 6 1 --
-------- -------- --------
Net unrealized gain (loss) $ (10) $ 88 $ (90)
======== ======== ========
Reclassification of investments from held to maturity to available
for sale $ 1,245 $- $-
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
SWVA Bancshares, Inc. (the "Parent Company"), is a unitary thrift holding
company whose principal asset is its wholly-owned subsidiary, Southwest Virginia
Savings Bank, FSB (the "Bank"). The Bank is a federally chartered stock savings
bank as provided by the Home Owners' Loan Act. In these financial statements the
consolidated group is referred to collectively as the "Company".
The accounting and reporting policies of the Company conform with generally
accepted accounting principles (GAAP). A brief description of the Company's
significant accounting policies is presented as follows.
Note 1 - Summary of significant accounting policies
Basis of consolidation
The consolidated financial statements include the accounts of SWVA Bancshares,
Inc., Southwest Virginia Savings Bank, its wholly-owned subsidiary, and
Southwest Virginia Service Corporation, the wholly-owned subsidiary of the Bank.
All material intercompany accounts and transactions have been eliminated in the
consolidation. The Company also presents herein condensed Parent Company
financial information. Prior year amounts are reclassified when necessary to
conform with current year classifications.
Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans. The
estimation process may include management obtaining independent appraisals for
significant collateral properties, but the ultimate collectibility and recovery
of carrying amounts are susceptible to changes in local real estate market and
other local economic conditions.
Management uses available information to recognize credit losses on loans and
real estate acquired in settlement of loans currently, while future additions to
the allowances may be necessary based on changes in local economic conditions.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for credit losses on loans.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is possible that the allowances
for credit losses on loans could change materially.
Cash equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities, when purchased, of three
months or less to be cash equivalents. Cash and cash equivalents for the three
years presented include cash on hand and demand deposits. Certificates of
deposit with initial maturities greater than three months are shown separately
as interest-bearing deposits.
20
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 1 - Summary of significant accounting policies (continued)
Investment securities
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115), requires certain
securities to be classified as "held to maturity", "trading" or "available for
sale", according to management's intent and ability.
Debt securities classified as "held to maturity" are carried at cost, adjusted
for amortization of premium and accretion of discount over the terms of the
securities, as long as the Company has the ability and maintains the positive
intent to hold such securities to maturity. If such securities are sold prior to
maturity, gains or losses are recognized in the year of sale by the specific
identification method.
Trading securities, if any, are carried at fair value. Realized gains and losses
on sales and unrealized changes in fair values are included in noninterest
income.
Marketable equity securities not classified as "trading" and debt securities not
classified as "trading" or "held to maturity" are carried at fair value, if
marketable, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity. Realized gains and losses on
sales are included in noninterest income and are computed under the specific
identification method.
Mortgage-backed and related securities
Mortgage-backed securities, held to maturity, represent participating interests
in pools of long-term first mortgage loans originated and serviced by the
issuers of the securities. These securities are carried at unpaid principal
balances, adjusted for unamortized premiums and discounts as the Bank has the
ability and intent to hold such securities to maturity. Premiums and discounts
are amortized using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. If such securities are sold
prior to maturity, gains and losses are determined using the specific
identification method.
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
noninterest income.
Loans and allowances for credit losses
The Company adopted the provisions of Statements of Financial Accounting
Standards No.114, Accounting by Creditors for Impairment of a Loan (SFAS 114),
and Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures (SFAS 118), as of July 1, 1996. The adoption has had no material
effect on the financial position or operating results of the Company nor does it
have any effect on the comparability of financial statement information.
Loans receivable that management has the intent and ability to hold for the
foreseeable future, or until maturity or pay off, are carried at their face or
par values, net of unearned discounts, participation or whole-loan interests
owned by others, unearned loan fees, undisbursed loans in process, and an
allowance for credit losses.
21
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 1 - Summary of significant accounting policies (continued)
Valuation allowances for estimated credit losses on loans are established by
charges to income when any material and estimable decline in value is deemed to
have occurred. The determination of the adequacy of the valuation allowance is
based on a detailed analysis of individual loans with known or anticipated
adverse performance characteristics, and includes consideration of historical
patterns, industry experience, current economic conditions, changes in
composition and risk characteristics of the loan portfolio, and other factors
deemed relevant to the collectibility of the loans currently outstanding. A loan
is considered impaired when, based on current information and events, it is
probable that all amounts due according to the contractual terms of the loan
agreement will not be collectible. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for credit losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
Loans that are 90 days or more past due are individually reviewed for ultimate
collectibility. Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
Foreclosed real estate
Foreclosed real estate owned, if any, consists of property acquired by
foreclosure on delinquent loans or by deed in lieu of foreclosure. Such property
is recorded initially at the lower of cost or fair value and is subsequently
maintained at the lower of cost or fair value minus the estimated costs to sell.
Property, equipment and depreciation
The various classes of property are stated at cost and are depreciated by the
straight-line method over their estimated useful lives of 10 to 50 years for
buildings and improvements and 3 to 12 years for furniture, fixtures, and
equipment. Repairs are expensed as incurred. The cost and accumulated
depreciation of property are eliminated from the accounts upon disposal, and any
resulting gain or loss is included in the determination of net income.
Income taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109), as of July 1, 1993.
This statement required a change from the deferred method to the
asset-and-liability method of accounting for deferred income taxes. Under the
asset-and-liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
22
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 1 - Summary of significant accounting policies (continued)
Loan origination fees, costs, discounts and premiums
Loan origination fees are accounted for in accordance with Statement of
Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases (SFAS 91). Under SFAS 91, loan origination and commitment fees and
certain direct loan origination costs are deferred. Upon the expiration of
unfunded commitments, the related fees are recognized into income as loan fees.
Loan origination fees on funded commitments and related direct costs are
amortized into income on loans as yield adjustments over the contractual life of
related loans using the level-yield method.
