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, 1997
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Ac
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
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(Address of Principal Executive Offices) (Zip Code)
(540) 343-0135
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(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. $5.7 million
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 9, 1997, was $8.2 million.
As of September 9, 1997, the registrant had 510,984 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, 1997.
2. Part III -- Portions of the registrant's Proxy Statement for Annual
Meeting of Stockholders to be held on October 7, 1997.
<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, 1997, the Company had total
assets of $70.8 million and stockholders' equity of $8.6 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. The Company
repurchased 22,756 shares of its Common Stock in the open market, at an
aggregate purchase price of approximately $341,000. The amount repurchased
represented approximately 4.2% of the Company's total shares outstanding prior
to the repurchase.
On March 19, 1997, the Company received the necessary approval from the
Office of Thrift Supervision ("OTS") to repurchase up to 5% (or 26,021 shares)
the Company's Common Stock prior to October 7, 1997. The Company repurchased
9,450 shares of its Common Stock in the open market, at an aggregate purchase
price of approximately $154,000. The amount repurchased represented
approximately 1.8% of the Company's total shares outstanding prior to the
repurchase.
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 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.
<PAGE>
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, and portions 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.
The Bank's main office is located at 302 Second Street, S.W., in the City
of Roanoke, Virginia. The Bank has one 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 mortgage loans, fixed rate mortgage loans and short-term loans
secured by one- to four-family residences. These fixed-rate and adjustable rate
loans are generally underwritten to conform to standards required for the sale
of such loans in the secondary mortgage market. A majority of these loans are
sold in the secondary market at the time of origination. The Bank also
originates some nonconforming first mortgage loans to serve community needs
which are retained in the Banks's portfolio. Adjustable-rate mortgage ("ARMs")
loans comprised 65.15% of total loans outstanding on June 30, 1997. For the
fiscal year ended June 30, 1997 adjustable-rate loans represented 34.65% 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, 1997, the Bank's total portfolio of loans (the "loan portfolio") was
$52.9 million, of which $39.6 million, or 74.86%, was secured by one- to
four-family residential real estate loans, $5.0 million or 9.41% was made up of
multi-family residential loans, $2.5 million or 4.77% was secured by
non-residential real estate and land loans, and $3.5 million or 6.69% were
secured by construction loans. At June 30, 1997, the Bank had $2.3 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,
-------------------------------------------------
1997 1996
------ -----
Amount Percent Amount Percent
-------- ------- ------- -------
(Dollars in Thousands)
Mortgage loans
Residential, one to four
<S> <C> <C> <C> <C>
family.................... $39,587 74.86% $37,191 76.00%
Residential, multifamily.... 4,976 9.41 3,114 6.36
Nonresidential and land..... 2,523 4.77 2,759 5.64
Construction................ 3,536 6.69 3,663 7.49
Non-mortgage loans
Consumer loans
Secured personal.......... 862 1.63 783 1.60
Unsecured personal........ 10 0.02 20 0.04
Auto...................... 53 0.10 116 0.24
Home Improvement.......... 37 0.07 73 0.15
Equity line............... 1,050 1.99 911 1.86
Other..................... 87 0.16 169 0.35
Commercial
Secured................... 35 0.06 98 0.20
Unsecured................. 128 0.24 35 0.07
------- ------ ------- -------
Total loans receivable.. $52,884 100.00% $48,932 100.00%
====== ======
Less
Deferred loan fees.......... 93 100
Undisbursed loans in process 1,592 1,881
Allowance for credit losses. 217 194
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Undisbursed loans in process $50,982 $46,757
====== ======
</TABLE>
3
<PAGE>
The following table sets forth the maturity of the Bank's loan portfolio
at June 30, 1997. The table does not include prepayments or scheduled principal
repayments. Prepayments and scheduled principal repayments on loans totalled
$9.8 million and $11.6 million, for the fiscal years ended June 30, 1997 and
1996, 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 ............ $ 5 $ 0 $ 2 $ 1,829 $ 6 $ 2,534
3 months to 1 Year ......... 23 0 443 1,519 39 2,024
------- ------- ------- ------- ------- -------
Total due in one year or
less.................... 28 0 445 3,348 737 4,558
------- ------- ------- ------- ------- -------
After 1 year:
1 to 3 years ............. 102 0 32 188 119 441
3 to 5 years ............. 405 0 81 0 174 660
5 to 10 years ............ 2,353 340 370 0 142 3,205
10 to 20 years ........... 10,319 4,093 1,595 0 1,090 17,097
Over 20 years ............ 26,380 543 0 0 0 26,923
------- ------- ------- ------- ------- -------
Total due after one year 39,559 4,976 2,078 188 1,525 48,326
------- ------- ------- ------- ------- -------
Total amount due ........ $39,587 $ 4,976 $ 2,523 $ 3,536 $ 2,262 $52,884
======= ======= ======= ======= ======= =======
Less:
Allowance for loan loss .... 217
Loans in process ........... 1,592
Deferred loan fees ......... 93
-------
Loans receivable, net .... $50,982
=======
</TABLE>
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, 1997, the Bank had $39.6 million, or 74.86%, 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, 1997, 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 up to 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
5
<PAGE>
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 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 originated during the fiscal
year ended June 30, 1997. During the same period, the bank originated $2.1
million in multi-family loans At June 30, 1997 outstanding non-residential real
estate and multi-family loans amounted to $2.5 million and $5.0 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, 1997, the largest non-residential or multi-family real
estate loan had a balance of $1.1 million and was secured by multi-family
apartments 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
6
<PAGE>
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, 1997, the
Bank had $1.3 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, 1997, there was $819,000 outstanding in
construction loans to owners with $469,000 outstanding in loans in process
allocated to these projects. There were no construction loans originated on
nonresidential and multi-family properties during the fiscal year ended June 30,
1997. The Bank originated $5.1 million in construction loans on one- to
four-family properties during the fiscal year ended June 30, 1997.
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, 1997, these consumer loans
totaled $2.1 million, or 3.97%, of the Bank's total loan portfolio.
The Bank makes fixed and adjustable rate consumer loans.
7
<PAGE>
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 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, 1997, $163,000 or .30%
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.
8
<PAGE>
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 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,
-----------------------------
1997 1996
----------- ----------
(In Thousands)
Total gross loans receivable at
<S> <C> <C>
beginning of period............... $ 48,932 $ 52,491
Loans originated:
One- to four-family residential... 19,176 23,340
Multi-family residential.......... 2,102 0
Non-residential and land.......... 0 0
Construction loans................ 5,108 4,382
Consumer loans.................... 1,006 1,373
--------- ---------
Total loans originated.......... 27,392 29,095
--------- ---------
Loans purchased:
One- to four-family residential... 11 0
Multi-family residential.......... 0 0
Non-residential and land.......... 11 0
--------- ---------
Total loans purchased............. 22 0
--------- ---------
Loans sold.......................... 10,071 19,601
--------- ---------
Other loan activity:
Loan principal repayments......... (9,780) (11,673)
Other (net)....................... (3,611) (1,450)
--------- ---------
Net other loan activity........... (13,391) (13,123)
--------- ---------
Total gross loans receivable at
end of period................... $ 52,884 $ 48,932
========= =========
</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,
1997, the Bank sold a total of $10.1 million of mortgage loans.
9
<PAGE>
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.
During the fiscal year ended June 30, 1997, the Bank purchased loans in
the amount of $22,000.
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, 1997, the Bank had $3.0 million of commitments to
finance real estate acquisitions and construction and had contracted to sell
$1.1 million of such loans.
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 $45,000 for the fiscal year
ended June 30, 1997. As of June 30, 1997, the Bank had $14,000 of loan fees
deferred under GAAP. As of June 30, 1997, loans serviced for the Virginia
Housing Development Authority ("VHDA") totalled $583,000 and loans serviced for
FHLMC totalled $379,000.
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 $1.2 million as of June 30, 1997.
The Bank's largest group of loans to one borrower at June 30, 1997 was
$1.2 million which consisted of loans secured by single family homes, developed
building lots, land and a mobile home park. The second largest group of loans to
one borrower was $1.1 million 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 was $1.1 million which consisted of
loans secured by single family homes and apartments.
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, 1997, the Bank had one
loan accounted for on a non-accrual basis and no restructured loans within the
meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
--------------
1997 1996
--------------
(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 $ 0
All other mortgage loans ..................................................... 0 0
---- ----
Total .......................................................................... $ 0 $ 0
==== ====
Total accruing loans past due 90 days or more .................................. $ 0 $ 0
---- ----
Foreclosed real estate ......................................................... $ 0 $ 0
---- ----
Total non-performing assets .................................................... $ 60 $ 0
==== ====
Total non-performing loans past due 90 days or more to total loans......... .12% .00%
Total non-performing loans past due 90 days or more to total assets............. .08% .00%
==== ====
Total non-performing assets to total assets .................................... .08% .00%
==== ====
</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, 1997 the Bank had a
general credit loss allowance of $217,000.
11
<PAGE>
On June 30, 1997, the Bank had approximately $548,000 of problem loans,
$519,000 of which were reported as "Substandard." All of these were on one- to
four-family residential loans. $23,000 of a loan on a duplex loan in the amount
of $46,000 was reported as "doubtful" and one $6,000 letter of credit secured by
one- to four-family residential loan was classified as "loss".
The following table provides further information regarding the Bank's
classified assets and allowances for credit losses at June 30, 1997.
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Special Mention................ $ 0
Substandard.................... 519,000
Doubtful assets................ 23,000
Loss assets.................... 6,000
General loss allowance......... 217,000
Specific loss allowance........ 0
Charge-offs.................... 0
</TABLE>
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, 1997.
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).
The following table sets forth the Bank's allowance for credit losses and
related ratios.
<TABLE>
<CAPTION>
At June 30,
----------------------
1997 1996
----------------------
(Dollars in Thousands)
<S> <C> <C>
Total loans ................................................ $52,884 $48,932
======= =======
Allowance balances (at beginning of period) ................ $ 194 $ 194
Provision .................................................. 23 0
Net Charge-offs ............................................ 0 0
------- -------
Allowance balance (at end of period) ....................... $ 217 $ 194
======= =======
Allowance for credit losses as a percentage of total lons... .41% .40%
</TABLE>
12
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1997 1996
-------------------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
-------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential, one-four family $ 87 74.86% $ 49 76.00%
Residential, multifamily ... 50 9.41 50 6.36
Nonresidential and land .... 46 4.77 39 5.64
Construction ............... 13 6.69 39 7.49
Consumer ................... 15 3.97 13 4.24
Commercial ................. 6 0.30 4 0.27
---- ------ ---- ------
$217 100.00% $194 100.00%
==== ====== ==== ======
</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, 1997, the Bank had an investment securities
portfolio of approximately $15.8 million, consisting primarily of U.S.
government and agency obligations, interest bearing deposits, 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 for liquidity purposes. The Bank seeks high quality investment securities
up to 30 years in maturity.
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.
13
<PAGE>
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,
1997, the Bank had $1.0 million or 6.36% of its investment portfolio in the ARM
Mutual Funds.
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 the Bank. These mortgage backed securities are classified as "held to
maturity".
Mortgage-backed securities are secured by interest in pools of
conventional mortgages or government backed mortgage loans originated by other
mortgage lenders. The Bank may purchase mortgage-backed securities from FNMA,
GNMA and FHLMC and generally classifies them as "available for sale". During the
year ended June 30, 1997, the Bank purchased $2.0 million in FNMA
mortgage-backed securities.
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.
As of June 30, 1997, mortgage-backed securities amounted to $2.3 million
or 3.27% of total assets.
14
<PAGE>
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, 1997, the fair value
of the Bank's investment portfolio was $9.1 million.
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ------- ---------- -------
(Dollars in Thousands)
Available for sale securities:
<S> <C> <C> <C> <C>
Mutual Fund - AMF Adjustable Rate Securities Portfolio $ 1,007 $ 1,006 $ 5,256 $ 5,215
FHLB bond ............................................ 5,750 5,751 1,245 1,222
Federal Home Loan Bank of
Atlanta Stock ...................................... 961 961 961 961
FNMA mortgage-backed securities ...................... 1,946 1,991 0 0
Financial Institution Insurance
Group, LTD Stock ................................... 00 00 50 98
------- ------- ------- -------
9,664 9,709 7,512 7,496
------- ------- ------- -------
Held to maturity securities:
Interest-bearing deposits (1) ........................ 6,003 6,038 8,253 8,253
FHLMC participation certificates ..................... 365 374 433 445
------- ------- ------- -------
6,074 6,412 8,696 8,698
------- ------- ------- -------
Total investment securities .......... $16,067 $16,121 $16,208 $16,194
======= ======= ======= =======
</TABLE>
- ---------------------
(1) Includes time and overnight deposits which are also cash equivalents.
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, 1997.
<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 Fair
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....... $ 5,742 6.03% $ 296 6.33% $ 0 0% $ 6,038 6.05% $ 6,038
Federal agency
obligations .................. 0 0 1,245 5.45 4,505 7.80 5,750 7.33 5,751
Mortgage-backed
securities ................... 0 0 0 0 2,311 8.00 2,311 8.00 2,365
Mutual fund - AMF
Adjustable Rate
securities portfolio ......... 1,007 6.06 0 0 0 0 1,007 6.06 1,006
FHLB Stock ..................... 961 7.24 0 0 0 0 961 7.24 961
Other securities ............... 0 0 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- ---- -------
Total ........................ $ 7,710 6.18% $ 1,541 5.62% $ 6,816 7.87% $16,067 6.86% $16,121
======= ======= ======= ======= ======= ======= ======= ==== =======
</TABLE>
15
<PAGE>
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.
Noninterest-bearing demand deposit accounts, NOW accounts, money market
accounts, regular savings and club accounts constituted $15.7 million, or 27.11%
of the Bank's deposit portfolio at June 30, 1997. At that date, certificates of
deposit constituted $42.2 million or 72.89% of the deposit portfolio, including
certificates of deposit with principal amounts of $100,000 or more, which
constituted $5.1 million or 8.84% of the deposit portfolio. The Bank generally
negotiates retail rates for certificates of deposit of $95,000 or more.
