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
For the fiscal year ended June 30, 1998
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|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to
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Commission File Number: 0-24674
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SWVA BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Virginia 54-1721629
- -------------------------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
302 Second Street, S.W., Roanoke, Virginia 24011-1597
- -------------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
(540) 343-0135
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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. $6.3 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
August 6, 1998, was $7.4 million.
As of September 1, 1998, the registrant had 495,887 shares of Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of the registrant's Annual Report to Stockholders for
the fiscal year ended June 30, 1998.
2. Part III -- Portions of the registrant's Proxy Statement for Annual Meeting
of Stockholders to be held on October 14, 1998.
<PAGE>
PART I
SWVA Bancshares, Inc. (the "Company") may from time to time make
written or oral "forward- looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this annual report on Form 10-KSB and the exhibits to the Form 10-KSB), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System (the "FRB"), inflation, interest rate, market and
monetary fluctuations; the timely development of and acceptance of new products
and services of the Company and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business.
Business of the Company
SWVA Bancshares, Inc. (the "Company") is a Virginia-chartered
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, 1998, the
Company had total assets of $84.4 million and stockholders' equity of $8.3
million.
During the year ended June 30, 1996, the Company repurchased 27,400
shares of its Common Stock at an aggregate purchase price of approximately
$466,000. The amount repurchased represented approximately 4.5% of the Company's
total shares outstanding prior to the repurchase.
During the year ended June 30, 1997, the Company repurchased 32,206
shares of its Common Stock at an aggregate purchase price of approximately
$495,000. The amount repurchased represented approximately 5.9% of the Company's
total shares outstanding prior to the repurchase.
1
<PAGE>
During the year ended June 30, 1998, the Company repurchased 14,097
shares of its Common Stock at an aggregate purchase price of approximately
$293,000. The amount repurchased represented approximately 2.8% 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.
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.
2
<PAGE>
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 for the Bank's loan
portfolio. 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 62.95% of total loans
outstanding on June 30, 1998. For the fiscal year ended June 30, 1998
adjustable-rate loans represented 87.00% 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 Office of
Thrift Supervision (the "OTS") guidelines as to loan limits. See "- Loans to One
Borrower." The Bank plans to increase its consumer and commercial lending. These
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 and Commercial loans over $200,000
require approval of the Board of Directors.
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,
-------------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans
Residential, one to four family........... $38,596 77.03% $39,587 74.86%
Residential, multifamily.................. 4,033 8.05 4,976 9.41
Nonresidential and land................... 2,513 5.02 2,523 4.77
Construction.............................. 2,980 5.95 3,536 6.69
Non-mortgage loans
Consumer loans
Secured personal........................ 725 1.45 862 1.63
Unsecured personal...................... 39 .08 10 0.02
Auto.................................... 34 .07 53 0.10
Home Improvement........................ 35 .07 37 0.07
Equity line............................. 1,023 2.04 1,050 1.99
Other................................... 59 .11 87 0.16
Commercial
Secured................................. 26 .05 35 0.06
Unsecured............................... 43 .08 128 0.24
------- ------ ------- ------
Total loans receivable................ $50,106 100.00% $52,884 100.00%
====== ======
Less
Deferred loan fees........................ 71 93
Undisbursed loans in process.............. 1,617 1,592
Allowance for credit losses............... 207 217
------ -------
Loans receivable, net .................... $48,211 $50,982
====== ======
</TABLE>
3
<PAGE>
The following table sets forth the maturity of the Bank's loan
portfolio at June 30, 1998. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $20.1 million and $9.8 million, for the fiscal years ended June 30, 1998
and 1997, respectively. ARMs are shown as maturing based on contractual
maturities.
<TABLE>
<CAPTION>
Residential Consumer
1-4 Multi- Non-residential and
Real Estate(1) Family and Land Construction Other Total
-------------- ------ -------- ------------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 3 months ................ $ 0 $ 0 $ 0 $ 478 $ 419 $ 897
3 months to 1 Year ............. 10 0 10 1,735 55 1,810
------- ------- ------- ------- ------- -------
Total due in one year or less 10 0 10 2,213 474 2,707
------- ------- ------- ------- ------- -------
After 1 year:
1 to 3 years ................. 57 0 24 767 155 1,003
3 to 5 years ................. 492 0 306 0 119 917
5 to 10 years ................ 2,768 948 578 0 151 4,445
10 to 20 years ............... 9,429 2,444 1,595 0 1,085 14,553
Over 20 years ................ 25,840 641 0 0 0 26,481
------- ------- ------- ------- ------- -------
Total due after one year .... 38,586 4,033 2,503 767 1,510 47,399
------- ------- ------- ------- ------- -------
Total amount due ............ $38,596 $ 4,033 $ 2,513 $ 2,980 $ 1,984 $50,106
======= ======= ======= ======= ======= =======
Less:
Allowance for loan loss............... 207
Loans in process...................... 1,617
Deferred loan fees.................... 71
------
Loans receivable, net............... $48,211
=======
</TABLE>
The following table sets forth the dollar amount at June 30, 1998 of
all loans due after June 30, 1999, which have pre-determined interest rates and
which have adjustable interest rates.