Discounts and premiums on loans purchased are recognized in interest income
using the level-yield method over the average life of the loan.
Sales of mortgage loans, mortgage-related securities and foreclosed real estate
Gains and losses on the sales of loans, participation interest in loans, and
foreclosed real estate are accounted for by imputing gain or loss on those sales
where a yield rate guaranteed to the buyer is more or less than the contract
interest rate being collected, in the case of loans, and where foreclosed
property is sold on financing terms more or less favorable than the prevailing
market terms for similar property. Such gains or losses are recognized in the
financial statements for the year of sale. The Bank services loans that have
been sold with servicing retained. Such loan balances are not included in the
accompanying consolidated statements of financial condition.
Advertising
The Company expenses most advertising costs as incurred. Such expenses are shown
in the consolidated statements of income. As of June 30, 1996 and 1995, the
Company's statements of financial condition included $2,000 of prepaid
advertising.
Earnings per share
Earnings per share of common stock for the year ended June 30, 1996 have been
computed by dividing the net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during the year. Stock
options are regarded as common stock equivalents and are, therefore, considered
in both primary and fully diluted earnings per share calculations. Common stock
equivalents are computed using the treasury stock method.
Shares acquired by the employee stock benefit plan are accounted for in
accordance with AICPA Statement of Position 93-6 and are not considered in the
weighted average shares outstanding until the shares have been earned by the
employees and/or committed to be released.
23
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 1 - Summary of significant accounting policies (continued)
Earnings per share were based on the following as of June 30, 1996:
Common shares issued $ 543,190
Common shares unallocated by ESOP 36,517
---------
Shares used in earnings computation $ 506,673
========
Earnings per share information for 1994 is not meaningful because the Bank did
not complete its stock conversion until 1995.
Fair values of financial instruments
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
- - Cash and short-term instruments - The carrying amounts of cash and
short-term instruments approximate their fair value.
- - Available-for-sale and held-to-maturity securities - Fair values for
securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities
approximate fair values.
- - Loans receivable - Fair values are based on carrying values for
variable-rate loans that reprice frequently and have no significant change
in credit risk. Fair values for certain mortgage loans (for example,
one-to-four family residential) and other consumer loans are based on
quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses and interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
- - Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed- term money-market accounts and certificates of deposit (CDs)
approximate their fair values at the reporting date. Fair values for
fixed-rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
- - Short-term borrowings - The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowing are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
24
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 1 - Summary of significant accounting policies (continued)
- - Long-term debt - The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
- - Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
- - Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
counterparties' credit standings.
Conversion to stock ownership
At a special meeting on July 20, 1994, the members of the Bank approved
management's plan to convert the Savings Bank from a Federal Mutual to a Federal
Stock Savings Bank. The plan called for the formation of SWVA Bancshares, Inc.
which would own the stock of the Bank upon its conversion to a stock form of
ownership. The stock of the Parent Company would then be offered through a
Subscription and Community Offering to the Bank's tax-qualified employee stock
plans, eligible account holders and others. The transaction was in the form of a
pooling of interests.
On October 7, 1994, the Parent Company issued 570,590 shares of $.10 par value
common stock at $10 per share and became the parent company of the Bank. Net
proceeds, after deducting conversion expenses and underwriters' discounts of
$469,000, were $5,242,000 and are reflected as common stock and additional
paid-in capital in the accompanying consolidated statements of financial
condition. The Parent Company's Articles of Incorporation contain certain
limitations on voting rights and other "anti-takeover" provisions.
As part of the conversion to stock form, the Bank formed an Employee Stock
Ownership Plan (ESOP) for eligible employees. The ESOP purchased 45,647 common
shares of the Parent Company issued in the conversion, which purchase was funded
by a loan from the Parent Company. In accordance with generally accepted
accounting principles, the unpaid balance of the ESOP loan has been eliminated
on the Company's consolidated statements of financial condition. Stockholders'
equity has been reduced by the aggregate purchase price of the shares owned by
the ESOP net of the shares committed to be released. Contributions to the ESOP
by the Savings Bank are made to fund the principal and interest payments on the
debt of the ESOP. As of June 30, 1996, a total of 9,130 shares had been
released.
Impact of new accounting standards
In April 1995, the Financial Accounting Standards Board ("FASB") issued
Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to
be Disposed Of (SFAS 121). This statement establishes standards for recognizing
and measuring the impairment of long-lived assets, certain identifiable
intangibles, and goodwill, when an entity is unable to recover the carrying
amount of those assets. This statement is effective for the year beginning July
1, 1996. SFAS 121 is not expected to have a material effect on the Company's
financial statements in the year of adoption.
25
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 1 - Summary of significant accounting policies (continued)
In May 1995, FASB issued Accounting for Mortgage Servicing Rights (SFAS 122),
which amends Accounting for Certain Mortgage Banking Activities (SFAS 65), to
require that a mortgage banking enterprise recognize as separate assets rights
to service mortgage loans for others, however those servicing rights are
acquired. SFAS 122 requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights and is effective for the year beginning July 1, 1996. SFAS 122 is
to be applied prospectively and is not expected to have a material effect on the
Company's financial statements in the year of adoption.
In October 1995, FASB issued Accounting for Stock-Based Compensation (SFAS 123),
which will become effective for the Company beginning July 1, 1996. This
statement will require increased disclosure of compensation expense arising from
both fixed and performance stock compensation plans. Such expense will be
measured as the fair value of the award at the date it is granted using an
option-pricing model that takes into account the exercise price and expected
volatility, expected dividends on the stock and the expected risk-free rate of
return during the term of the option. The compensation cost would be recognized
over the service period, usually the period from the grant date to the vesting
date. SFAS 123 encourages, rather than requires, companies to adopt a new method
that accounts for stock compensation awards based on their estimated fair value
at the date they are granted. Companies would be permitted, however, to continue
accounting under Accounting Principles Board ("APB") Opinion No. 25. The Company
will continue to apply APB Opinion No. 25 in their financial statements and will
be required to disclose pro forma net income and earnings per share in a
footnote, determined as if the Company had applied the new method.