16
<PAGE>
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,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
------- -------- -------- -------- ---------- --------
(Dollars in Thousands)
Demand accounts:
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposit $ 739 1.28% 0 % $ 791 1.37% 0 %
NOW .............................. 4,118 7.11 2.15 5,467 9.48 2.15
Money market ..................... 3,477 6.00 2.96 3,607 6.26 2.96
Regular savings .................. 7,305 12.61 3.00 7,319 12.70 3.00
Club ............................. 66 0.11 2.00 65 0.11 2.00
------- ------ ---- ------- ------ ----
Total ......................... 15,705 27.11 17,249 29.92
------- ------ ------- ------
Certificate accounts:
Fixed rates of interest:
7 to 91 days .................. 77 0.13 3.00 115 .20 3.00
Over 91 to 180 days ........... 3,756 6.49 4.63 5,091 8.83 4.56
Over 181 to 365 days .......... 12,980 22.40 5.13 14,679 25.47 5.30
Over 1 year to 3 years ........ 10,220 17.64 5.16 8,517 14.78 5.18
Over 3 years and up ........... 468 .81 5.03 945 1.64 5.13
Other ......................... 5,860 10.11 3.57 3,869 6.71 4.65
Variable rates of interest
Up to 1 year .................. 0 0 0 0 0 0
Over 1 year ................... 6,370 11.00 6.19 6,144 10.66 5.92
Negotiable rate .................... 2,497 4.31 5.11 1,034 1.79 5.09
------- ------ ---- ------- ------ ----
Total ..................... 42,228 72.89 40,394 70.08
------- ------ ---- ------- ------ ----
Total deposits ............ $57,933 100.00% 4.58% $57,643 100.00% 4.22 %
======= ====== ==== ======= ====== ====
</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,
----------------------
1997 1996
----------------------
(In Thousands)
Interest Rate:
<S> <C> <C>
3.00-4.00%................. $ 109 $ 407
4.01-5.00%................. 14,116 13,147
5.01-6.00%................. 21,430 26,702
6.01-7.00%................. 6,570 135
7.01-8.00%................. 3 3
------- -------
Total.................... $42,228 $40,394
======= =======
</TABLE>
17
<PAGE>
The following table sets forth the amount and maturities of time deposits
at June 30, 1997.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------
After
June 30, June 30, June 30, June 30,
1998 1999 2000 2001 Total
------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00-4.00%........ $ 109 $ 0 $ 0 $ 0 $ 109
4.01-5.00%........ 13,880 236 0 0 14,116
5.01-6.00%........ 19,141 1,884 295 110 21,430
6.01-7.00%........ 4,810 1,560 200 0 6,570
7.01-8.00%........ 0 3 0 0 3
------- ------ ---- ---- -------
Total........... $37,940 $3,683 $495 $110 $42,228
======= ====== ==== ==== =======
</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, 1997.
<TABLE>
<CAPTION>
Certificates
of Deposits
--------------
(In Thousands)
<S> <C>
Within three months...... $1,166
Three through six months. 1,279
Six through twelve months 1,954
Over twelve months....... 722
------
$5,121
======
</TABLE>
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1997 1996
--------- --------
(In Thousands)
Net increase (decrease)
<S> <C> <C>
before interest credited $(1,680) $ 1,253
Interest credited ........ 1,970 1,748
------- -------
Net increase (decrease)
in savings deposits .... $ 290 $ 3,001
======= =======
</TABLE>
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
18
<PAGE>
Atlanta to supplement its supply of lendable funds and to use for investment
activities. 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, 1997,
the Bank had $3.5 million in outstanding advances from FHLB. The Bank had a
$850,000 note payable due to the Company at June 30, 1997.
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, 1997, the Bank was authorized to invest up to approximately $1.4
million in the stock of, or loans to, service corporations (based upon the 2%
limitation). As of June 30, 1997, the net book value of the Bank's investment in
its service corporation was approximately $13,000.
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 $1,000 for the fiscal year ended June 30, 1997.
Employees
As of June 30, 1997, the Bank had 30 full-time employees and one part-time
employee. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
19
<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.
20
<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.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, The Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. Effective September 30,1995, the FDIC lowered the
insurance premium of BIF insured deposits to a range of between 0.04% and 0.31%
of deposits with the result that most commercial banks would pay the lowest rate
of 0.04%. Effective January 1, 1996, the annual insurance premium for most BIF
members was lowered to $2,000. These reductions in insurance premiums for BIF
members placed SAIF members at a competitive disadvantage to BIF members.
21
<PAGE>
Effective September 30, 1996, federal law was revised to mandate a one-time
special assessment on SAIF members such as the Bank of approximately .657% of
deposits held on March 31, 1995. The Savings Bank recorded a $355,000 pre-tax
expense for this assessment at September 30 1996. Beginning January 1, 1997,
deposit insurance assessments for SAIF members was reduced to approximately
.065% of deposits on an annual basis through the end of 1999. During this same
period, BIF members were assessed approximately .013% of deposits. After 1999,
assessments for BIF and SAIF members should be the same. It is expected that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank declined by approximately 70%.
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, 1997 totalled approximately $24,000.
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 nonqualifing 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
22
<PAGE>
additional capital in order to comply with the risk-based capital requirement.
An association with a 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 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, 1997. 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.
23
<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, 1997, 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, 1997, the Bank was in compliance with its QTL
requirement with 75.29% 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
24
<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 January, 1997.
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.
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, 1997, 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.
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, 1997, 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
25
<PAGE>
the fiscal year ended June 30, 1997, 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,
1997, 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, 1997.
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 64 Director and President
Barbara C. Weddle 60 Director, Senior Vice President and Secretary
Mary G. Staples 43 Controller/Treasurer
</TABLE>
- ------------------------
(1) At June 30, 1997.
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
26
<PAGE>
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 Vice President of Operations for the Bank since
1997. She has served as Controller/Treasurer since 1990. She has been employed
by the Bank since 1972 in various capacities.
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 immediately foreseeable needs of the Bank.
The following table provides information regarding the Bank's offices as of June
30, 1997.
<TABLE>
<CAPTION>
ORIGINAL DATE
LEASED OR OWNED OR
LOCATION ACQUIRED LEASED
-------- -------------- --------
<S> <C> <C>
MAIN OFFICE
-----------
302 Second Street
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, 1996.
Lease Termination Date - November 30, 1999.
27
<PAGE>
(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, 1997, such rental income
was $98,000.
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.
(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, 1997.
27
<PAGE>
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, 1997 (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.
Item 7. Financial Statements.
Financial Statements of the Company are incorporated by reference to the
following indicated pages of the Annual Report.
PAGE
----
Report of Independent Auditors..................................... 14
Statement of Financial Condition as of the Fiscal Years Ended
June 30, 1997 and 1996........................................... 15
Statement of Operations for the Fiscal Years Ended
June 30, 1997, 1996 and 1995..................................... 17
Statement of Changes in Stockholders' Equity
for the Fiscal Years Ended June 30, 1997, 1996 and 1995.......... 16
Statement of Cash Flows for the Fiscal Years
Ended June 30, 1997, 1996 and 1995............................... 18
Notes to Financial Statements...................................... 20
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 7, 1997 (the
"Proxy Statement") is incorporated herein by reference.
29
<PAGE>
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.
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.
30
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
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**
10.4 1994 Stock Option Plan
10.5 Management Stock Bonus Plan
13 Annual Report to Stockholders for the fiscal year ended June
30, 1997
21 Subsidiaries of the Company**
23 Consent of Cherry Bekaert & Holland L.L.P.
27 Financial Data Schedule
- ---------------------------
* 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, 1995.
(b) In the last quarter of the fiscal year ended June 30, 1997, a report
on Form 8-K was filed by the Registrant with the SEC dated April 18,
1997.
31
<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, 1997.
/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
EXHIBIT 10.4
<PAGE>
SWVA BANCSHARES, INC.
1994 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the SWVA Bancshares,
Inc. ("Corporation") 1994 Stock Option Plan (the "Plan"). The purpose of the
Plan is to attract and retain the best available personnel for positions of
substantial responsibility and to provide additional incentive to officers,
directors and key employees of the Corporation, or any present or future parent
or subsidiary of the Corporation to promote the success of the business. The
Plan is intended to provide for the grant of "Incentive Stock Options," within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and Non-Incentive Stock Options, options that do not so qualify. Each
and every one of the provisions of the Plan relating to Incentive Stock Options
shall be interpreted to conform to the requirements of Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall
apply.
(a) "Award" means the grant by the Committee of an Incentive
Stock Option or a Non-Incentive Stock Option, or any combination thereof, as
provided in the Plan.
(b) "Bank" shall mean Southwest Virginia Savings Bank, FSB, or
any successor corporation thereto.
(c) "Board" shall mean the Board of Directors of the
Corporation, or any successor or parent corporation thereto.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Committee" shall mean the Stock Option Committee
appointed by the Board in accordance with paragraph 5(a) of the Plan.
(f) "Common Stock" shall mean common stock, par value $.10 per
share, of the Corporation, or any successor or parent corporation thereto.
(g) "Continuous Employment" or "Continuous Status as an
Employee" shall mean the absence of any interruption or termination of
employment with the Corporation or any present or future Parent or Subsidiary of
the Corporation. Employment shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the
Corporation or in the case of transfers between payroll locations, of the
Corporation or between the Corporation, its Parent, its Subsidiaries or a
successor.
(h) "Corporation" shall mean the SWVA Bancshares, Inc., the
parent corporation for the Bank, or any successor or Parent thereof.
(i) "Director" shall mean a member of the Board of the
Corporation, or any successor or parent corporation thereto.
(j) "Effective Date" shall mean the date specified in Section
15 hereof.
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(k) "Employee" shall mean any person employed by the
Corporation or any present or future Parent or Subsidiary of the Corporation.
(l) "Incentive Stock Option" or "ISO" shall mean an option to
purchase Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is intended
to qualify under Section 422 of the Code.
(m) "Non-Incentive Stock Option" or "Non-ISO" shall mean an
option to purchase Shares granted pursuant to Section 9 hereof, which option is
not intended to qualify under Section 422 of the Code.
(n) "Option" shall mean an Incentive or Non-Incentive Stock
Option granted pursuant to this Plan providing the holder of such Option with
the right to purchase Common Stock.
(o) "Optioned Stock" shall mean stock subject to an Option
granted pursuant to the Plan.
(p) "Optionee" shall mean any person who receives an Option or
Award pursuant to the Plan.
(q) "Parent" shall mean any present or future corporation
which would be a "parent corporation" as defined in Subsections 424(e) and (g)
of the Code.
(r) "Participant" means any director, officer or key employee
of the Corporation or any Parent or Subsidiary of the Corporation or any other
person providing a service to the Corporation who is selected by the Committee
to receive an Award, or who by the express terms of the Plan is granted an
Award.
(s) "Plan" shall mean the SWVA Bancshares, Inc. 1994 Stock
Option Plan.
(t) "Share" shall mean one share of the Common Stock.
(u) "Subsidiary" shall mean any present or future corporation
which would be a "subsidiary corporation" as defined in Subsections 424(f) and
(g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 57,059.1 Such
Shares may either be authorized but unissued shares, treasury shares or shares
purchased in the market for Plan purposes.
An Award shall not be considered to be made under the Plan with respect
to any Option which terminates prior to its exercise, and new Awards may be
granted under the Plan with respect to the number of Shares as to which such
termination has occurred.
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1 Equal to 10% of shares issued in the initial stock offering.
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4. Six Month Holding Period.
A minimum of six months must elapse between the date of the
grant of an Option and the date of the sale of Common Stock received through the
exercise of such Option.
5. Administration of the Plan.
(a) (i) Composition of the Committee. Except as indicated in
paragraph 5(a)(ii) below, the Plan shall be administered by the Committee
consisting of at least three non-employee Directors of the Corporation appointed
by the Board and serving at the pleasure of the Board. Officers, Directors, key
employees and other persons who are designated by the Committee shall be
eligible to receive Awards under the Plan, and all persons designated as members
of the Committee shall be "disinterested persons" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934.
(ii) For the purpose of granting Awards to directors,
the selection of any Director to whom Awards may be granted, as well as the
number of Shares subject to Awards, must be determined by a "disinterested
committee", as defined in Rule 16b-3 under the Securities Exchange Act of 1934.
(b) Powers of the Committee. The Committee is authorized (but
only to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The Chairman of the Corporation and such other officers as
shall be designated by the Committee are hereby authorized to execute
instruments evidencing Awards on behalf of the Corporation and to cause them to
be delivered to the Participants.
(c) Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
6. Eligibility.
(i) Awards may be granted to officers, Directors,
key employees and other persons. The Committee shall from time to time determine
the officers, Directors, key employees and other persons who shall be granted
Awards under the Plan, the number to be granted to each such officer, Director,
key employee and other persons under the Plan, and whether Awards granted to
each such Participant under the Plan shall be Incentive and/or Non-Incentive
Stock Options. In selecting Participants and in determining the number of Shares
of Common Stock to be granted to each such Participant pursuant to each Award
granted under the Plan, the Committee may consider the nature of the services
rendered by each such Participant, each such Participant's current and potential
contribution to the Corporation and such other factors as the Committee may, in
its sole discretion, deem relevant.
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Officers, Directors, key employees or other persons who have been granted an
Award may, if otherwise eligible, be granted additional Awards.
(ii) The aggregate fair market value (determined as
of the date the Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by each Employee during any
calendar year (under all Incentive Stock Option plans, as defined in Section 422
of the Code, of the Corporation or any present or future Parent or Subsidiary of
the Corporation) shall not exceed $100,000. Notwithstanding the prior provisions
of this Section 6, the Committee may grant Options in excess of the foregoing
limitations, provided said Options shall be clearly and specifically designated
as not being Incentive Stock Options.
(iii) In no event shall Shares subject to Options
granted to non-employee
Directors in the aggregate under this Plan exceed more than 30% of the total
number of Shares authorized for delivery under this Plan pursuant to Section 3
herein or 5% to any individual non-employee Director. In no event shall Options
granted to any Employee exceed more than 25% of the total number of Shares
authorized for delivery under the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless sooner terminated pursuant to
Section 18 hereof. No Option shall be granted under the Plan after ten (10)
years from the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each and every
Incentive Stock Option granted pursuant to the Plan shall comply with, and be
subject to, the following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive Stock
Option granted under the Plan may be exercised shall not, as to any particular
Incentive Stock Option, be less than the fair market value of the Common Stock
at the time such Incentive Stock Option is granted. For such purposes, if the
Common Stock is traded otherwise than on a national securities exchange at the
time of the granting of an Option, then the exercise price per Share of the
Optioned Stock shall be not less than the mean between the bid and asked price
on the date the Incentive Stock Option is granted or, if there is no bid and
asked price on said date, then on the next prior business day on which there was
a bid and asked price. If no such bid and asked price is available, then the
exercise price per Share shall be determined by the Committee. If the Common
Stock is listed on a national securities exchange at the time of the granting of
an Incentive Stock Option, then the exercise price per Share shall be not less
than the average of the highest and lowest selling price on such exchange on the
date such Incentive Stock Option is granted or, if there were no sales on said
date, then the exercise price shall be not less than the mean between the bid
and asked price on such date.
(ii) In the case of an Employee who owns Common Stock
representing more than ten percent (10%) of the outstanding Common Stock at the
time the Incentive Stock Option is granted, the Incentive Stock Option exercise
price shall not be less than one hundred and ten percent (110%) of the fair
market value of the Common Stock at the time the Incentive Stock Option is
granted.
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(b) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Incentive Stock Option granted under the Plan
shall be made at the time of exercise of each such Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at its fair market value at the date of
exercise. The Corporation shall accept full or partial payment in Common Stock
only to the extent permitted by applicable law. No Shares of Common Stock shall
be issued until full payment therefor has been received by the Corporation, and
no Optionee shall have any of the rights of a stockholder of the Corporation
until Shares of Common Stock are issued to him.