Note 2 - Investment securities
Investments consisting of U.S. government, mortgage-backed and other securities
at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1996
------------------------------------------------
Amortized Gross Unrealized
--------------------
Cost Gain Loss Fair Value
---- ---- ---- ----------
Securities, held to maturity
<S> <C> <C> <C> <C>
FHLMC participation certificates ...................... $ 443 $ 2 $ -- $ 445
------- ----- ------- -------
Securities, available for sale
Mutual fund - AMF Adjustable Rate Securities Portfolio 5,256 -- (41) 5,215
FHLB bonds ............................................ 1,245 -- (23) 1,222
Federal Home Loan Bank of Atlanta, restricted ......... 961 -- -- 961
Financial Institution Insurance Group, Ltd., restricted 50 48 -- 98
------- ----- ------- -------
7,512 48 (64) 7,496
------- ----- ------- -------
Total securities ............................... $ 7,955 $ 50 $ (64) $ 7,941
======= ===== ======= =======
</TABLE>
26
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 2 - Investment securities (continued)
<TABLE>
<CAPTION>
1996
---------------------------------------------
Amortized Gross Unrealized
--------------------
Cost Gain Loss Fair Value
---- ---- ---- ----------
Securities, held to maturity
<S> <C> <C> <C> <C>
FHLB bonds $ 1,245 $ -- $ (23) $ 1,222
FHLMC participation certificates 577 29 -- 606
------- ------- ------- -------
1,822 29 (23) 1,828
------- ------- ------- -------
Securities, available for sale
Mutual fund - AMF Adjustable Rate Securities Portfolio 5,256 -- (30) 5,226
Federal Home Loan Bank of Atlanta, restricted 961 -- -- 961
Financial Institution Insurance Group, Ltd., restricted 50 27 -- 77
------- ------- ------- -------
6,267 27 (30) 6,264
------- ------- ------- -------
Total securities $ 8,089 $ 56 $ (53) $ 8,092
======= ======= ======= =======
</TABLE>
The amortized cost and estimated fair value of debt securities at June 30, 1996,
by contractual maturity, were as follows in thousands. Expected maturities of
mortgage-backed securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Values of mutual fund shares are not guaranteed by any government agency.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------- ------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Matures October 28, 1998 $ -- $ -- $ 497 $ 484
Matures March 10, 1999 -- -- 748 738
Mortgage-backed and related securities 443 445 5,256 5,215
------ ------ ------ ------
$ 443 $ 445 $6,501 $6,437
====== ====== ====== ======
</TABLE>
Proceeds from maturities of interest-bearing deposits a nd inves tments were
$3,950,000 in 1996, $3,837,000 in 1995, and $ 6,465,000 in 1994. Gross gains
realized on redemption of mutual fund shares in 1995 were $190, and gross losses
were $2,814. Cost was determined by the specific identification method. No gains
or losses were realized in 1996 or 1994.
27
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 3 - Loans receivable
Loans receivable at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
Mortgage loans
<S> <C> <C>
Residential, one to four family $ 37,191 $ 41,561
Residential, multifamily 3,114 3,866
Nonresidential and land 2,759 2,372
Construction 3,663 3,007
--------- ---------
46,727 50,806
Non-mortgage loans
Consumer loans
Secured personal 783 711
Unsecured personal 20 18
Auto 116 157
Home improvement 73 72
Equity line 911 427
Other 169 75
Commercial
Unsecured 35 25
Secured 98 200
--------- ---------
2,205 1,685
Total loans 48,932 52,491
--------- ---------
Less
Deferred loan fees 100 160
Unearned discounts - 1
Undisbursed loans in process 1,881 1,072
Allowance for credit losses 194 194
--------- ---------
2,175 1,427
Loans receivable, net $ 46,757 $ 51,064
======= ========
</TABLE>
At June 30, 1995, a total of $2,400,000 of real estate loans had been pledged to
the Federal Home Loan Bank of Atlanta, as collateral for advances from that bank
(see Note 7). No loans were pledged as of June 30, 1996.
28
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 3 - Loans receivable (continued)
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these loans
at June 30 of each year are summarized as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $ 459 $ 600
Virginia Housing Development Authority (VHDA) 729 713
---- ------
$ 1,188 $1,313
====== ======
</TABLE>
Custodial escrow balances at June 30 of each year maintained in connection with
the foregoing loans serviced are summarized as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
FHLMC $ 5 $ 8
VHDA 4 6
-------- -----
$ 9 $ 14
======== =====
</TABLE>
Activity in the allowance for credit losses for the years ended June 30, 1996,
1995 and 1994 is summarized as follows in thousands:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -----
<S> <C> <C> <C>
Balance at beginning of year $ 194 $ 194 $ 194
Provision charged to operations - 1 2
Charge-offs - 1 2
---- ----- -----
Balance at end of year $ 194 $ 194 $ 194
==== ===== =====
</TABLE>
29
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 3 - Loans receivable (continued)
The following table sets forth the maturity of the loan portfolio at June 30,
1996 in thousands. The table does not include prepayments or scheduled principal
repayments.
<TABLE>
<CAPTION>
Residential
---------------------
One to Four Multi- Nonresidential Consumer
Family Family and Land Construction and Other Total
------ ------ -------------- ------------ --------- -----
Amounts due
<S> <C> <C> <C> <C> <C> <C>
Within 3 months $ 3 $ - $ - $ 1,816 $ 679 $ 2,498
3 months to 1 year 18 - - 758 40 816
--------- ------- ----------- ----------- --------- ---------
21 - - 2,574 719 3,314
--------- ------- ----------- ----------- --------- ---------
After 1 year
1 to 3 years 149 14 255 1,089 214 1,721
3 to 5 years 204 - 113 - 115 432
5 to 10 years 2,622 - 616 - 229 3,467
10 to 20 years 9,654 2,676 1,670 - 928 14,928
Over 20 years 24,541 424 105 - - 25,070
--------- ------- ----------- ----------- --------- ---------
37,170 3,114 2,759 1,089 1,486 45,618
--------- ------- ----------- ----------- --------- ---------
Total due $ 37,191 $ 3,114 $ 2,759 $ 3,663 $ 2,205 48,932
======= ====== =========== ============ ========= ---------
Less
Allowance for loan loss 194
Loans in process 1,881
Deferred loan fees 100
---------
2,175
---------
Loans receivable, net $ 46,757
========
</TABLE>
The following table sets forth the dollar amount (in thousands) of all loans due
after June 30, 1996, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
----- ----------- -----
One to four family $ 7,515 $29,676 $37,191
Multifamily 1,284 1,830 3,114
Nonresidential and land 1,127 1,632 2,759
Construction 2,292 1,371 3,663
Consumer and other 1,293 912 2,205
------- ------- -------
$13,511 $35,421 $48,932
======= ======= =======
30
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 4 - Property, equipment and depreciation
Property and equipment at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 575 $ 575
Office buildings and improvements 1,783 1,770
Furniture, fixtures and equipment 866 832
--------- ---------
3,224 3,177
Less accumulated depreciation 1,562 1,463
--------- ---------
Property and equipment, net $ 1,662 $ 1,714
========== ==========
</TABLE>
Accumulated depreciation at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Office buildings and improvements $ 826 $ 790
Furniture, fixtures and equipment 736 673
------- ------
$ 1,562 $ 1,463
====== =======
</TABLE>
Depreciation expense for the years ended June 30, 1996, 1995 and 1994 was as
follows in thousands:
<TABLE>
<CAPTION>
1996 1995 1994
---- ----- -----
<S> <C> <C> <C>
Office buildings and improvements $ 37 $ 35 $ 35
Furniture, fixtures and equipment 64 65 67
---- ----- -----
$101 $ 100 $ 102
=== ===== =====
</TABLE>
Note 5 - Accrued interest receivable
Accrued interest receivable at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrued interest on loans $ 294 $ 291
Accrued interest on investments 49 50
------ ------
$ 343 $ 341
===== =====
</TABLE>
31
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 6 - Deposits
Savings deposits at June 30 of each year, summarized by interest rate, were as
follows in thousands:
<TABLE>
<CAPTION>
1996 1995
--------------------- ------------------
Amount Percent Amount Percent
------ ------- ------- -------
Negotiable order of withdrawal deposits
<S> <C> <C> <C> <C>
Non-interest bearing $ 791 1.37% $ 408 .75%
2.15% 5,467 9.48 - -
2.50% - - 3,884 7.11
2.96% 3,607 6.26 - -
3.00% - - 3,644 6.67
--------- ------ --------- ------
9,865 17.11 7,936 14.53
--------- ------ --------- ------
Passbooks and statement deposits, 3.00% for each year 7,384 12.81 7,061 12.92
----- ----- ----- -----
Certificates of deposit and other term deposits
Less than 2.99% - - 10 .02
3.00% to 4.00% 407 .71 2,833 5.18
4.01% to 5.00% 13,147 22.81 13,277 24.30
5.01% to 6.00% 26,702 46.32 15,704 28.74
6.01% to 7.00% 135 .23 7,816 14.30
7.01% to 8.00% 3 .01 5 .01
--------- ------ --------- ------
Total term deposits 40,394 70.08 39,645 72.55
--------- ------ --------- ------
Total deposits $ 57,643 100.00% $54,642 100.00%
======== ====== ========= ======
</TABLE>
The aggregate amounts of certificates of deposit with a denomination of $100,000
or more were $3,970,000, $4,253,000 and $2,491,000 at June 30, 1996, 1995 and
1994, respectively.
Certain deposit accounts were pledged as collateral for $152,000, $178,000 and
$160,000 of consumer loans at June 30, 1996, 1995 and 1994, respectively.
Maturities of certificates of deposit are scheduled for each fiscal year
indicated as follows in thousands:
<TABLE>
<CAPTION>
1997 1998 1999 After 2000 Total
------------ --------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
3.00% to 4.00% $ 407 $ - $ - $ - $ 407
4.01% to 5.00% 11,759 1,274 113 1 13,147
5.01% to 6.00% 21,310 4,756 512 124 26,702
6.01% to 7.00% 35 - - 100 135
7.01% to 8.00% - - 3 - 3
--------- --------- --------- --------- ---------
$ 33,511 $ 6,030 $ 628 $ 225 $ 40,394
========== ========== ========= ======== =========
</TABLE>
32
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 6 - Deposits (continued)
Interest expense on deposits for the years ended June 30, 1996, 1995 and 1994 is
summarized as follows in thousands:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Money market $ 111 $ 116 $ 147
Passbook savings 213 224 232
NOW 110 105 95
Club accounts 1 1 1
Certificates of deposit 2,135 1,773 1,278
--------- ---------- --------
$ 2,570 $ 2,219 $ 1,753
========= ========== ========
</TABLE>
Note 7 - Borrowed funds
The following table sets forth certain information regarding advances at the
dates or for the periods indicated in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
FHLB-Atlanta advances
<S> <C> <C>
Balance outstanding at end of year $ - $1,800
Average balance outstanding 800 1,867
Maximum amount outstanding at any month-end during the year 1,800 2,650
Weighted-average interest rate during the year 3.82% 5.09%
Weighted-average interest rate at end of year 0% 6.25%
</TABLE>
Residential loans aggregating $2,400,000 were pledged as of June 30, 1995 as
collateral for the advances from FHLB-Atlanta under a blanket floating lien
agreement. No loans were pledged as of June 30, 1996.