(c) Term of Incentive Stock Option. The term of exercisability
of each Incentive Stock Option granted pursuant to the Plan shall be not more
than ten (10) years from the date each such Incentive Stock Option is granted,
provided that in the case of an Employee who owns stock representing more than
ten percent (10%) of the Common Stock outstanding at the time the Incentive
Stock Option is granted, the term of the Incentive Stock Option shall not exceed
five (5) years.
(d) Exercise Generally. Except as otherwise provided in
Section 10 hereof, no Incentive Stock Option may be exercised unless the
Optionee shall have been in the employ of the Corporation at all times during
the period beginning with the date of grant of any such Incentive Stock Option
and ending on the date three (3) months prior to the date of exercise of any
such Incentive Stock Option. The Committee may impose additional conditions upon
the right of an Optionee to exercise any Incentive Stock Option granted
hereunder which are not inconsistent with the terms of the Plan or the
requirements for qualification as an Incentive Stock Option under Section 422 of
the Code. Notwithstanding anything herein to the contrary, the Incentive Stock
Option will be exercisable at the rate of 20% on the one year anniversary of the
date of grant of such Option and 20% annually thereafter, and will remain
exercisable for up to ten years from such date of grant; provided however that
the exercisability of such Options shall be accelerated in the event of death,
disability or change in control in accordance with the Plan.
(e) Cashless Exercise. An Optionee who has held an Incentive
Stock Option for at least six months may engage in the "cashless exercise" of
the Option. In a cashless exercise, an Optionee gives the Corporation written
notice of the exercise of the Option and places an order with a registered
broker-dealer or equivalent third party, to sell part or all of the Optioned
Stock and to deliver enough of the proceeds to the Corporation to pay the Option
exercise price and any applicable withholding taxes. If the Optionee does not
sell the Optioned Stock through a registered broker-dealer or equivalent third
party, he can give the Corporation written notice of the exercise of the Option
and the third party purchaser of the Optioned Stock shall pay the Option
exercise price plus any applicable withholding taxes to the Corporation.
(f) Transferability. Any Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
and every Non-Incentive Stock Option granted pursuant to the Plan shall comply
with and be subject to the following terms and conditions.
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(a) Options Granted to Directors. Subject to the limitations
of Section 6(iii), Non- Incentive Stock Options to purchase 2,852 shares of
Common Stock will be granted to each other Director who is not an Employee as of
the Effective Date, at an exercise price equal to the fair market value of the
Common Stock on such date of grant. Options may be granted to newly appointed or
elected non-employee Directors within the sole discretion of the Committee. The
Option will be first exercisable at the rate of 20% on the one year anniversary
of stockholder approval of the Plan and 20% annually thereafter during such
periods of service as a director or director emeritus, and will remain
exercisable for up to ten years from such date of grant. Upon the death or
disability of the director or director emeritus, or upon a change or control of
the Bank or the Corporation as provided at Section 13(b) herein, such Option
shall be deemed immediately 100% exercisable. The price per Share at which such
Options granted shall be exercisable and shall be equal to the fair market value
of the Common Stock at the time such Options are granted. For such purposes, if
the Common Stock is traded otherwise than on a national securities exchange at
the time of the granting of the Options, then the exercise price per Share of
the Optioned Stock shall be not less than the mean between the bid and asked
price on the date the Options are granted or, if there is no bid and asked price
on said date, then on the next prior business day on which there was a bid and
asked price. If no such bid and asked price is available, then the exercise
price per Share shall be determined by the Committee. If the Common Stock is
listed on a national securities exchange at the time of the granting of an
Options, then the exercise price per Share shall be not less than the average of
the highest and lowest selling price on such exchange on the date such Options
are granted or, if there were no sales on said date, then the exercise price
shall be not less than the mean between the bid and asked price on such date.
Such Options may be exercisable for a period of ten years following the date of
grant without regard to the continued services of such Directors as a Director
or Director Emeritus. In the event of such person's death during the term of his
directorship, such Options may be exercised by the personal representative of
his estate or person or persons to whom his rights under such Option shall have
passed by will or by laws of descent and distribution. Unless otherwise
inapplicable, or inconsistent with the provisions of this paragraph, the Options
to be granted to Directors hereunder shall be subject to all other provisions of
this Plan.
(b) Option Price. The exercise price per Share of Common Stock
for each Non-Incentive Stock Option granted pursuant to the Plan, other than
Options granted pursuant to Section 9(a) herein, shall be at such price as the
Committee may determine in its sole discretion, but in no event less than the
fair market value of such Common Stock on the Date of Grant.
(c) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Non-Incentive Stock Option granted under the
Plan shall be made at the time of exercise of each such Non-Incentive Stock
Option and shall be paid in cash (in United States Dollars), Common Stock or a
combination of cash and Common Stock. Common Stock utilized in full or partial
payment of the exercise price shall be valued at its fair market value at the
date of exercise. The Corporation shall accept full or partial payment in Common
Stock only to the extent permitted by applicable law. No Shares of Common Stock
shall be issued until full payment therefor has been received by the Corporation
and no Optionee shall have any of the rights of a stockholder of the Corporation
until the Shares of Common Stock are issued to him.
(d) Term. The term of exercisability of each Non-Incentive
Stock Option granted pursuant to the Plan shall be not more than ten (10) years
from the date each such Non-Incentive Stock Option is granted.
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(e) Exercise Generally. The Committee may impose additional
conditions upon the right of any Participant to exercise any Non-Incentive Stock
Option granted hereunder which is not inconsistent with the terms of the Plan.
(f) Cashless Exercise. An Optionee who has held a
Non-Incentive Stock Option for at least six months may engage in the "cashless
exercise" of the Option. In a cashless exercise, an Optionee gives the
Corporation written notice of the exercise of the Option and places an order
with a registered broker-dealer or equivalent third party, to sell part or all
of the Optioned Stock and to deliver enough of the proceeds to the Corporation
to pay the Option exercise price and any applicable withholding taxes. If the
Optionee does not sell the Optioned Stock through a registered broker-dealer or
equivalent third party, he can give the Corporation written notice of the
exercise of the Option and the third party purchaser of the Optioned Stock shall
pay the Option exercise price plus any applicable withholding taxes to the
Corporation.
(g) Transferability. Any Non-Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on
Incentive Stock Options.
(a) Termination of Employment. In the event that any
Optionee's employment with the Corporation shall terminate for any reason, other
than Permanent and Total Disability (as such term is defined in Section 22(e)(3)
of the Code) or death, all of any such Optionee's Incentive Stock Options, and
all of any such Optionee's rights to purchase or receive Shares of Common Stock
pursuant thereto, shall automatically terminate on the earlier of (i) the
respective expiration dates of any such Incentive Stock Options, (ii) the
expiration of not more than three (3) months after the date of such termination
of employment, or (iii) at such later date as determined by the Committee at the
time of the grant of such Award, but only if, and to the extent that, the
Optionee was entitled to exercise any such Incentive Stock Options at the date
of such termination of employment. In the event that a subsidiary ceases to be a
subsidiary of the Corporation, the employment of all of its employees who are
not immediately thereafter employees of the Corporation shall be deemed to
terminate upon the date such subsidiary so ceases to be a Subsidiary of the
Corporation. Notwithstanding anything herein to the contrary, upon termination
of employment for "cause" as defined at 12 C.F.R. 563.39(b)(1) as determined by
the Board of Directors, all Options held by such Participant shall cease to be
exercisable as of the date of such termination of employment.
(b) Disability. In the event that any Optionee's employment
with the Corporation shall terminate as the result of the Permanent and Total
Disability of such Optionee, such Optionee may exercise any Incentive Stock
Options granted to him pursuant to the Plan at any time prior to the earlier of
(i) the respective expiration dates of any such Incentive Stock Options or (ii)
the date which is one (1) year after the date of such termination of employment,
but only if, and to the extent that, the Optionee was entitled to exercise any
such Incentive Stock Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any
Incentive Stock Options granted to such Optionee may be exercised by the person
or persons to whom the Optionee's rights under any such Incentive Stock Options
pass by will or by the laws of descent and distribution (including the
Optionee's estate during the period of administration) at any time prior to the
earlier of (i) the respective
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expiration dates of any such Incentive Stock Options or (ii) the date which is
two (2) years after the date of death of such Optionee but only if, and to the
extent that, the Optionee was entitled to exercise any such Incentive Stock
Options at the date of death. For purposes of this Section 10(c), any Incentive
Stock Option held by an Optionee shall be considered exercisable at the date of
his death if the only unsatisfied condition precedent to the exercisability of
such Incentive Stock Option at the date of death is the passage of a specified
period of time. At the discretion of the Committee, upon exercise of such
Options the Optionee may receive Shares or cash or combination thereof. If cash
shall be paid in lieu of Shares, such cash shall be equal to the difference
between the fair market value of such Shares and the exercise price of such
Options on the exercise date.
(d) Incentive Stock Options Deemed Exercisable. For purposes
of Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of his
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment.
(e) Termination of Incentive Stock Options. To the extent that
any Incentive Stock Option granted under the Plan to any Optionee whose
employment with the Corporation terminates shall not have been exercised within
the applicable period set forth in this Section 10, any such Incentive Stock
Option, and all rights to purchase or receive Shares of Common Stock pursuant
thereto, as the case may be, shall terminate on the last day of the applicable
period.
11. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment,
disability of an Optionee or his death shall be such terms and conditions as the
Committee shall, in its sole discretion, determine at the time of termination,
unless specifically provided for by the terms of the Agreement at the time of
grant of the Award. Notwithstanding the foregoing, the exercisability of such
Non-Incentive Options may be accelerated only in the event of death, disability
or change in control in accordance with the Plan.
12. Right of Repurchase and Restrictions on Disposition. The Committee,
in its sole discretion, may include, as a term of any Incentive Stock Option or
Non-Incentive Stock Option, the right (the "Repurchase Right"), but not the
obligation for the Corporation, to repurchase all or any amount of the Shares
acquired by an Optionee pursuant to the exercise of any such Options. The intent
of the Repurchase Right is to encourage the continued employment of the
Optionee. The Repurchase Right shall provide for, among other things, a
specified duration of the Repurchase Right, a specified price per Share to be
paid upon the exercise of the Repurchase Right and a restriction on the
disposition of the Shares by the Optionee during the period of the Repurchase
Right. The Repurchase Right may permit the Corporation to transfer or assign
such right to another party. The Corporation may exercise the Repurchase Right
only to the extent permitted by applicable law.
13. Recapitalization, Merger, Consolidation, Change in Control and
Similar Transactions.
(a) Adjustment. Subject to any required action by the
stockholders of the Corporation, within the sole discretion of the Committee,
the aggregate number of Shares of Common Stock for which Options may be granted
hereunder, the number of Shares of Common Stock covered by each outstanding
Option, and the exercise price per Share of Common Stock of each such Option,
shall all be proportionately adjusted for any increase or decrease in the number
of issued and outstanding
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Shares of Common Stock resulting from a subdivision or consolidation of Shares
(whether by reason of merger, consolidation, recapitalization, reclassification,
split-up, combination of shares, or otherwise) or the payment of a stock
dividend (but only on the Common Stock) or any other increase or decrease in the
number of such Shares of Common Stock effected without the receipt of
consideration by the Corporation (other than Shares held by dissenting
stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a change in control of the Corporation,
as determined by the Committee. In the event of such a change in control, the
Optionee shall, at the discretion of the Committee, be entitled to receive cash
in an amount equal to the fair market value of the Common Stock subject to any
Incentive or Non-Incentive Stock Option over the Option Price of such Shares, in
exchange for the surrender of such Options by the Optionee on that date in the
event of a change in control of the Corporation. For purposes of this Section
13, "change in control" shall mean: (i) the execution of an agreement for the
sale of all, or a material portion, of the assets of the Corporation; (ii) the
execution of an agreement for a merger or recapitalization of the Corporation or
any merger or recapitalization whereby the Corporation is not the surviving
entity; (iii) a change of control of the Corporation, as otherwise defined or
determined by the Office of Thrift Supervision or regulations promulgated by it;
or (iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Corporation by any person, trust, entity or group. This
limitation shall not apply to the purchase of shares by underwriters in
connection with a public offering of Corporation stock, or the purchase of
shares of up to 25% of any class of securities of the Corporation by a
tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a change
in control has occurred shall be conclusive and binding.
(c) Extraordinary Corporate Action. Subject to any required
action by the stockholders of the Corporation, in the event of any change in
control, recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, liquidation or other extraordinary corporate
action or event, the Committee, in its sole discretion, shall have the power,
prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of
Common Stock subject to each Option, the exercise price per Share of Common
Stock, and the consideration to be given or received by the Corporation upon the
exercise of any outstanding Option;
(ii) cancel any or all previously granted Options,
provided that appropriate consideration is paid to the Optionee in connection
therewith; and/or
(iii) make such other adjustments in connection with
the Plan as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be taken by
the Committee which would cause Incentive Stock Options granted pursuant to the
Plan to fail to meet the requirements of Section 422 of the Code.
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Except as expressly provided in Sections 13(a) and 13(b)
hereof, no Optionee shall have any rights by reason of the occurrence of any of
the events described in this Section 13.
(d) Acceleration. The Committee shall at all times have the
power to accelerate the exercise date of Options previously granted under the
Plan; provided, however, the exercisability of such Options may be accelerated
only in the event of death, disability or change in control in accordance with
the Plan.
14. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Except, however, for purposes of
compliance with Section 16 of the Securities Exchange Act of 1934, the date of
grant of an Option shall be deemed the later of the date of grant or the date of
stockholder approval of the Plan. Notice of the grant of an Option shall be
given to each individual to whom an Option is so granted within a reasonable
time after the date of such grant in a form determined by the Committee.
15. Effective Date. The Plan shall become effective upon the date of
approval of the Plan by the stockholders of the Corporation. On or after the
date of stockholder approval of the Plan, the Committee may authorize the grant
of options to be awarded under the Plan. Notwithstanding anything herein to the
contrary, in no event shall awards made hereunder be deemed effective or
exercisable prior to issuance of a letter of approval or non-objection by the
Office of Thrift Supervision with respect to the Plan.
16. Approval by Stockholders. The Plan shall be approved by
stockholders of the Corporation within twelve (12) months before or after the
date the Plan is approved by the Board.
17. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on him by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 18 hereof.
18. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or
discontinue the Plan, except that no action of the Board may increase (other
than as provided in Section 13 hereof) the maximum number of Shares permitted to
be optioned under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Corporation.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all or part of
any previously granted Incentive and/or Non-Incentive Stock Option unlawful or
subject the Corporation to any penalty, the Committee may restrict any such
exercise without the consent of the Optionee or other holder thereof in order to
comply with any such law, rule or regulation or to avoid any such penalty.
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19. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law and the requirements
of any stock exchange upon which the Shares may then be listed.
The inability of the Corporation to obtain approval or non-objection
from any regulatory body or authority deemed by the Corporation's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Corporation of any liability in respect of the non-issuance or sale of such
Shares.