Note 8 - Income taxes
The Bank's portion of the consolidated taxable income was computed by
application of Section 593(b)(2) of the U.S. Internal Revenue Code which
provides a special deduction for bad debts. The bad debt deduction may be a "tax
preference item" to which a minimum tax may apply.
The 1996 federal tax legislation repealed the benefits of Section 593(b)(2) of
the U.S. Internal Revenue Code. For ensuing fiscal years, the Bank will compute
its tax bad debt deduction by use of the "experience method" which is based on a
moving five-year average of actual loss experience. The legislation also
provides that "applicable excess reserves" must be recaptured as taxable income
over five years beginning in fiscal 1997. The amount to be recaptured is the
excess of the accumulated reserves since 1987 over the amount allowed by use of
the experience method for those years. The Bank has not determined the amount of
its potential recapture but does not believe it will have a material effect on
its reportable earnings.
33
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 8 - Income taxes (continued)
The consolidated provision for income taxes for the years ended June 30, 1996,
1995 and 1994, consisted of the following elements in thousands:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
Tax paid or payable currently
<S> <C> <C> <C>
Federal $ 183 $ 136 $ 216
State 14 13 24
Income tax deferred, net (6) 41 36
----- ----- ------
Total provision for income taxes $ 191 $ 190 $ 276
==== ===== =====
</TABLE>
The provision for income taxes differed from that computed at the statutory
corporate rate for the years ended June 30, 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -----
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increases in taxes resulting from
State income tax, net of federal tax benefit 1.9 1.6 2.1
Other 2.6 2.9 .4
------ ------ ------
Total provision for income taxes 38.5% 38.5% 36.5%
======== ======== ========
</TABLE>
The classification of the Bank's portion of retained earnings for federal income
tax purposes at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
---- ----
Appropriated and earmarked net income representing tax bad debt
<S> <C> <C>
deductions on which no income tax has been paid $ 1,947 $ 1,904
Tax-paid or tax-exempt income accumulated 2,922 2,645
------- ---------
$ 4,869 $ 4,549
======= =========
</TABLE>
If any of the untaxed retained earnings at June 30, 1996 are used for other than
bad debt losses, gross taxable income will be created to the extent of such
amounts.
The Company adopted SFAS 109, effective for the year ended June 30, 1994. The
cumulative effect of the application of the new method, amounting to $87,000,
was included in income for 1994.
34
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 8 - Income taxes (continued)
The significant components of the net deferred tax asset (liability) at June 30
of each year were as follows in thousands:
<TABLE>
<CAPTION>
Liability Method
---------------------------------
1996 1995 1994
------------ ----------- -------
Components of the deferred tax asset
<S> <C> <C> <C>
Loan fees $ 38 $ 45 $ 71
Pension expense 57 48 40
Unrealized loss on securities, available for sale 6 1 -
Stock bonus plan 14 - -
--------- -------- -----
115 94 111
Valuation allowance - - -
--------- -------- -----
Total deferred tax asset 115 94 111
--------- -------- -----
Components of the deferred tax liability
Accelerated depreciation 60 64 55
Bad debts 55 41 28
--------- -------- -----
Total deferred tax liability 115 105 83
--------- -------- -----
Net deferred tax asset (liability) $ - $ (11) $ 28
========= ======== =====
</TABLE>
The Company's consolidated income tax returns for years not closed by statutes
of limitations are subject to review by tax authorities.
Note 9 - Retirement plans and employee benefit programs
The Company has a multi-employer defined benefit pension plan with The Financial
Institution's Retirement Fund. Pension expense is the amount of the required
contribution, and a liability is recognized for such contributions which are
unpaid at the end of the fiscal year. Pension expense was $92,000 for the year
ended June 30, 1996 and $101,000 for each of the years ended June 30, 1995 and
1994.
The multi-employer defined benefit plan covers substantially all employees who
have reached age 21 and who have completed one year of service. The benefits are
based on length of service and high five-year average earnings. However, in no
event will the benefits be less than those vested through June 30, 1992 under a
previous plan.
Supplemental executive retirement plan
The Company has deferred compensation agreements with two principal officers
which provide for retirement benefits supplementary to those of the pension
plan. As of June 30, 1996 and 1995, cumulative accruals under the contracts
totaled $150,000 and $127,000, respectively, and constituted general obligations
of the Company.
35
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 9 - Retirement plans and employee benefit programs (continued)
Employee stock ownership plan
At the time of the stock conversion, the Bank established an Employee Stock
Ownership Plan covering all full-time employees over the age of 21, with at
least 1,000 hours of service within a plan year. The ESOP borrowed funds from
the Company to purchase a total of 45,647 shares of the Company's common stock,
the loan being collateralized by the common stock. Contributions by the Bank,
along with dividends received on unallocated shares, are used to repay the loan
with shares being released from the Company's lien proportional to the loan
repayments. Annually on June 30, the released shares are allocated to the
participants in the same proportion that their wages bear to the total
compensation of all of the participants. The Company has released 9,130 shares
of the common stock as of June 30, 1996. The Company recognized $5,000 and
$54,500 as accrued compensation costs in 1996 and 1995, respectively. The fair
value of unearned ESOP shares totaled $570,000 and $490,000 at June 30, 1996 and
1995, respectively. There were no commitments to repurchase ESOP shares.
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as a reduction of
stockholders' equity in the consolidated statements of financial condition. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt.
Recognition and retention plan
The stockholders approved the establishment of a Management Stock Bonus Plan and
Trust (MSBP) on October 25, 1995. The plan states that the Trust shall not
purchase more than 4% of the aggregate shares of common stock issued by the
Company in the mutual-to-stock conversion of the Bank (22,823 shares). During
1996, the Bank purchased 22,812 shares of the Company's common stock at an
average price of $17.02 per share to be awarded to directors, officers and
employees in accordance with the provision of the Recognition and Retention
Plan. The costs of the shares awarded under the plan are recorded as unearned
compensation, a contra equity account, and are recognized as an expense in
accordance with the vesting requirements under the plan. For the year ended June
30, 1996, the amount included in compensation expense was $36,000. The status of
the shares in this plan at June 30, 1996 is shown as follows.
<TABLE>
<CAPTION>
Unawarded Awarded
Shares Shares
------ ------
<S> <C> <C>
Total established by plan 22,812 -
Granted (18,484) 18,484
Vested - -
------- -------
Balance at June 30, 1996 4,328 18,484
======== =========
</TABLE>
36
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 9 - Retirement plans and employee benefit programs (continued)
Stock option plans
The stockholders also approved the establishment of a stock option plan on
October 5, 1995 for directors, officers and employees. The exercise price under
both plans is $17 per share, the fair market price on the date of the grant. One
is a non-incentive stock option plan, and the other is an incentive stock option
plan. Rights to exercise options granted vest at the rate of 20% per year,
beginning on the first anniversary of the grant. A summary of the stock option
activity is as follows.
<TABLE>
<CAPTION>
Available Options Vested and
for Grant Outstanding Exercisable
--------- ----------- -----------
<S> <C> <C> <C>
At inception 57,059 - -
Granted (43,927) 43,927 -
Vested - - -
---------- ----------- ---------
Balance at June 30, 1996 13,132 43,927 -
========== =========== =========
</TABLE>
Note 10 - Financial instruments with off-balance-sheet risk
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist primarily of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statements of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on- balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counter-party.
Collateral normally consists of real property.
The Company's commitments to finance real estate acquisitions and construction
were $3,929,000 at June 30, 1996, $2,561,000 at June 30, 1995 and $5,320,000 at
June 30, 1994. As of June 30, 1996, the Company had contracted to sell
$2,522,000 of the loans to be financed. No loss is anticipated. At June 30,
1996, outstanding letters of credit totaled $435,000, and unfunded lines of
credit totaled $840,000. Loans sold with recourse totaled $-0- and $3,165,000 in
1996 and 1995, respectively.
37
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 11 - Restricted retained earnings
The Bank is required by federal insurance regulations to maintain certain
reserves for the sole purpose of absorbing losses. A federal insurance reserve
was established for this purpose by an appropriation of retained earnings. In
1980, the requirement for a separate federal insurance reserve account was
eliminated. However, amounts previously credited to this separate reserve
account are designated "restricted retained earnings" and shall be used only for
absorption of losses. The amount so designated totaled $1,790,000 at both June
30, 1996 and 1995 and $1,792,000 at June 30, 1994.
In accordance with the regulations concerning conversion from a mutual to a
stock organization, the Bank was required to establish a liquidation account
equal to its net worth as of the latest statement of financial condition
contained in the final prospectus. Such liquidation account is to be maintained
as of the eligibility record date (March 31, 1993) or supplemental eligibility
record date (June 30, 1994) for the benefit of depositors who continue to
maintain their deposits in the Bank after the conversion in the event of a
complete liquidation of the Bank. If, however, on any annual closing date (June
30) of the Bank, the amount in any deposit account is less than the amount in
such deposit account on March 30, 1993 or June 30, 1994, then the interest in
the liquidation account relating to such deposit account would be reduced by the
amount of such reduction, and such interest will cease to exist if such deposit
account is closed. The Bank may not declare or pay a cash dividend or repurchase
any of its capital stock if the effect thereof would cause the net worth of the
Bank to be reduced below either the amount required for the liquidation account
or the minimum regulatory capital requirements. At June 30, 1996, the
liquidation account, unadjusted for customer withdrawals, totaled $4,166,000,
and minimum regulatory capital was $2,775,000.
See Note 13 for Bank regulatory capital requirements.
Note 12 - Significant group concentrations of credit risk
The Company grants residential, commercial, and consumer loans to customers
mainly in the southwest region of Virginia. The Company has a loan portfolio
consisting principally of residential mortgage loans and is not dependent upon
any particular economic sector, although the portfolio as a whole may be
affected by general economic factors of the southwest Virginia region.
At June 30, 1996, the Company had commercial bank deposits of $243,000 in excess
of the Federal Deposit Insurance Corporation insurance limit.
Note 13 - Bank regulatory matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's 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 regulators about components, risk
weightings, and other factors.
38
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 13 - Bank regulatory matters (continued)
The Office of Thrift Supervision's capital regulations require thrift
institutions to maintain capital at least sufficient to meet three requirements:
tangible capital, core capital, and risk-based capital. Management has
determined that the Bank's capital meets and exceeds all three capital
requirements as follows as of June 30, 1996 and 1995, in thousands. Tangible and
core capital levels are shown as a percentage of adjusted total assets.
Risk-based capital levels are shown as a percentage of risk-weighted assets.
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital computed $7,475 11.1% $7,475 11.1% $7,681 22.1%
Minimum capital requirement 1,011 1.5 2,023 3.0 2,775 8.0
------ ---- ------ ----- ------ ----
Regulatory capital excess $6,464 9.6% $5,452 8.1% $4,906 14.1%
===== === ===== === ====== ====
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital computed $7,170 10.8% $7,170 10.8% $7,364 21.0%
Minimum capital requirement 994 1.5 1,989 3.0 2,801 8.0
------ ---- ------ ----- ------ ----
Regulatory capital excess $6,176 9.3% $5,181 7.8% $4,563 13.0%
===== ==== ====== ==== ====== ====
</TABLE>
Note 14 - Related-party transactions
The Company has made loans in the ordinary course of business to various
officers and directors. These loans are generally collateralized by the
individuals' personal residences or by savings accounts in the Company. The
aggregate balances of such loans which exceed $60,000 in aggregate outstanding
amount to any officer or director for the years ended June 30, 1996, 1995 and
1994 are summarized as follows in thousands:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Beginning balance $ 56 $ 62 $ 128
Additions - - -
Repayments (7) (6) (66)
----- ------ ------
Ending balance $ 49 $ 56 $ 62
==== ===== ======
</TABLE>
39
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 14 - Related-party transactions (continued)
Fees paid to a law firm, of which a director is a principal, aggregated $18,000,
$19,000 and $25,000 for the years ended June 30, 1996, 1995 and 1994,
respectively. Insurance commissions received by a director from a business with
or for the Company aggregated $3,000 for each of the years ended June 30, 1996,
1995 and 1994.