As a condition to the exercise of an Option, the Corporation may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
20. Reservation of Shares. During the term of the Plan, the Corporation
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Corporation by reason of the Plan
or the grant of any Incentive or Non-Incentive Stock Option under the Plan. No
trust fund shall be created in connection with the Plan or any grant of any
Incentive or Non-Incentive Stock Option hereunder and there shall be no required
funding of amounts which may become payable to any Participant.
22. Withholding Tax. The Corporation shall have the right to deduct
from all amounts paid in cash with respect to the cashless exercise of Options
under the Plan any taxes required by law to be withheld with respect to such
cash payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option pursuant to the Plan, the Corporation
shall have the right to require the Participant or such other person to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
23. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia, except to the extent
that federal law shall be deemed to apply.
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EXHIBIT 10.5
<PAGE>
Southwest Virginia Savings Bank, FSB
Management Stock Bonus Plan
and Trust Agreement
Article I
---------
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Southwest Virginia Savings Bank, FSB ("Savings Bank") hereby
establishes the Management Stock Bonus Plan (the "Plan") and Trust (the "Trust")
upon the terms and conditions hereinafter stated in this Management Stock Bonus
Plan and Trust Agreement (the "Agreement").
1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.
Article II
----------
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability in key positions of responsibility with the Savings Bank
and its subsidiaries, by providing such key employees of the Savings Bank and
its subsidiaries with an equity interest in the parent corporation of the
Savings Bank, SWVA Bancshares, Inc. ("Parent"), as compensation for their future
professional contributions and service to the Savings Bank and its subsidiaries.
Article III
-----------
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meaning as set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by the
Recipient to receive any benefits payable under the Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, Recipient's estate.
3.02 "Board" means the Board of Directors of the Savings Bank, or any
successor corporation or Parent thereto.
3.03 "Committee" means the Management Stock Bonus Plan Committee
appointed by the Board pursuant to Article IV hereof.
3.04 "Common Stock" means shares of the common stock, $.10 par value
per share, of the Savings Bank or any successor corporation or Parent thereto.
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3.05 "Employee" means any person who is employed by the Savings Bank
or a Subsidiary.
3.06 "Effective Date" shall mean the date of stockholder approval of
the Plan by the Parent's stockholders.
3.07 "Parent" shall mean SWVA Bancshares, Inc., the parent corporation
of the Savings Bank.
3.08 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Recipient pursuant to the Plan.
3.09 "Plan Share Award" means a right granted to an Employee under this
Plan to receive Plan Shares.
3.10 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.11 "Recipient" means an Employee who receives a Plan Share Award
under the Plan.
3.12 "Savings Bank" means Southwest Virginia Savings Bank, FSB, and any
successor corporation thereto.
3.13 "Subsidiary" means those subsidiaries of the Savings Bank which,
with the consent of the Board, agree to participate in this Plan.
3.14 "Trustee" or "Trustee Committee" means that person(s) or entity
nominated by the Committee and approved by the Board pursuant to Sections 4.01
and 4.02 to hold legal title to the Plan assets for the purposes set forth
herein.
Article IV
----------
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three
non-employee members of the Board, which shall have all of the powers allocated
to it in this and other sections of the Plan. All persons designated as members
of the Committee shall be "disinterested persons" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"). The
interpretation and construction by the Committee of any provisions of the Plan
or of any Plan Share Award granted hereunder shall be final and binding. The
Committee shall act by vote or written consent of a majority of its members.
Subject to the express provisions and limitations of the Plan, the Committee may
adopt such rules, regulations and procedures as it deems appropriate for the
conduct of its affairs. The Committee shall report its actions and decisions
with respect to the Plan to the Board at appropriate times, but in no event less
than one time per calendar year. The Committee shall recommend to the Board one
or more persons or entity to act as Trustee(s) in accordance with the provision
of this Plan and Trust and the terms of Article VIII hereof.
4.02 Role of the Board. The members of the Committee and the Trustee or
Trustees shall be appointed or approved by, and will serve at the pleasure of
the Board. The Board may in its
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discretion from time to time remove members from, or add members to, the
Committee, and may remove, replace or add Trustees. The Board shall have all of
the powers allocated to it in this and other sections of the Plan, may take any
action under or with respect to the Plan which the Committee is authorized to
take, and may reverse or override any action taken or decision made by the
Committee under or with respect to the Plan, provided, however, that the Board
may not revoke any Plan Share Award already made except as provided in Section
7.01(b) herein. Members of the Board who are eligible for or who have been
granted Plan Share Awards may not vote on any matters affecting the
administration of the Plan or the grant of Plan Shares or Plan Share Awards
(although such members may be counted in determining the existence of a quorum
at any meeting of the Board during which actions taken). Further, with respect
to all actions taken by the Board in regard to the Plan, such action shall be
taken by a majority of the Board where such a majority of the directors acting
in the matter are "disinterested persons" within the meaning of Rule 16b-3
promulgated under the 1934 Act.
4.03 Limitation on Liability. No member of the Board or the Committee
or the Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan or any Plan Share Awards granted under it. If a member of
the Board or Committee or any Trustee is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by any reason of
anything done or not done by him in such capacity under or with respect to the
Plan, the Parent shall indemnify such member against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the Parent and its Subsidiaries and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Article V
---------
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board of Directors of the
Savings Bank shall determine the amounts (or the method of computing the
amounts) to be contributed by the Savings Bank to the Trust established under
this Plan. Such amounts shall be paid to the Trustee at the time of
contribution. No contributions to the Trust by Employees shall be permitted.
5.02 Initial Investment. Any funds held by the Trust prior to
investment in the Common Stock shall be invested by the Trustee in such
interest-bearing account or accounts at the Savings Bank as the Trustee shall
determine to be appropriate.
5.03 Investment of Trust Assets. Following approval of the Plan by
stockholders of the Parent and receipt of any other necessary regulatory
approvals, the Trust shall purchase Common Stock of the Parent in an amount
equal to up to 100% of the Trust's assets, after providing for any required
withholding as needed for tax purposes, provided, however, that the Trust shall
not purchase more than 22,823 share of Common Stock, representing 4% of the
aggregate shares of Common Stock issued by the Parent in the mutual-to-stock
conversion of the Savings Bank ("Conversion"). The Trustee shall purchase shares
of Common Stock in the open market or, in the alternative, shall purchase
authorized but unissued shares of the Common Stock from the Parent sufficient to
fund the Plan Share Reserve.
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<PAGE>
5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Section 6.02, or the
decision of the Committee to return Plan Shares to the Parent, the Plan Share
Reserve shall be reduced by the number of Shares subject to the Awards so
allocated or returned. Any Shares subject to an Award which may not be earned
because of forfeiture by the Recipient pursuant to Section 7.01 shall be added
to the Plan Share Reserve.
Article VI
----------
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Employees of the Savings Bank and its Subsidiaries
are eligible to receive Plan Share Awards within the sole discretion of the
Committee.
6.02 Allocations. The Committee will determine which of the Employees
referenced in Section 6.01 above will be granted Plan Share Awards and the
number of Shares covered by each Award, provided, however, that in no event
shall any Awards be made which will violate the Charter or Bylaws of the Savings
Bank or its Parent or Subsidiaries or any applicable federal or state law or
regulation. In the event Shares are forfeited for any reason or additional
Shares are purchased by the Trustee, the Committee may, from time to time,
determine which of the Employees referenced in Section 6.01 above will be
granted additional Plan Share Awards to be awarded from forfeited Shares. In
selecting those Employees to whom Plan Share Awards will be granted and the
number of shares covered by such Awards, the Committee shall consider the
position duties and responsibilities of the eligible Employees, the value of
their services to the Savings Bank and its Subsidiaries, and any other factors
the Committee may deem relevant. All actions by the Committee shall be deemed
final, except to the extent that such actions are revoked by the Board.
6.03 Form of Allocation. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award is to be
made, the Committee shall notify the Recipient in writing of the grant of the
Award, the number of Plan Shares covered by the Award, and the terms upon which
the Plan Shares subject to the award may be earned. The date on which the
Committee so notifies the Recipient shall be considered the date of grant of the
Plan Share Awards. The Committee shall maintain records as to all grants of Plan
Share Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the contrary
in Sections 6.01 and 6.02, no Employee shall have any right or entitlement to
receive a Plan Share Award hereunder, such Awards being at the total discretion
of the Committee and the Board, nor shall the Employees as a group have such a
right. The Committee may, with the approval of the Board (or, if so directed by
the Board) return all Common Stock in the Plan Share Reserve to the Savings Bank
at any time, and cease issuing Plan Share Awards.
6.05 Awards to Directors. Notwithstanding anything herein to the
contrary, upon the Effective Date, a Plan Share Award consisting of 1,141 Plan
Shares shall be awarded to each director of the Savings Bank that is not
otherwise an Employee. Such Plan Share Award shall be earned and non-
forfeitable at the rate of one-seventh on the first anniversary of the Effective
Date and an additional one-seventh following each of the next six successive
years during such period of service as a director or director emeritus. Further,
such Plan Share Award shall be immediately 100% vested and non-forfeitable in
the event of the death or disability of such director, or a change in control of
the Savings Bank or Parent as provided in Section 7.01(d) herein. Subsequent to
the Effective Date, Plan Share Awards may
4
<PAGE>
be awarded to newly elected or appointed directors of the Savings Bank by the
Committee, provided that total Plan Share Awards to non-employee directors of
the Savings Bank shall not exceed 30% of total Plan Shares in the aggregate
under the Plan or 5% to any individual non-employee director.
Article VII
-----------
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earnings Plan Shares; Forfeitures.
(a) General Rules. Unless the Committee shall specifically state to the
contrary at the time a Plan Share Award is granted, Plan Shares subject to an
Award shall be earned and non-forfeitable by a Recipient at the rate of 20% of
such Award following one year after granting of such Award, and an additional
20% following each of the next four successive years; provided that such
Recipient remains an Employee during such period. Notwithstanding anything
herein to the contrary, in no event shall a Plan Share Award granted hereunder
be earned and non-forfeitable by a Recipient more rapidly than at the rate of
20% of such Award as of the one year anniversary of the date of granting of the
Award and an additional 20% following each of the next four successive years.
(b) Revocation for Misconduct. Notwithstanding anything herein to the
contrary, the Board may, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent Plan Shares have not been delivered thereunder to the
Recipient, whether or not yet earned, in the case of an Employee who is
discharged from the employ of the Parent, Savings Bank or a Subsidiary for Cause
(as hereinafter defined), or who is discovered after termination of employment
to have engaged in conduct that would have justified termination for cause.
"Cause" is defined as personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profits, intentional failure to
perform stated duties, willful violation of a material provision of any law,
rule or regulation (other than traffic violations and similar offense), or a
material violation of a final cease-and-desist order or any other action which
results in a substantial financial loss to the Parent, Savings Bank or its
Subsidiaries. A determination of "Cause" shall be made by the Board within its
sole discretion.
(c) Exception for Terminations Due to Death or Disability.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Recipient whose employment with
the Parent, Savings Bank or a Subsidiary terminates due to death or disability
(as determined by the Committee), shall be deemed earned as of the Recipient's
last day of employment with the Parent, Savings Bank or Subsidiary and shall be
distributed as soon a practicable thereafter.
(d) Exception for Termination after a Change in Control.
Notwithstanding the general rule contained in Section 7.01 above, all Plan
Shares subject to a Plan Share Award held by a recipient shall be deemed to be
immediately 100% earned and non-forfeitable in the event of a "change in
control" of the Parent or Savings Bank and shall be distributed as soon as
practicable thereafter. For purposes of this Plan, "change in control" shall
mean: (i) the execution of an agreement for the sale of all, or a material
portion, of the assets of the Parent or Savings Bank; (ii) the execution of an
agreement for a merger or recapitalization of the Parent or Savings Bank or any
merger or recapitalization whereby the Parent or Savings Bank is not the
surviving entity; (iii) a change of control of the Parent or Savings Bank, as
otherwise defined or determined by the Office of Thrift Supervision or
regulations promulgated
5
<PAGE>
by it; or (iv) the acquisition, directly or indirectly, of the beneficial
ownership (within the meaning of that term as it is used in Section 13(d) of the
1934 Act and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Parent or
Savings Bank by any person, trust, entity or group. This limitation shall not
apply to the purchase of shares of up to 25% of any class of securities of the
Parent or Savings Bank by a tax-qualified employee stock benefit plan which is
exempt from the approval requirements, set forth under 12 C.F.R.
ss.574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
decision of the Committee as to whether a change in control has occurred shall
be conclusive and binding.
7.02 Payment of Dividends. A holder of a Plan Share Award, whether or
not non-forfeitable, shall also be entitled to receive an amount equal to any
cash dividends declared and paid with respect to shares of Common Stock
represented by such Plan Share Award between the date the relevant Plan Share
Award was initially granted to such Recipient and the date the Plan Shares are
distributed. Such dividend amounts shall be held in arrears under the Trust and
distributed upon vesting of the applicable Plan Share Award.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
Subsections (d) and (e) below, Plan Shares shall be distributed to the Recipient
or his Beneficiary, as the case may be, as soon as practicable after they have
been earned. No fractional shares shall be distributed. Notwithstanding anything
herein to the contrary, at the discretion of the Committee, Plan Shares may be
distributed prior to such shares being 100% earned, provided that such Plan
Shares shall contain a restrictive legend detailing the applicable limitations
of such shares with respect to transfer and forfeiture.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned. Payments
representing cash dividends (and earning thereon) shall be made in cash.
Notwithstanding anything within the Plan to the contrary, upon a Change in
Control whereby substantially all of the Common Stock of the Company shall be
acquired for cash, all Plan Shares associated with Plan Share Awards, together
with any shares representing stock dividends associated with Plan Share Awards,
shall be, at the sole discretion of the Committee, distributed as of the
effective date of such Change in Control, or as soon as administratively
feasible thereafter, in the form of cash equal to the consideration received in
exchange for such Common Stock represented by such Plan Shares.
(c) Withholding. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes, and if the amount of such payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to have the
Trustee withhold from delivery a number of Plan Shares having a fair market
value, at the time withheld, sufficient to satisfy such withholding and
employment taxes, or to pay to the Trustee the amount required to be withheld as
a condition of delivering the Plan Shares. The Trustee shall pay over to the
Parent, Savings Bank or Subsidiary which employs or employed such recipient any
such amount withheld from or paid by the Recipient or Beneficiary.
6
<PAGE>
(d) Timing: Exception for 10% Shareholders. Notwithstanding Subsection
(a) above, no Plan Shares may be distributed prior to the date which is five (5)
years from the effective date of the Savings Bank's Conversion to the extent the
Recipient or Beneficiary, as the case may be, would after receipt of such Shares
own in excess of ten percent (10%) of the issued and outstanding shares of
Common Stock held by parties other than Parent, unless such action is approved
in advance by a majority vote of disinterested directors of the Board. Any Plan
Shares remaining undistributed solely by reason of the operation of this
Subsection (d) shall be distributed to the Recipient or his Beneficiary on the
date which is five years from the effective date of the Savings Bank's
Conversion.
(e) Regulatory Exceptions. No Plan Shares shall be distributed,
however, unless and until all of the requirements of all applicable law and
regulation shall have been fully complied with, including the receipt of
approval of the Plan by the stockholders of the Parent by such vote, if any, as
may be required by applicable law and regulations as determined by the Board.
7.04 Voting of Plan Shares. After a Plan Share Award has become earned
and non- forfeitable, the Recipient shall be entitled to direct the Trustee as
to the voting of the Plan Shares which are covered by the Plan Share Award and
which have not yet been distributed pursuant to Section 7.03, subject to rules
and procedures adopted by the Committee for this purpose. All shares of Common
Stock held by the Trust as to which Recipients are not entitled to direct, or
have not directed, the voting of, shall be voted by the Trustee as directed by
the Committee.
Article VIII
------------
TRUST
8.01 Trust. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
the Plan.
8.02 Management of Trust. It is the intent of this Plan and Trust that
the Trustee shall have complete authority and discretion with respect to the
management, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust, except those attributable to cash dividends paid
with respect to Plan Shares not held in the Plan Share Reserve, in Common Stock
to the fullest extent practicable, and except to the extent that the Trustee
determines that the holding of monies in cash or cash equivalents is necessary
to meet the obligations of the Trust. In performing their duties, the Trustees
shall have the power to do all things and execute such instruments as may be
deemed necessary or proper, including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
the Common Stock without regard to any law now or hereafter in force
limiting investments for Trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and
in making such investment, the Trustees are authorized to purchase
Common Stock from Parent or from any other source, and such Common
Stock so purchased may be outstanding, newly issued, or Treasury
shares.
(b) To invest in any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of deposit
(including those issued by the Savings Bank),
7
<PAGE>
obligations of the United States government or its agencies or such
other investments as shall be considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any time
held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in the
name of a nominee, without the addition of words indicating that such
security is an asset of the Trust (but accurate records shall be
maintained showing that such security is an asset of the Trust).
(e) To hold cash without interest in such amounts as may be in the
opinion of the Trustee reasonable for the proper operation of the Plan
and Trust.
(f) To employ brokers, agents, custodians, consultants and accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services or
representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his Beneficiary as a consequence of a
dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 Records and Accounts. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 Earnings. All earnings, gains and losses with respect to Trust
assets shall be allocated in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. In particular, any earnings on cash dividends
received with respect to shares of Common Stock shall be allocated to accounts
for Recipients, except to the extent that such cash dividends are distributed to
Recipients, if such shares are the subject of outstanding Plan Share Awards, or,
otherwise to the Plan Share Reserve.
8.05 Expenses. All costs and expenses incurred in the operation and
administration of this Plan shall be paid by the Savings Bank.
8.06 Indemnification. The Parent shall indemnify, defend and hold the
Trustee harmless against all claims, expenses and liabilities arising out of or
related to the exercise of the Trustee's powers and the discharge of their
duties hereunder, unless the same shall be due to their gross negligence or
willful misconduct.
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<PAGE>
Article IX
----------
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan
Shares available for issuance pursuant to the Plan Share Awards and the number
of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to the effective date of the Plan resulting
from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Parent.
9.02 Amendment and Termination of the Plan. The Board may, by
resolution, at any time, amend or terminate the Plan. The power to amend or
terminate the Plan shall include the power to direct the Trustee to return to
the Parent all or any part of the assets of the Trust, including shares of
Common Stock held in the Plan Share Reserve, as well as shares of Common Stock
and other assets subject to Plan Share Awards but not yet earned by the
Employees to whom they are allocated. However, the termination of the Trust
shall not affect a Recipients right to earn Plan Share Awards and to the
distribution of Common Stock relating thereto, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee or the
Board.
9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Recipient, and during the lifetime of the Recipient,
Plan Shares may only be earned by and paid to the Recipient who was notified in
writing of the Award by the Committee pursuant to Section 6.03. No Recipient or
Beneficiary shall have any right in or claim to any assets of the Plan or Trust,
nor shall the Parent, Savings Bank, or any Subsidiary be subject to any claim
for benefits hereunder.
9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right,
either express or implied, on the part of any Employee to continue in the employ
of the Parent, Savings Bank, or a Subsidiary thereof.
9.05 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights of a stockholder with respect to any Plan Shares covered by a
Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above,
prior to the time said Plan Shares are actually distributed to him.
9.06 Governing Law. The Plan and Trust shall be governed and construed
under the laws of the Commonwealth of Virginia, except to the extent that
Federal Law shall be deemed applicable.
9.07 Effective Date. The Plan shall be effective as of the date of
approval of the Plan by stockholders of the Parent. Notwithstanding anything
herein to the contrary, no Plan Share Award shall be effective or distributed
prior to receipt of a letter of approval or non-objection related to the Plan by
the Office of Thrift Supervision.
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9.08 Term of Plan. This Plan shall remain in effect until the earlier
of (1) termination by the Board, (2) the distribution of all assets of the
Trust, or (3) 21 years from the Effective Date. Termination of the Plan shall
not effect any Plan Share Awards previously granted, and such Awards shall
remain valid and in effect until they have been earned and paid, or by their
terms expire or are forfeited.
9.09 Tax Status of Trust. It is intended that the trust established
hereby be treated as grantor trust of the Savings Bank under the provisions of
Section 671 et seq. of the Internal Revenue Code, as the same may be amended
from time to time.
10
EXHIBIT 13
Annual Report to Stockholders for Fiscal Year
Ended June 30, 1997
<PAGE>
[** LOGO **]
SWVA BANCSHARES, INC.
1997
ANNUAL REPORT
<PAGE>
SWVA BANCSHARES, INC.
1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Corporate Profile and Related Information.................................... 1
Stock Market Information..................................................... 1
President's Message.......................................................... 3
Selected Financial and Other Data............................................ 5
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............................................................. 48
Directors and Executive Officers............................................. 48
Other Corporate Information.................................................. 48
<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 Quotation Bureau
"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 1 - December 31, 1995 17.750 15.500
January 1 - March 31, 1996 17.500 16.400
April 1 - June 30, 1996 17.400 14.600
July 1 - September 30, 1996 15.600 14.600
1
<PAGE>
Stock Market Information, cont.
October 1 - December 31, 1996 15.300 14.250
January 1 - March 31, 1997 17.250 14.500
April 1 - June 30, 1997 17.000 15.000
July 1 - August 31, 1997 19.000 16.000
The number of shareholders of record of common stock as of September 1,
1997 was approximately 237. This does not reflect the number of persons or
entities who held stock in "street" name through various brokerage firms. At
September 1, 1997, there were 510,984 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 12 and 14 to the consolidated financial statements.
<TABLE>
<CAPTION>
Dividends Declared and Paid
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
February 19, 1997 $0.15 March 14, 1997 March 31, 1997
August 20, 1997 $0.15 September 15, 1997 September 30, 1997
September 3, 1997 $1.00 September 15, 1997 September 30, 1997
</TABLE>
2
<PAGE>
President's Message
Dear Shareholder:
I am pleased to report that this year's net income exceeded the
previous year's net income by $108,000 or 34.64%. Net income was $414,000 or
$0.86 per share. The Company (the Savings Bank is its only subsidiary) recorded
a $355,000 pre-tax expense which was as assessment for the recapitalization of
the Savings Association Insurance Fund (SAIF). Without this assessment the
Company's net income would have been $632,000 or $1.31 per share, the best year
ever. Future income is expected to be enhanced due to lower SAIF premiums. The
increase in earnings has been a slow process; however, we are beginning to see
the results of our efforts.
Several actions contributed to this year's increased net income.
Management's continuing efforts to reduce non-interest expense resulted in
personnel expenses decreasing 8.19% and office occupancy and equipment expense
decreased 7.01%. In the 1996 annual report, I reported that the Savings Bank
expected to put a larger portion of its originated fixed-rate mortgage loans in
its loan portfolio rather than selling them if the market and interest rates met
our expectations. This happened and we increased our fixed-rate mortgage
portfolio by 49.00% or $4.8 million dollars. Our adjustable-rate mortgage
portfolio decreased by 2.94% or $970,000. The Savings Bank expects that its
asset growth policy of retaining a greater portion of fixed-rate loans will
increase interest rate risk. However, the Savings Bank has adequate capital to
manage the increased risk. The fixed-rate mortgage portfolio enhanced interest
income resulting in higher net income as the loans were originated at a rate
approximately two and one-half per cent higher than adjustable rate mortgage
(ARM) loans. In a rising interest rate environment, the ARM would have taken a
minimum of two years before attaining the rate on the originated fixed-rate
mortgage loans.
Management's strategy for the Savings Bank is to continue to be a
traditional lender for one-to four-family residential loans. In addition, the
Savings Bank will continue to serve residents in its primary market area and
surrounding areas by offering a wide variety of financial services, including
deposit products, residential mortgage loans, home equity lines and other
services. The Savings Bank will continue to operate and grow in a safe and sound
manner and remain a well-capitalized institution which is in compliance with
applicable regulations. The Savings Bank plans to emphasize profitability
through the efficient use of existing operations and high asset quality and
generate competitive return for stockholders inclusive of cash dividends.
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 Company have increased
$15.9 million, or 29.00%, from $54.9 million at June 30, 1994 to $70.8 million
at June 30, 1997. The increase was due primarily to an increase in loans
receivable of $10.6 million, from $40.4 million at June 30, 1994 to $51.0
million at June 30, 1997 and the net proceeds from the conversion.
It is management's expectation that the Savings Bank can continue to
grow within our market area. As larger institutions are sold or consolidated in
our market area, we believe that market share will become more available to us
as an independent community bank. We expect this to continue and provide us the
opportunity to increase our franchise value, therefore, enhancing shareholder
value.
3
<PAGE>
In order to meet the needs of our customers, we are in the final
planning stage to offer ATM cards and debit cards. We feel that the debit card
will be accepted and become a major factor in customer financial transactions.
Other electronic delivery services may be added as needed to enhance the
services to our customers.
In addition to our efforts to obtain market share, the board has
continued to take other steps toward enhancing shareholder value. The board has
declared and the Company has paid five semi-annual dividends since we converted
to a public company in October, 1994. The board has declared a semi-annual
dividend of $0.15 per share to be paid September 30, 1997. Also, the board has
declared a special dividend of $1.00 per share to be paid September 30, 1997.
Both dividends will be paid to shareholders of record at the close of business
on September 15, 1997. In addition, the Company has repurchased a total of
59,606 shares of its stock.
The Company has been under restrictions of the Office of Thrift
Supervision (OTS) in regard to repurchasing stock. These restrictions will no
longer apply after October 6, 1997. After that date, the board will be limited
only by their business judgement as to the use of stock repurchases to enhance
stockholder value.
The results of this year and continuing strategy for the Savings Bank
are expected to reap rewards for our employees, our community and our
stockholders.
Southwest Virginia Savings Bank, FSB is a "community bank" poised to
serve the banking needs of the community in a friendly, courteous manner in
person or by mail.
The directors, officers and staff of SWVA Bancshares, Inc. and
Southwest Virginia Savings Bank, FSB appreciate your support. We will continue
to do our best to see that your investment and confidence are rewarded.
Sincerely yours,
B.L. Rakes
President
4
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Condition (Dollars in Thousands)
At June 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 70,753 $66,987 $ 66,265 $ 54,878 $ 54,995
Loans receivable, net 50,982 46,757 51,064 40,401 39,533
Mortgage-backed & investment securities 10,074 7,939 7,048 7,108 7,423
Interest-bearing deposits 5,304 3,841 3,061 2,757 2,268
Cash and cash equivalents 1,276 5,262 830 874 2,216
Savings deposits 57,933 57,643 54,642 50,029 50,397
Borrowed funds 3,500 -- 1,800 -- --
Equity capital/stockholders' equity 8,602 8,675 9,313 4,169 3,691
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations (Dollars in Thousands)
Year Ended June 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 5,310 $ 4,906 $ 4,539 $ 3,848 $ 4,186
Interest expense 2,673 2,622 2,314 1,753 2,073
Net interest income 2,637 2,284 2,225 2,095 2,113
Provision for credit losses 23 -- 1 2 91
------- ------- ------- ------- -------
Net interest income after provision for
credit losses 2,614 2,284 2,224 2,093 2,022
Noninterest income 398 455 315 545 554
------- ------- ------- ------- -------
Noninterest expense 2,392 2,242 2,045 1,881 1,825
------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 620 497 494 757 751
Provision for income taxes 206 191 190 276 269
------- ------- ------- ------- -------
Net income before cumulative effect of
change in accounting principle 414 306 304 481 482
Cumulative effect of change in
accounting principles -- -- -- 87 --
------- ------- ------- ------- -------
Net income $ 414 $ 306 $ 304 $ 568 $ 482
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Other Selected Data
Year Ended June 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.60% 0.46% 0.47% 0.87% 0.85%
Return on average equity 4.87 3.50 3.77 11.85 13.98
Interest rate spread 3.55 3.17 3.37 4.28 4.00
Non-performing loans to total loans 0.10 0.00 0.12 0.73 0.02
Non-performing loans to total assets 0.08 0.00 0.09 0.53 0.02
Allowance for credit losses to total loans 0.43 0.40 0.37 0.48 0.47
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Per share data
Year Ended June 30, 1997 1995 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ .86 $ .60 $ .57 N/A N/A
Stockholders' equity 16.83 15.97 16.32 N/A N/A
Dividends .30 .30 .15 N/A N/A
Dividend payout ratio 35% 50% 26% N/A N/A
</TABLE>
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, Virginia. 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 74.86% 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, 1997, the
Savings Bank had $60,000 in non-performing assets. The Savings Bank's ratio of
non-performing loans to total assets at June 30, 1997 was .08%.
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
6
<PAGE>
Bank's existing branch network, facilities, and personnel resources. The assets
of the Company increased $15.9 million, or 28.96%, from $54.9 million at June
30, 1994, to $70.8 million at June 30, 1997. The increase was due primarily to
the conversion and an increase in loans receivable of $10.6 million, from $40.4
million at June 30, 1994, to $51.0 million at June 30, 1997. For fiscal year
1996-97, the Bank's asset growth was 5.62%.
The Bank expects to continue to put a reasonable portion of its
originated fixed-rate loans in its portfolio and to purchase mortgage-backed and
related securities during the fiscal year 1997-98 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 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 certificates 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 continue using 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.