Note 15 - Interest lost on restructured debt
The Company did not acquire any real estate due to loan defaults in 1996 or
1995.
During 1995, the Company temporarily held real estate with a carrying value of
$74,000 acquired as a result of a defaulted loan. This loan would have generated
interest income of approximately $2,000 had it not been in default. No interest
income was recognized.
Note 16 - Commitments and contingencies
Rental expenses paid under operating leases for a loan office for the years
ended June 30, 1996, 1995 and 1994 totaled $24,000, $23,000 and $18,000,
respectively. The Company has entered into a three-year lease agreement for
office space. The lease terminates November 30, 1996.
The current minimum annual rental commitments under the non-cancelable operating
lease in effect at June 30, 1996 are as follows:
Year Ended Amount
---------- ------
1997 $ 10,000
========
40
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 17 - Disclosures about fair value of financial instruments
The estimated fair values of the Company's financial instruments as of June 30
of each year are as follows in thousands:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,262 $ 5,262 $ 830 $ 830
Interest-bearing deposits 3,841 3,841 3,061 3,061
Investment securities 7,512 7,496 7,512 7,486
Mortgage-backed securities 443 445 577 606
Loans receivable, net 46,757 47,688 51,064 52,076
Financial liabilities
Deposits 57,643 56,422 54,642 55,012
Advances from Federal Home Loan Bank - - 1,800 1,800
Unrecognized financial instruments
Commitments to purchase securities 1,000 1,000 - -
Standby letters of credit issued 435 435 393 393
</TABLE>
Note 18 - Other noninterest expense
Other noninterest expense for the years ended June 30, 1996, 1995 and 1994 is
shown as follows in thousands:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
Other noninterest expense
<S> <C> <C> <C>
Contributions $ 5 $ 5 $ 5
Dues and subscriptions 14 11 14
Insurance 38 41 40
Office supplies, telephone and postage 101 87 90
Other expenses 24 18 14
Professional fees 128 74 29
Supervisory fees and assessments 33 32 33
--------- --------- ---------
$ 343 $ 268 $ 225
========== ========== ==========
</TABLE>
41
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 19 - Condensed parent company information
The following shows the Parent Company's condensed financial information (in
thousands) as of and for years of operation ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Balance Sheets
1996 1995
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $ 76 $ 69
Accrued interest receivable 19 36
Investment in Bank subsidiary 6,722 6,759
Loan to Bank ESOP 365 411
Loan to Bank subsidiary 1,470 2,050
Other assets 54 -
--------- ---------
Total assets $ 8,706 $ 9,325
=========== =========
Liabilities and stockholders' equity
Liabilities $ 31 $ 12
Stockholders' equity 8,675 9,313
--------- ---------
Total liabilities and stockholders' equity $ 8,706 $ 9,325
========== =========
</TABLE>
42
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 19 - Condensed parent company information (continued)
Statements of Operations
<TABLE>
<CAPTION>
1996 1995
---- ----
Income
Interest from
<S> <C> <C>
Bank's ESOP loan $ 36 $ 28
Loan to Bank subsidiary 84 57
--------- --------
Total income 120 85
--------- --------
Expense
Directors' compensation 25 19
Professional fees 90 32
Stationery and supplies 2 4
Other 25 6
--------- --------
Total expense 142 61
--------- --------
Net income (loss) before income taxes and equity in
undistributed net income of Bank subsidiary (22) 24
Income tax expense (credit) (8) 9
--------- --------
(14) 15
Equity in undistributed net income of Bank subsidiary 320 289
--------- --------
Net income $ 306 $ 304
========== ========
</TABLE>
43
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 19 - Condensed parent company information (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
1996 1995
---- ----
Cash flows from operating activities
<S> <C> <C>
Net income $ 306 $ 304
Adjustments
Equity in undistributed net income of Bank subsidiary (320) (289)
Increase in other assets (4) (45)
Increase in other liabilities 19 21
------- -------
Net cash provided by (used in) operations 1 (9)
------- -------
Cash flows from investing activities
Loans originated, net of principal repayments 626 (2,461)
Purchase of Bank subsidiary stock -- (2,618)
Purchase of furniture -- (1)
------- -------
Net cash provided by (used in) investing activities 626 (5,080)
------- -------
Cash flows from financing activities
Proceeds from sale of stock -- 5,237
Dividends paid (154) (79)
Purchase of stock (466) --
------- -------
Net cash provided by (used in) financing activities (620) 5,158
------- -------
Increase in cash and cash equivalents 7 69
Cash and cash equivalents at beginning of year 69 --
------- -------
Cash and cash equivalents at end of year $ 76 $ 69
======= =======
Non-cash transactions
Recording of residual equity in capital of Bank subsidiary
acquired in mutual to stock conversion $ -- $ 3,846
======= =======
</TABLE>
44
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 20 - Selected quarterly financial data (unaudited)
Condensed consolidated financial data for the years ended June 30, 1996 and 1995
is shown as follows in thousands except per-share data:
<TABLE>
<CAPTION>
1996
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 1,228 $ 1,234 $ 1,226 $ 1,218
Total interest expense 667 665 655 635
------- ------- ------- -------
Net interest income 561 569 571 583
Provision for credit losses -- -- -- --
------- ------- ------- -------
Net interest income after provision for credit losses 561 569 571 583
Other noninterest income 114 105 132 104
Noninterest expense (559) (580) (543) (560)
------- ------- ------- -------
Income before income tax expense 116 94 160 127
Income tax expense 50 32 62 47
------- ------- ------- -------
Net income $ 66 $ 62 $ 98 $ 80
======= ======= ======= =======
Net income per share $ .13 $ .12 $ .19 $ .16
Cash dividends per share .15 -- .15 --
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 1,019 $ 1,151 $ 1,164 $ 1,205
Total interest expense 508 563 582 661
------- ------- ------- -------
Net interest income 511 588 582 544
Provision for credit losses -- -- -- 1
------- ------- ------- -------
Net interest income after provision for credit losses 511 588 582 543
Other noninterest income 78 89 63 85
Noninterest expense (460) (496) (531) (558)
------- ------- ------- -------
Income before income tax expense 129 181 114 70
Income tax expense 48 67 36 39
------- ------- ------- -------
Net income $ 81 $ 114 $ 78 $ 31
======= ======= ======= =======
Net income per share N/A $ .22 $ .15 $ .06
Cash dividends per share N/A -- .15 --
</TABLE>
45
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, 1995 and 1994
Note 21 - Subsequent events
On July 26, 1996, the Company received approval from the Office of Thrift
Supervision to repurchase up to 5% (27,160 shares) of the Company's common
stock.