7
<PAGE>
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997, 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, 1997
-------------------------------------------------------------------------------------------
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>
Mortgage loans (1) $ 3,405 $ 5,667 $ 26,337 $ 3,726 $ 5,299 $ 7,964 $ 52,398
Other loans 144 135 406 529 0 0 1,214
Mortgage-backed securities:
Held to maturity, at cost 0 0 0 0 0 365 365
Available for sale, FMV (2) 1,006 0 0 1,239 0 6,503 8,748
Other Investments (3) 3,279 1,381 2,043 296 0 0 6,999
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets $ 7,834 $ 7,183 $ 28,786 $ 5,790 $ 5,299 $ 14,832 $ 69,724
======== ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing demand accounts $ 457 $ 407 $ 686 $ 1,418 $ 379 $ 839 $ 4,186
Non-interest-bearing demand accounts 81 72 121 182 67 148 671
Regular savings & club accounts 304 322 600 1,912 1,246 2,987 7,371
Money market deposit accounts 1,123 760 863 383 182 166 3,477
Certificates of deposit 10,824 6,158 22,423 2,713 110 0 42,228
Borrowed funds 0 500 3,000 0 0 0 3,500
-------- -------- -------- -------- -------- -------- --------
Total Interest-bearing liabilities $ 12,789 $ 8,219 $ 27,693 $ 6,608 $ 1,984 $ 4,140 $ 61,433
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap per period $ (4,955) $ (1,036) $ 1,093 $ (818) $ 3,315 $ 10,692 $ 8,291
-------- -------- -------- -------- -------- -------- --------
Cumulative interest sensitivity gap $ (4,955) $ (5,991) $ (4,898) $ (5,716) $ (2,401) $ 8,291
-------- -------- -------- -------- -------- --------
Cumulative net interest-earning assets
as a percentage of net interest
bearing liabilities 61.26% 71.48% 89.94% 89.67% 95.81% 113.50%
-------- -------- -------- -------- -------- --------
Cumulative interest sensitivity gap
as a percentage of total assets -7.00% -8.47% -6.92 -8.08% -3.39% 11.72%
-------- -------- -------- -------- -------- --------
</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 daily average balances.
<TABLE>
<CAPTION>
For the Year Ended June 30
------------------------------------------------------------------------------------
1997 1996
----------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $50,601 $ 4,318 8.53% $49,879 $4,071 8.16%
Investments and mortgage-backed
securities:
Held to maturity, at cost 414 32 7.80 495 40 8.08
Available for sale, FMV (2) 8,510 567 6.66 5,527 332 6.01
Other investments (3) 6,577 393 5.97 7,502 463 6.16
------- ----- ------- ------
Total interest-earning assets 66,102 5,310 8.03 63,403 4,906 7.74
----- ------
Non-interest earning assets 3,120 3,415
------- -------
Total assets $69,222 $66,818
======= =======
Interest-bearing liabilities:
Interest-bearing demand accounts $ 5,222 102 1.95 $ 4,872 110 2.25
Regular savings & club accounts 7,363 222 3.02 7,274 216 2.97
Money market deposit accounts 3,735 110 2.95 3,761 111 2.96
Certificates of deposit 40,784 2,097 5.14 40,167 2,133 5.31
Borrowed funds 2,448 142 5.79 750 52 6.92
------ ----- ------ ------
Total interest-bearing liabilities 59,552 2,673 4.49 56,824 2,622 4.57
-----
Non-interest-bearing demand accounts 201 573
Non-interest bearing liabilities 984 684
Equity 8,485 8,737
------ ------
Total liabilities and equity $69,222 $66,818
======= ======
Net-interest income $2,637 $ 2,284
===== ======
Interest rate spread (4) 3.55 3.17
Net yield on interest-earning assets (5) 3.99 3.60
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.99 110.47
Average equity to average total assets 12.26 13.08
</TABLE>
(1) Includes loans held for sale and non-accrual loans.
(2) Calculations based on historical cost.
(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,
--------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
(In Thousands)
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net $ 59 $ 185 $ 3 $ 247 $ 30 $ 200 $ 1 $ 231
Mortgage backed securities
and investments:
Held to maturity, at cost (7) (1) 0 (8) (81) 43 (32) (70)
Available for sale, FMV 180 36 19 235 8 17 1 26
Other investments (57) (15) 2 (70) 228 (27) (21) 180
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets 175 205 24 404 185 233 (51) 367
----- ----- ----- ----- ----- ----- ----- -----
Interest expense:
Deposits:
Interest-bearing demand 8 (15) (1) (8) 14 (8) (1) 5
accounts
Regular savings & club 3 3 0 6 (35) 31 (5) (9)
accounts
Money market deposit (1) 0 0 (1) (6) 1 (0) (5)
accounts
Certificates of deposit 33 (68) (1) (36) 166 177 17 360
Borrowed funds 117 (8) (19) 90 (58) 39 (24) (43)
----- ----- ----- ----- ----- ----- ----- -----
160 (88) (21) 51 81 240 (13) 308
----- ----- ----- ----- ----- ----- ----- -----
Net change in interest income $ 15 $ 293 $ 45 $ 353 $ 104 $ (7) $ (38) $ 59
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
10
<PAGE>
Comparison of Financial Condition for
Fiscal Years Ended June 30, 1997 and June 30, 1996
Total assets at June 30, 1997 were $70.8 million as compared to $67.0
million at June 30, 1996, an increase of $3.8 million. The increase was due to
an increase in loans receivable, investments and interest bearing deposits,
offset by a decrease in cash and cash equivalents. Cash and cash equivalents
decreased from $5.3 million at June 30, 1996 to $1.3 million at June 30, 1997, a
decrease of $4.0 million. Interest bearing deposits and investments increased
from $11.8 million at June 30, 1996 to $15.4 million at June 30, 1997, an
increase of $3.6 million. The increases were due mainly to an increase in
investments in jumbo certificates which are matched off with investment
certificates and additional investments securities purchased using cash
available and borrowed funds. Net loans receivable increased $4.2 million from
$46.8 million at June 30, 1996 to $51.0 million at June 30, 1997, due to
increased origination of fixed rate mortgage loans. On the liability side,
deposits increased $300,000 to $57.9 million at June 30, 1997 from $57.6 million
at June 30, 1996. At June 30, 1997, there were $3.5 million in advances
outstanding from the Federal Home Loan Bank of Atlanta, an increase of $3.5
million from June 30, 1996. Advances were used to fund mortgage loan
originations and to leverage investment purchases.
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, 1997 was $414,000 as
compared to $306,000 for the year ended June 30, 1996, an increase of $108,000.
Per share earnings for the year ended June 30, 1997 was $0.86.
Interest Income. Interest income increased $400,000 from $4.9 million
at June 30, 1996 to $5.3 million at June 30, 1997. The increase was mainly a
result in the additional mortgage loans in the Bank's portfolio and the increase
in earnings on a larger investment base.
Interest Expense. Interest expense for the year ended June 30, 1997 was
$2.7 million as compared to $2.6 million for the year ended June 30, 1996, an
increase of $100,000. The increase was due mainly to an increase in borrowed
funds.
Net Interest Income. Net interest income increased $300,000 from 2.3
million at June 30, 1996 to $2.6 million at June 30, 1997. The increase was
mainly due to increased interest income on mortgage loans and investment
securities offset by increased interest paid on borrowed funds.
Provision for Credit Losses. The Bank made an addition of $23,000 to
the provision for credit losses for the year ended June 30, 1997. The addition
was made due to an expected loss on a delinquent real estate loan. The allowance
for credit losses is $217,000. No additions were made to the provision for
credit losses during the year ended June 30, 1996.
11
<PAGE>
Noninterest Income. Noninterest income decreased $57,000 from $455,000
for the year ended June 30, 1996 to $398,000 for the year ended June 30, 1997.
This was due primarily to a decrease on gain on loans sold in the secondary
market of $90,000, offset by a one time gain on the sale of Financial
Institution Insurance stock in the amount of $51,000 and a loss on the sale of
ARM fund investments of $9,000..
Noninterest Expense. Noninterest expense increased from $2.2 million
for the year ended June 30, 1996 to $2.4 million for the year ended June 30,
1997, an increase of $200,000. This was mainly due to the FDIC Special
Assessment of $355,000 offset by a decrease in personnel expenses associated
with increased earnings on the pension fund.
Provision for Income Taxes. The provision for income taxes for the year
ended June 30, 1997 was $206,000 as compared to $191,000 for the year ended June
30, 1996. The increase was due to increased net income for the year.
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.
Borrowings are also used to purchase assets to leverage capital.
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,
1997, cash and cash equivalents totaled $1.3 million.
At June 30, 1997, the Savings Bank had $37.9 million in certificates of
deposits due within one year and $4.2 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, 1997, the Savings Bank had $3.0 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, 1997 was 6.74%.
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, 1997, the Savings Bank's tangible and core
capital totaled $7.9 million. This amount exceeded the tangible capital
requirement of $1.1 million by $6.8 million and the core capital requirement of
$2.1
12
<PAGE>
million by $5.8 million on that date. At June 30, 1997, the Savings Bank's
risk-based capital totaled $8.1 million, which exceeded its risk-based capital
requirement of $3.0 million by $5.1 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>
- -----------------
CHERRY
BAKAERT &
HOLLAND
CERTIFIED PUBLIC
ACCOUNTANTS &
CONSULTANTS
- -----------------
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, 1997
and 1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997 in conformity with generally accepted accounting principles.
/s/Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
July 25, 1997
14
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,276 $ 5,262
Interest-bearing deposits 5,304 3,841
Investment and mortgage-backed securities
Held to maturity, at amortized cost 365 443
Available for sale, at fair value 8,748 6,535
Restricted at cost 961 961
Loans held for sale 727 985
Loans receivable, net 50,982 46,757
Property and equipment, net 1,666 1,662
Accrued interest receivable 437 343
Prepaid expenses and other assets 287 198
----------- -----------
Total assets $ 70,753 $ 66,987
=========== ===========
Liabilities and stockholders' equity
Liabilities
Deposits $ 57,933 $ 57,643
Advances from Federal Home Loan Bank 3,500 -
Advances from borrowers for taxes and insurance 205 146
Other liabilities and deferred income 513 523
---------- ----------
Total liabilities 62,151 58,312
---------- ----------
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, 510,984 and
543,190 shares outstanding for 1997 and 1996, respectively 51 54
Additional paid-in capital 4,286 4,750
Retained earnings, substantially restricted 4,904 4,636
Unrealized holding loss on securities, available for sale 29 ( 12)
Less unearned ESOP shares, 31,951 for 1997 and 36,517 shares for 1996 ( 319) ( 365)
Less unearned MSBP shares, 20,145 for 1997 and 22,812 shares for 1996 ( 349) ( 388)
----------- -----------
Total stockholders' equity 8,602 8,675
---------- ----------
Total liabilities and stockholders' equity $ 70,753 $ 66,987
========== ==========
</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, 1997, 1996 and 1995
(In thousands, except shares outstanding)
<TABLE>
<CAPTION>
Unrealized
Holding
Gain (Loss)
on
Common Stock 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 at June 30, 1994 - $ - $ - $ 4,259 $( 90) $ - $ - $ 4,169
Net income - - - 304 - - - 304
Change in unrealized gain 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
($.15 per share) - - - ( 79) - - - ( 79)
--------- ------ -------- --------- ------ ----- ----- ---------
Balance at June 30, 1995 570,590 57 5,185 4,484 ( 2) ( 411) - 9,313
Net income - - - 306 - - - 306
Change in unrealized loss on
marketable equity securities - - - - ( 10) - - ( 10)
Purchase of unearned MSBP
shares - - - - - - ( 388) ( 388)
Repurchase of common stock ( 27,400) ( 3) ( 463) - - - - ( 466)
Allocated/earned ESOP shares - - 28 - - 46 - 74
Dividends declared and paid
($.30 per share) - - - ( 154) - - - ( 154)
--------- ------ -------- --------- ------ ----- ----- ---------
Balance at June 30, 1996 543,190 54 4,750 4,636 ( 12) ( 365) ( 388) 8,675
Net income - - - 414 - - - 414
Change in unrealized gain on
marketable equity securities - - - - 41 - - 41
Repurchase of common stock ( 32,206) ( 3) ( 492) - - - - ( 495)
Allocated/earned ESOP shares - - 28 - - 46 - 74
Allocated/earned MSBP shares - - - - - - 39 39
Dividends declared and paid
($.30 per share) - - - ( 146) - - - ( 146)
--------- ------ -------- --------= ------ ----- ----- ---------
Balance at June 30, 1997 510,984 $ 51 $ 4,286 $ 4,904 $ 29 $( 319) $(349) $ 8,602
========= ====== ======== ========= ====== ====== ===== =========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1997, 1996 and 1995
(In thousands, except per-share data)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Interest income
Loans $ 4,318 $ 4,071 $ 3,840
Mortgage-backed and related securities 407 360 348
U.S. government obligations including agencies 122 71 71
Other investments, including overnight deposits 463 404 280
----------- ----------- -----------
Total interest income 5,310 4,906 4,539
----------- ----------- -----------
Interest expense
Deposits 2,531 2,570 2,219
Borrowed funds 142 52 95
----------- ----------- -----------
Total interest expense 2,673 2,622 2,314
----------- ----------- -----------
Net interest income 2,637 2,284 2,225
Provision for credit losses 23 - 1
----------- ----------- -----------
Net interest income after provision for credit losses 2,614 2,284 2,224
----------- ----------- -----------
Noninterest income
Loan and other customer service fees 142 154 161
Gain on sale of mortgage loans 118 208 50
Gross rental income 98 93 92
Other 40 - 12
----------- ----------- -----------
Total noninterest income 398 455 315
----------- ----------- -----------
Noninterest expenses
Personnel 1,155 1,258 1,124
Office occupancy and equipment 292 314 310
Data processing 132 127 133
Federal insurance of accounts 431 126 121
Advertising 64 74 89
Other 318 343 268
----------- ----------- -----------
Total noninterest expenses 2,392 2,242 2,045
----------- ----------- -----------
Income before income taxes 620 497 494
Provision for income taxes 206 191 190
----------- ----------- -----------
Net income $ 414 $ 306 $ 304
=========== =========== ===========
Primary earnings per share $ .86 $ .60 $ .57
Fully diluted earnings per share $ .86 $ .60 $ .57
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
(In thousands)
Page 1
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Operating activities
Net income $ 414 $ 306 $ 304
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
ESOP shares allocated 74 74 -
MSBP shares allocated 39 - -
Provision for credit losses 23 - 1
Provision for depreciation and amortization 87 101 100
Provision for deferred income tax ( 85) ( 6) 39
Loans originated for sale ( 9,695) ( 19,516) ( 5,747)
Proceeds from sales of loans originated for sale 10,071 19,601 5,039
Gain on sale of loans ( 118) ( 208) ( 50)
Loss on disposal of fixed assets 3 - -
Net (increase) decrease in other assets ( 77) 110 ( 49)
Net increase (decrease) in other liabilities 49 159 ( 131)
Gain on sale of investments, available for sale ( 43) - 3
---------- ---------- ----------
Net cash provided by (used in) operating activities 742 621 ( 491)
---------- ---------- ----------
Investing activities
Proceeds from maturity of investments and interest-bearing deposits 3,839 3,950 3,837
Proceeds from sale of investments, available for sale 4,300 - 207
Purchase of investments and interest-bearing deposits ( 5,302) ( 4,730) ( 4,141)
Purchase of investments, available for sale ( 6,488) - ( 45)
Purchase of property and equipment ( 94) ( 49) ( 50)
Net (increase) decrease in loans ( 4,226) 4,304 ( 10,664)
Purchase of loans ( 22) - -
Principal repayments on mortgage-backed securities 116 143 188
---------- ---------- ----------
Net cash provided by (used in) investing activities ( 7,877) 3,618 ( 10,668)
---------- ---------- ----------
Financing activities
Proceeds from advances 7,000 200 4,950
Curtailment of advances and other borrowings ( 3,500) ( 2,000) ( 3,150)
Net increase in savings deposits 290 3,001 4,613
Proceeds from sale of stock - - 5,237
Loan to ESOP for purchase of stock - - ( 456)
Repurchase of stock ( 495) ( 466) -
Purchase of stock for MSBP - ( 388) -
Dividends paid ( 146) ( 154) ( 79)
---------- ---------- ----------
Net cash provided by financing activities 3,149 193 11,115
---------- ---------- ----------
(Increase) decrease in cash and cash equivalents ( 3,986) 4,432 ( 44)
Cash and cash equivalents at beginning of year 5,262 830 874
---------- ---------- ----------
Cash and cash equivalents at end of year $ 1,276 $ 5,262 $ 830
========== ========== ==========
</TABLE>
(continued)
18
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Page 2
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for
Interest on deposits and borrowed funds $ 2,680 $ 2,620 $ 2,300
========== ========== ==========
Income taxes $ 172 $ 159 $ 191
========== ========== ==========
Other non-cash activities
Gross unrealized gain (loss) on securities, available for sale $ 62 $ ( 16) $ 89
Deferred income taxes ( 21) 6 ( 1)
---------- ---------- ----------
Net unrealized gain (loss) $ 41 $ ( 10) $ 88
========== ========== ==========
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, 1997, 1996 and 1995
SWVA Bancshares, Inc. (Parent Company), is a unitary thrift holding company
whose principal asset is its wholly-owned subsidiary, Southwest Virginia Savings
Bank, FSB (Bank). The Bank is a federally chartered stock savings bank as
provided by the United States Home Owner's Loan Act. The Bank has five locations
in Roanoke, Virginia and the surrounding area. In these financial statements the
consolidated group is referred to collectively as the "Company".
The Office of Thrift Supervision (OTS) is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation (FDIC) is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund (SAIF).
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.
20
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 1 - Summary of significant accounting policies (continued)
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.
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.
Due to the nature of, and restrictions placed upon the Company's common stock
investment in the Federal Home Loan Bank of Atlanta, these securities have been
classified as restricted equity securities and carried at cost. These restricted
securities are not subject to the investment security classifications of SFAS
115.
Marketable equity securities not classified as "trading" or "restricted" 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.
Mortgage-backed securities, available for sale, consisted of a mutual fund - AMF
adjustable rate mortgage portfolio and U.S. Government and agency securities.
Securities classified as available for sale are carried at their current market
value. The difference between the amortized cost and current market value, net
of deferred income tax, is reflected as a component of equity capital and is
designated as unrealized holding gain/loss on securities available for sale.
21
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 1 - Summary of significant accounting policies (continued)
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.
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.
22
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 1 - Summary of significant accounting policies (continued)
Income taxes
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. The effect of a change in tax rates
upon deferred taxes is recognized in income in the period that includes the
enactment date.
Prior to 1996, savings banks that met certain definitional tests and other
conditions prescribed by the Internal Revenue Code were allowed, within
limitations, to deduct from taxable income an allowance for bad debts based on
actual loss experience, a percentage of taxable income (8%) before such
deduction, or an amount based on a percentage of eligible loans. The cumulative
bad debt reserve, upon which no taxes have been paid, was approximately
$1,947,000 as of June 30, 1997.
As a result of 1996 tax legislation, the Company will compute its tax bad debt
deduction by use of the actual charge-off method, for tax years beginning with
July 1, 1996. According to the legislation, "applicable excess reserves" must be
recaptured as taxable income over five years beginning with fiscal year 1997.
Thrifts can delay those payments by two years if they meet a residential lending
requirement. The amount to be recaptured is the excess of the accumulated
reserves since 1987 over the amount allowed by use of the actual charge-off
method for those years. Since the Bank has provided deferred taxes on those bad
debt reserves accumulated since 1987, management does not believe that the
legislation will have a material effect on the Company's financial statements.
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.
23
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 1 - Summary of significant accounting policies (continued)
Advertising
The Company expenses most advertising costs as incurred. Such expenses are shown
in the consolidated statements of income. As of June 30, 1997 and 1996, 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, 1997 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.
Earnings per share of common stock for the year ended June 30, 1995 have been
determined by dividing the net income for the 12-month period by the calculated
weighted average number of shares of common stock and common stock equivalents
which would have been outstanding if the conversion had occurred on the first
day of the fiscal year rather than on October 7, 1994.
The weighted-average number of common and common stock equivalent shares
outstanding for the periods indicated are as follows:
Primary Fully Diluted
Shares Shares
------ ------
October 7, 1994 - June 30, 1995 570,590 570,590
July 1, 1995 - June 30, 1996 506,673 506,673
July 1, 1996 - June 30, 1997 482,345 482,345
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.
24
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 1 - Summary of significant accounting policies (continued)
- - 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.
- - 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.
25
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 1 - Summary of significant accounting policies (continued)
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, 1997, a total of 13,696 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 did not have a material effect on the Company's financial
statements in the year of adoption.
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 was
applied prospectively and did not 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 became effective for the Company beginning July 1, 1996. This statement
requires increased disclosure of compensation expense arising from both fixed
and performance stock compensation plans. Such expense is 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 is 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 are permitted, however, to continue accounting under
Accounting Principles Board ("APB") Opinion No. 25. The Company has elected to
continue to apply APB Opinion No. 25 in their financial statements. Pro forma
net income and earnings per share are presented in accordance with the
requirements of SFAS 123 (see Note 10).
26
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 1 - Summary of significant accounting policies (continued)
In June 1996, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 125 (SFAS 125), Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. After a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished. In
addition, a transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after June 30,
1997, and is to be applied prospectively. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the Company.
Reclassifications
Certain items in the 1996 financial statements have been reclassified to afford
comparability with the 1997 financial statements.
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>
1997
------------------------------------------------------------
Gross Unrealized
Amortized -------------------------
Cost Gain Loss Fair Value
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Securities, held to maturity
FHLMC participation certificates $ 365 $ 9 $ - $ 374
----------- ----------- ---------- -----------
Securities, available for sale
Mutual fund - AMF Adjustable Rate Securities Portfolio 1,007 - ( 1) 1,006
U.S. Government and agency bonds 5,750 18 ( 17) 5,751
FNMA mortgage-backed securities 1,946 45 - 1,991
----------- ----------- ----------- -----------
8,703 63 ( 18) 8,748
----------- ----------- ----------- -----------
Total securities $ 9,068 $ 72 $ ( 18) $ 9,122
=========== =========== =========== ===========
</TABLE>
27
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 2 - Investment securities (continued)
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
Gross Unrealized
Amortized --------------------------
Cost Gain Loss Fair Value
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Securities, held to maturity
FHLMC participation certificates $ 443 $ 2 $ - $ 445
----------- ----------- ----------- -----------
Securities, available for sale
Mutual fund - AMF Adjustable Rate Securities Portfolio 5,256 - ( 41) 5,215
U.S. Government and agency bonds 1,245 - ( 23) 1,222
Financial Institution Insurance Group, Ltd. 50 48 - 98
----------- ----------- ----------- -----------
6,551 48 ( 64) 6,535
----------- ----------- ----------- -----------
Total securities $ 6,994 $ 50 $ ( 64) $ 6,980
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated fair value of debt securities at June 30, 1997,
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>
Due in one year or less $ - $ - $ - $ -
Due after one year through five years - - 2,250 2,235
Due after five years through ten years - - 1,500 1,508
Due after ten years - - 2,000 2,008
Mortgage-backed and related securities 365 374 2,953 2,997
----------- ----------- ----------- -----------
$ 365 $ 374 $ 8,703 $ 8,748
============ =========== =========== ===========
</TABLE>
Proceeds from maturities of interest-bearing deposits and investments were
$3,839,000 in 1997, $3,950,000 in 1996, and $3,837,000 in 1995. Gross realized
gains and losses on redemption of mutual fund shares are summarized below in
thousands:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------
<S> <C> <C> <C>
Gross realized gains $ 52 $ - $ -
Gross realized losses ( 9) - ( 3)
---------- ----------- -----------
Net realized gains (losses) $ 43 $ - $ ( 3)
========== =========== ===========
</TABLE>
Cost was determined by the specific identification method.
28
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 3 - Loans receivable
Loans receivable at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1997 1996
------------- -------
<S> <C> <C>
Mortgage loans
Residential, one to four family $ 39,587 $ 37,191
Residential, multifamily 4,976 3,114
Nonresidential and land 2,523 2,759
Construction 3,536 3,663
----------- -----------
50,622 46,727
----------- -----------
Non-mortgage loans
Consumer loans
Secured personal 862 783
Unsecured personal 10 20
Auto 53 116
Home improvement 37 73
Equity line 1,050 911
Other 87 169
Commercial
Unsecured 35 35
Secured 128 98
----------- -----------
2,262 2,205
----------- -----------
Total loans 52,884 48,932
----------- -----------
Less
Deferred loan fees 93 100
Undisbursed loans in process 1,592 1,881
Allowance for credit losses 217 194
----------- -----------
1,902 2,175
----------- -----------
Loans receivable, net $ 50,982 $ 46,757
=========== ===========
</TABLE>
No loans were pledged as of June 30, 1996. At June 30, 1997, a total of
$4,700,000 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).
29
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
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>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $ 379 $ 459 $ 600
Virginia Housing Development Authority (VHDA) 583 729 713
----------- ----------- -----------
$ 962 $ 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>
1997 1996
------------- -------------
<S> <C> <C>
FHLMC $ 5 $ 5
VHDA 4 4
----------- -----------
$ 9 $ 9
=========== ===========
</TABLE>
Activity in the allowance for credit losses for the years ended June 30, 1997,
1996 and 1995 is summarized as follows in thousands:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 194 $ 194 $ 194
Provision charged to operations 23 - 1
Charge-offs - - 1
----------- ----------- -----------
Balance at end of year $ 217 $ 194 $ 194
=========== =========== ===========
</TABLE>
30
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 3 - Loans receivable (continued)
The following table sets forth the maturity of the loan portfolio at June 30,
1997 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
------ ------ -------- ------------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Amounts due
Within 3 months $ 5 $ - $ 2 $ 1,829 $ 698 $ 2,534
3 months to 1 year 23 - 443 1,519 39 2,024
----------- --------- ------------- ------------- ----------- -----------
Total due within 1 year 28 - 445 3,348 737 4,558
----------- --------- ------------- ------------- ----------- -----------
After 1 year
1 to 3 years 102 - 32 188 119 441
3 to 5 years 405 - 81 - 174 660
5 to 10 years 2,353 340 370 - 142 3,205
10 to 20 years 10,319 4,093 1,595 - 1,090 17,097
Over 20 years 26,380 543 - - - 26,923
----------- --------- ------------- ------------- ----------- -----------
Total due after 1 year 39,559 4,976 2,078 188 1,525 48,326
----------- --------- ------------- ------------- ----------- -----------
Total due $ 39,587 $ 4,976 $ 2,523 $ 3,536 $ 2,262 52,884
=========== ========= ============= ============= =========== -----------
Less
Allowance for loan loss 217
Loans in process 1,592
Deferred loan fees 93
-----------
1,902
Loans receivable, net $ 50,982
===========
</TABLE>
The following table sets forth the dollar amount (in thousands) of all loans due
after June 30, 1998, which have predetermined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
Rates Rates Total
<S> <C> <C> <C>
One to four family $ 10,875 $ 28,684 $ 39,559
Multifamily 2,651 2,325 4,976
Nonresidential and land 1,124 954 2,078
Construction 188 - 188
Consumer and other 475 1,050 1,525
----------- ----------- -----------
$ 15,313 $ 33,013 $ 48,326
=========== =========== ===========
</TABLE>
31
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 4 - Property, equipment and depreciation
Property and equipment at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Land $ 575 $ 575
Office buildings and improvements 1,783 1,783
Furniture, fixtures and equipment 935 866
----------- -----------
3,293 3,224
Less accumulated depreciation 1,627 1,562
----------- -----------
Property and equipment, net $ 1,666 $ 1,662
=========== ===========
</TABLE>
Accumulated depreciation at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Office buildings and improvements $ 862 $ 826
Furniture, fixtures and equipment 765 736
----------- -----------
$ 1,627 $ 1,562
=========== ===========
</TABLE>
Depreciation expense for the years ended June 30, 1997, 1996 and 1995 was as
follows in thousands:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Office buildings and improvements $ 37 $ 37 $ 35
Furniture, fixtures and equipment 50 64 65
----------- ----------- -----------
$ 87 $ 101 $ 100
=========== =========== ===========
</TABLE>
Note 5 - Accrued interest receivable
Accrued interest receivable at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Accrued interest on loans $ 316 $ 294
Accrued interest on investments 121 49
----------- -----------
$ 437 $ 343
=========== ===========
</TABLE>
32
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 6 - Deposits
Savings deposits at June 30 of each year, summarized by interest rate, were as
follows in thousands:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------------
Amount Percent Amount Percent
Negotiable order of withdrawal deposits
<S> <C> <C> <C> <C>
Non-interest bearing $ 739 $ 1.37% $ 791 1.37%
2.15% 4,118 9.48 5,467 9.48
2.96% 3,477 6.26 3,607 6.26
----------- ------- ----------- --------
8,334 17.11 9,865 17.11
----------- ------- ----------- --------
Passbooks and statement deposits, 3.00% for each year 7,371 12.81 7,384 12.81
----------- ------- ----------- --------
Certificates of deposit and other term deposits
3.00% to 4.00% 109 .71 407 .71
4.01% to 5.00% 14,116 22.81 13,147 22.81
5.01% to 6.00% 21,430 46.32 26,702 46.32
6.01% to 7.00% 6,570 .23 135 .23
7.01% to 8.00% 3 .01 3 .01
----------- ------- ----------- --------
Total term deposits 42,228 70.08 40,394 70.08
----------- ------- ----------- --------
Total deposits $ 57,933 $ 100.00% $ 57,643 100.00%
=========== ========== =========== ==========
</TABLE>
The aggregate amounts of certificates of deposit with a denomination of $100,000
or more were $5,121,009, $3,970,000, and $4,253,000 at June 30, 1997, 1996 and
1995, respectively.
Certain deposit accounts were pledged as collateral for $171,000, $152,000, and
$178,000 of consumer loans at June 30, 1997, 1996 and 1995, respectively.