On August 21, 1996, the Company declared a cash dividend of $.15 per share of
common stock, payable on September 30, 1996, to holders of record on September
9, 1996.
The week of August 18, 1996, the President of the United States signed the 1996
tax legislation, elements of which will affect the Bank's tax bad debt
deductions and accumulated bad debt reserves as set forth in Note 8.
46
<PAGE>
OFFICE LOCATIONS
Corporate Office
SWVA Bancshares, Inc. and Southwest Virginia Savings Bank, FSB
302 Second Street, S.W.
Roanoke, VA 24011-1597
(540) 343-0135
Branch Offices - Southwest Virginia Savings Bank, FSB
1006 Hardy Road 1611 Hershberger Road
Vinton, VA Roanoke, VA
2133 Electric Road 40 W. Main Street
Roanoke, VA Salem, VA
Loan Production Office
Building D, Suite 101
2847 Penn Forest Blvd.
Roanoke, VA
-------------------------------------------
Board of Directors of SWVA Bancshares, Inc.
John L. Hart
Chairman of the Board
Attorney-at-Law
<TABLE>
<CAPTION>
<S> <C> <C>
F. Courtney Hoge James C. Brock Michael M. Kessler
Vice Chairman of the Board President, Rusco Window Co. President, Kessler Associates, LTD,
Insurance Sales Representative a photo processor
New York Life Insurance Co.
B.L. Rakes Barbara C. Weddle Glen C. Combs
Executive Officer Executive Officer President, M&M Brokerage, a food
brokerage
Executive Officers of SWVA Bancshares, Inc.
B.L. Rakes Barbara C. Weddle Mary G. Staples
President and Chief Senior Vice President Controller and Treasurer
Executive Officer and Secretary
</TABLE>
-------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Special Counsel: Independent Auditors:
Malizia, Spidi, Sloane & Fisch, P.C. Cherry Bekaert & Holland
One Franklin Square 1700 Central Fidelity Bank Building
1301 K Street, N.W., Suite 700 East Lynchburg, VA 24505
Washington, D.C. 20005
Transfer Agent and Registrar:
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07106
(908) 272-8511
-------------------------------------------
</TABLE>
SWVA Bancshares, Inc.'s Annual Report for the year ended June 30, 1996 filed
with the Securities and Exchange Commission on Form 10-KSB is available without
charge upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call Barbara C. Weddle, Senior Vice President and
Secretary at the Company's Corporate Office in Roanoke, Virginia. The Annual
Meeting of Stockholders will be held on October 23, 1996 at 10:30 a.m. at the
Holiday Inn-Tanglewood, 4468 Starkey Road, Roanoke, Virginia.
47
INDEPENDENT AUDITORS' CONSENT
Board of Directors
SWVA Bancshares, Inc.
302 Second Street, S.W.
Roanoke, Virginia 24011
We consent to incorporation by reference in Registration Statement No 333-2794
of SWVA Bancshares, Inc. on Form S-8 (filed with the Securities and Exchange
Commission on March 27, 1996) of our report dated July 26, 1996 (except for Note
21 as to which the date is August 21, 1996) on the consolidated financial
statements of SWVA Bancshares, Inc., included in this Annual Report on Form
10-KSB of SWVA Bancshares, Inc. for the fiscal year ended June 30, 1996.
/s/Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
September 24, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,262
<INT-BEARING-DEPOSITS> 3,841
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,496
<INVESTMENTS-CARRYING> 443
<INVESTMENTS-MARKET> 445
<LOANS> 46,951
<ALLOWANCE> 194
<TOTAL-ASSETS> 66,987
<DEPOSITS> 57,643
<SHORT-TERM> 0
<LIABILITIES-OTHER> 669
<LONG-TERM> 0
0
0
<COMMON> 54
<OTHER-SE> 8,621
<TOTAL-LIABILITIES-AND-EQUITY> 66,987
<INTEREST-LOAN> 4,071
<INTEREST-INVEST> 835
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,906
<INTEREST-DEPOSIT> 2,570
<INTEREST-EXPENSE> 52
<INTEREST-INCOME-NET> 2,284
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,242
<INCOME-PRETAX> 497
<INCOME-PRE-EXTRAORDINARY> 497
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 7.74
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 871
<ALLOWANCE-OPEN> 194
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 194
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 194
</TABLE>