Maturities of certificates of deposit are scheduled for each fiscal year
indicated as follows in thousands:
<TABLE>
<CAPTION>
1998 1999 2000 After 2001 Total
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
3.00% to 4.00% $ 109 $ - $ - $ - $ 109
4.01% to 5.00% 13,880 236 - - 14,116
5.01% to 6.00% 19,141 1,884 295 110 21,430
6.01% to 7.00% 4,810 1,560 200 - 6,570
7.01% to 8.00% - 3 - - 3
----------- ----------- ----------- ----------- -----------
$ 37,940 $ 3,683 $ 495 $ 110 $ 42,228
=========== =========== =========== =========== ===========
</TABLE>
33
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 6 - Deposits (continued)
Interest expense on deposits for the years ended June 30, 1997, 1996 and 1995 is
summarized as follows in thousands:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Money market $ 110 $ 111 $ 116
Passbook savings 219 213 224
NOW 102 110 105
Club accounts 1 1 1
Certificates of deposit 2,099 2,135 1,773
----------- ----------- -----------
$ 2,531 $ 2,570 $ 2,219
=========== =========== ===========
</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>
1997 1996
------------- -------------
<S> <C> <C>
FHLB-Atlanta advances
Balance outstanding at end of year $ 3,500 $ -
Average balance outstanding 3,000 800
Maximum amount outstanding at any month-end during the year 3,500 1,800
Weighted-average interest rate during the year 5.67% 3.82%
Weighted-average interest rate at end of year 6.12% 0%
</TABLE>
No loans were pledged as of June 30, 1996. Residential loans aggregating
$3,500,000 were pledged as of June 30, 1997 as collateral for the advances from
FHLB-Atlanta under a blanket floating lien agreement.
Note 8 - SAIF premium assessment
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (Act), the
FDIC imposed a special assessment on SAIF members to capitalize the SAIF at the
designated reserve level of 1.25% of insured deposits as of September 30, 1996.
Based on the Company's deposits as of March 31, 1995, the date for measuring the
amount of the special assessment pursuant to the Act, the Company paid a special
assessment of $355,000 on November 27, 1996 to capitalize the SAIF. The FDIC has
lowered the premium for deposit insurance to a level necessary to maintain the
SAIF at its required reserve level. The Bank's premium for deposit insurance for
1997 is currently .0657% of assessable deposits.
34
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 9 - 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 consolidated provision for income taxes for the years ended June 30, 1997,
1996 and 1995, consisted of the following elements in thousands:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Tax paid or payable currently
Federal $ 250 $ 183 $ 136
State 41 14 13
Income tax deferred, net ( 85) ( 6) 41
----------- ----------- -----------
Total provision for income taxes $ 206 $ 191 $ 190
========== ========== ===========
</TABLE>
The provision for income taxes differed from that computed at the statutory
corporate rate for the years ended June 30, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<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 2.0 1.9 1.6
Other ( 2.0) 2.6 2.9
-------- -------- --------
Total provision for income taxes 34.0% 38.5% 38.5%
======== ======== ========
</TABLE>
35
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 9 - 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
------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Components of the deferred tax asset
Loan fees $ 16 $ 38
Pension expense 66 57
Unrealized loss on securities, available for sale - 6
Stock bonus plan 20 14
Accelerated depreciation 4 -
----------- -----------
106 115
Valuation allowance - -
----------- -----------
Total deferred tax asset 106 115
----------- -----------
Components of the deferred tax liability
Accelerated depreciation - 60
Bad debts 27 55
Unrealized gains on securities, available for sale 15 -
----------- -----------
Total deferred tax liability 42 115
----------- -----------
Net deferred tax asset (liability) $ 64 $ -
=========== ===========
</TABLE>
The Company's consolidated income tax returns for years not barred by the
statute of limitations are subject to review by tax authorities.
Note 10 - 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 for the three years ended June 30, 1997 was as follows.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Pension expense $ 49,000 $ 92,000 $ 101,000
=========== =========== ===========
</TABLE>
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.
36
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 10 - Retirement plans and employee benefit programs (continued)
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, 1997 and 1996, cumulative accruals under the contracts
totaled $175,000 and $150,000, respectively, and constituted general obligations
of the Company.
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 13,696 shares
of the common stock as of June 30, 1997. The Company recognized $7,800 and
$5,000 as accrued compensation costs in 1997 and 1996, respectively. The fair
value of unearned ESOP shares totaled $511,000 and $570,000 at June 30, 1997 and
1996, 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 years ended
June 30, 1997 and 1996, the amounts included in compensation expense was $54,000
and $36,000, respectively. The status of the shares in this plan at June 30,
1997 is shown as follows.
37
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 10 - Retirement plans and employee benefit programs (continued)
<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
Granted - -
Vested - 2,640)
Forfeiture - -
---------- ----------
Balance at June 30, 1997 4,328 15,844
========== ==========
</TABLE>
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 -
Granted - - -
Vested - ( 8,785) 8,785
Exercised - - -
Forfeiture - - -
------------- ------------ ------------
Balance at June 30, 1997 13,132 35,142 8,785
============= ============ ============
</TABLE>
The Company applies APB Opinion 25 in accounting for employee stock option
plans. Accordingly, no compensation cost has been recognized in 1997 and 1996.
38
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 10 - Retirement plans and employee benefit programs (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.89%; dividend yields of 3.20%; volatility factor of 27%; and
a weighted-average expected life of the option of 6.76 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro forma net income $ 413 $ 303
Pro forma earnings per share
Primary $ .86 $ .59
Fully diluted $ .86 $ .59
</TABLE>
Note 11 - 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.
39
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 11 - Financial instruments with off-balance-sheet risk (continued)
The Company's commitments to finance real estate acquisitions and construction
were $2,994,000 at June 30, 1997, $3,929,000 at June 30, 1996, and $2,561,000 at
June 30, 1995. As of June 30, 1997, the Company had contracted to sell
$2,994,000 of the loans to be financed. No loss is anticipated. At June 30,
1997, outstanding letters of credit totaled $245,000, and unfunded lines of
credit totaled $1,086,000. There were no loans sold with recourse in 1997 and
1996.
Note 12 - 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 $1,767,000 at June 30,
1997 and $1,790,000 at both June 30, 1996 and 1995.
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, 1997, the
liquidation account, unadjusted for customer withdrawals, totaled $4,166,000,
and minimum regulatory capital was $3,003,000.
See Note 14 for Bank regulatory capital requirements.
Note 13 - 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, 1997, the Company had commercial bank deposits of $84,000 in excess
of the Federal Deposit Insurance Corporation insurance limit.
40
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 14 - 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.
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, 1997 and 1996, 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>
1997
---------------------------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
-------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital computed $ 7,905 11.1% $ 7,905 11.1% $ 8,123 21.6%
Minimum capital requirement 1,068 1.5 2,137 3.0 3,003 8.0
-------- ----- ----------- ---- ------- ----
Regulatory capital excess $ 6,837 9.6% $ 5,768 8.1% $ 5,120 13.6%
======== ===== =========== ===== ========= ====
</TABLE>
<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>
Note 15 - 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, 1997, 1996 and
1995 are summarized as follows in thousands:
41
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 15 - Related-party transactions (continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Beginning balance $ 49 $ 56 $ 62
Additions 285 - -
Repayments ( 48) ( 7) ( 6)
---------- ----------- -----------
Ending balance $ 286 $ 49 $ 56
========== ========== ==========
</TABLE>
Fees for foreclosures, titles and deeds of trust, paid to a law firm, of which a
director is a principal, aggregated $6,625, $18,000, and $19,000 for the years
ended June 30, 1997, 1996 and 1995, respectively. Insurance commissions received
by a director from business with or for the Company aggregated $3,000 for each
of the years ended June 30, 1997, 1996 and 1995.
Note 16 - Interest lost on restructured debt
The Company did not acquire any real estate due to loan defaults in 1997 and
1996.
Note 17 - Commitments and contingencies
Rental expenses paid under operating leases for a loan office at June 30 of each
year was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Rental expense $ 24,000 $ 24,000 $ 23,000
=========== =========== ===========
</TABLE>
The Company entered into a two-year lease agreement for office space. The lease
terminates November 30, 1999, with an option to renew for one year.
The current minimum annual rental commitments under the non-cancelable operating
lease in effect at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ended Amount
---------- ------
<S> <C> <C>
1998 $ 25,000
1999 10,000
-------------
$ 35,000
===============
</TABLE>
42
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 18 - 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>
1997 1996
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 1,276 $ 1,276 $ 5,262 $ 5,262
Interest-bearing deposits 5,304 5,304 3,841 3,841
Investment securities 6,711 6,712 7,512 7,496
Mortgage-backed securities 3,318 3,371 443 445
Loans receivable, net 50,982 54,579 46,757 47,688
Financial liabilities
Deposits 57,933 57,929 57,643 56,422
Advances from Federal Home Loan Bank 3,500 3,500 - -
Unrecognized financial instruments
Commitments to purchase securities - - 1,000 1,000
Standby letters of credit issued 245 245 435 435
</TABLE>
Note 19 - Other noninterest expense
Other noninterest expense for the years ended June 30, 1997, 1996 and 1995 is
shown as follows in thousands:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------
<S> <C> <C> <C>
Other noninterest expense
Contributions $ 5 $ 5 $ 5
Dues and subscriptions 12 14 11
Insurance 32 38 41
Office supplies, telephone and postage 101 101 87
Other expenses 46 24 18
Professional fees 91 128 74
Supervisory fees and assessments 31 33 32
----------- ----------- -----------
$ 318 $ 343 $ 268
=========== =========== ===========
</TABLE>
43
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 20 - 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, 1997 and 1996:
<TABLE>
<CAPTION>
Balance Sheets
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 76 $ 76
Accrued interest receivable - 19
Investment in Bank subsidiary 7,268 6,722
Loan to Bank ESOP 319 365
Loan to Bank subsidiary 850 1,470
Other assets 96 54
----------- -----------
Total assets $ 8,609 $ 8,706
=========== ===========
Liabilities and stockholders' equity
Liabilities $ 7 $ 31
Stockholders' equity 8,602 8,675
----------- -----------
Total liabilities and stockholders' equity $ 8,609 $ 8,706
=========== ===========
</TABLE>
44
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 20 - Condensed parent company information (continued)
<TABLE>
<CAPTION>
Statements of Operations
1997 1996
------------- -------------
<S> <C> <C>
Income
Interest from
Bank's ESOP loan $ 30 $ 36
Loan to Bank subsidiary 55 84
----------- -----------
Total income 85 120
----------- -----------
Expense
Directors' compensation 25 25
Professional fees 49 90
Stationery and supplies 3 2
Other 18 25
----------- -----------
Total expense 95 142
----------- -----------
Net loss before income taxes and equity in
undistributed net income of Bank subsidiary ( 10) ( 22)
Income tax expense (credit) ( 5) ( 8)
----------- -----------
( 5) ( 14)
Equity in undistributed net income of Bank subsidiary 419 320
----------- ----------
Net income $ 414 $ 306
=========== ==========
</TABLE>
45
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 20 - Condensed parent company information (continued)
<TABLE>
<CAPTION>
Statements of Cash Flows
1997 1996
------------- --------
Cash flows from operating activities
<S> <C> <C>
Net income $ 414 $ 306
Adjustments
Equity in undistributed net income of Bank subsidiary ( 419) ( 320)
(Increase) decrease in other assets 4 ( 4)
Increase (decrease) in other liabilities ( 24) 19
---------- ----------
Net cash provided by (used in) operations ( 25) 1
---------- ----------
Cash flows from investing activities
Principal repayments from Bank subsidiary 666 626
---------- ----------
Cash flows from financing activities
Dividends paid ( 146) ( 154)
Purchase of stock ( 495) ( 466)
---------- ----------
Net cash used in financing activities ( 641) ( 620)
---------- -----------
Increase in cash and cash equivalents - 7
Cash and cash equivalents at beginning of year 76 69
---------- ----------
Cash and cash equivalents at end of year $ 76 $ 76
========== ==========
</TABLE>
46
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
Note 21 - Selected quarterly financial data (unaudited)
Condensed consolidated financial data for the years ended June 30, 1997 and 1996
is shown as follows in thousands except per-share data:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 1,255 $ 1,346 $ 1,341 $ 1,368
Total interest expense 644 684 664 681
---------- ---------- ---------- ----------
Net interest income 611 662 677 687
Provision for credit losses - - - 23
---------- ---------- ---------- ----------
Net interest income after provision for credit losses 611 662 677 664
Other noninterest income 87 130 76 105
Noninterest expense ( 892) ( 538) ( 529) ( 433)
---------- ---------- ---------- ----------
Income before income tax expense ( 194) 254 224 336
Income tax expense - 30 82 94
---------- ---------- ---------- ----------
Net income $ ( 194) $ 224 $ 142 $ 242
========== ========== ========== ==========
Net income per share $ ( .39) $ .47 $ .30 $ .51
Cash dividends per share .15 - .15 -
</TABLE>
<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>
47
<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
F. Courtney Hoge James C. Brock Michael M. Kessler
Vice Chairman of the Board President, Rusco Window Co. President, Kessler
Insurance Sales Representative Associates, Ltd.
New York Life Insurance Co. a photo processor
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
---------------------------------
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
---------------------------------
SWVA Bancshares, Inc.'s Annual Report for the year ended June 30, 1997 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 7, 1997 at 10:30 a.m. at 302
Second Street, S.W., Roanoke, Virginia.
EXHIBIT 23
<PAGE>
- ----------
Cherry
Bekaert &
Holland
- ----------
CERTIFIED PUBLIC
ACCOUNTANTS &
CONSULTANTS
INDEPENDENT ACCOUNTANT'S 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 25, 1997 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, 1997.
/s/ Cherry, Bekaert & Holland, L.L.P.
CHERRY, BEKAERT & HOLLAND, L.L.P.
Lynchburg, Virginia
September 24, 1997
Cherry Bekaert & Holland, L.L.P.
1700 Central Fidelity Bank Building - 828 Main Street (24504) -
P.O. Box 1119 - Lynchburg, VA 24505 - (804) 847-6643 - Fax (804) 528-3605
Offices Throughout The Southeast - Represented Internationally Through
Summit International Associates, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,276
<INT-BEARING-DEPOSITS> 5,304
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,748
<INVESTMENTS-CARRYING> 365
<INVESTMENTS-MARKET> 374
<LOANS> 50,982
<ALLOWANCE> 217
<TOTAL-ASSETS> 70,753
<DEPOSITS> 57,933
<SHORT-TERM> 3,500
<LIABILITIES-OTHER> 718
<LONG-TERM> 0
0
0
<COMMON> 51
<OTHER-SE> 8,551
<TOTAL-LIABILITIES-AND-EQUITY> 70,753
<INTEREST-LOAN> 4,318
<INTEREST-INVEST> 992
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,310
<INTEREST-DEPOSIT> 2,531
<INTEREST-EXPENSE> 142
<INTEREST-INCOME-NET> 2,637
<LOAN-LOSSES> 23
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 2,392
<INCOME-PRETAX> 620
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 620
<CHANGES> 0
<NET-INCOME> 414
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
<YIELD-ACTUAL> 3.99
<LOANS-NON> 58
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 58
<ALLOWANCE-OPEN> 194
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 217
<ALLOWANCE-DOMESTIC> 217
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