<TABLE>
<CAPTION>
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In Thousands)
<S> <C> <C> <C>
Residential one- to four-family.............. $9,836 $28,750 $38,586
Multi-family................................. 2,197 1,836 4,033
Nonresidential and land ..................... 1,618 885 2,503
Construction................................. 767 0 767
Consumer and other........................... 486 1,024 1,510
-------- ------- -------
Total(1)................................... $14,904 $32,495 $47,399
====== ====== ======
</TABLE>
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(1) Before deductions for unearned discounts, deferred loan costs, net and
allowances for loan losses.
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, 1998, the Bank had $38.6 million, or 77.03%, 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, 1998, the Bank originated some ARMs at interest
rates up to 1.00% 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 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
5
<PAGE>
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 $567,000 in non-residential real estate loans originated
during the fiscal year ended June 30, 1998. During the same period, the bank
originated $100,000 in multi-family loans.
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 generally obtains appraisals on each property in accordance with applicable
regulations. At June 30, 1998, 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
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, 1998, the
Bank had $1.1 million in construction loans outstanding to builders on a
speculative basis, with $407,000 in loans in process (funds being held for
construction progress) outstanding and attributed to these loans.
6
<PAGE>
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, 1998, there was $670,000 outstanding in
construction loans to owners with $505,000 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,
1998.
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.
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.
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.
7
<PAGE>
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 20% of the Bank's assets, and amounts in excess of 10% of such total
assets may be used only for small business loans. As of June 30, 1998, $69,000
or 0.13% 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 the result of
advertising.
Any mortgage or construction loan up to $250,000 is reviewed and
approved by the Management Loan Committee. Any mortgage or construction loan
over $250,000 up to $350,000 is reviewed and approved by the Board of Directors'
Loan Committee. The Board of Directors' Loan Committee reviews loans in excess
of $350,000 to be submitted to the Board of Directors for its approval.
Consumer and commercial loans may be approved by two officers for
unsecured loans up to $25,000 and for secured loans up to $100,000. The maximum
consumer or commercial loan to be approved by the Board of Directors Loan
Committee is $200,000 with any loans exceeding that amount requiring Board of
Directors approval.
The Bank uses independent fee appraisers on all real estate related
transactions. Each fee appraiser used must be state licensed or certified and
approved by the Bank's Board of Directors. It is 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.
8
<PAGE>
Loan Originations, Purchase, Sales and Repayments. The following table
sets forth the Bank's loan originations, sales, and principal repayments for the
periods indicated.
Year Ended June 30,
----------------------------
1998 1997
-------- -------
(In Thousands)
Total gross loans receivable at
beginning of period....................... $52,884 $48,932
Loans originated:
One- to four-family residential........... 27,544 19,176
Multi-family residential.................. 100 2,102
Non-residential and land.................. 567 0
Construction loans........................ 3,391 5,108
Consumer loans............................ 526 1,006
-------- -------
Total loans originated.................. 32,128 27,392
------ ------
Loans purchased:
One- to four-family residential........... 28 11
Multi-family residential.................. 0 0
Non-residential and land.................. 315 11
-------- ---------
Total loans purchased..................... 343 22
-------- ---------
Loans sold.................................. 19,796 10,071
------ ------
Other loan activity:
Loan principal repayments................. (20,061) (9,780)
Other (net)............................... 4,608 (3,611)
-------- --------
Net other loan activity................... (15,453) (13,391)
-------- ------
Total gross loans receivable at
end of period........................... $50,106 $52,884
====== ======
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.
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.
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
9
<PAGE>
based on the length and type of commitment. At June 30, 1998, the Bank had $4.1
million of commitments to finance real estate acquisitions and construction and
had contracted to sell $2.4 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 $6,500 for the fiscal year
ended June 30, 1998. As of June 30, 1998, the Bank had no loan fees deferred
under GAAP. As of June 30, 1998, loans serviced for the Virginia Housing
Development Authority ("VHDA") totaled $614,000 and loans serviced for FHLMC
totaled $321,000.
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, 1998.
The Bank's largest group of loans to one borrower at June 30,1998 was
$1.1 million which consisted of loans secured by apartments. The second largest
group of loans to one borrower was $1.0 million which consisted of loans secured
by single family homes, developed building lots, land and a mobile home park.
The next largest group of loans to one borrower was $896,000 which consisted of
loans secured by single family homes, both completed and under construction, and
rental units.
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.
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, 1998, the Bank had no
loans accounted for on a non-accrual basis and no restructured loans within the
meaning of SFAS 15.
10
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-----------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by one-to four- family dwelling units........ $102 $ 0
All other mortgage loans............................................. 0 0
----- ----
Total.................................................................. $102 $ 0
=== ===
Total accruing loans past due 90 days or more.......................... $102 $ 0
--- ---
Foreclosed real estate................................................. $ 0 $ 0
--- ---
Total non-performing assets............................................ $ 0 $ 60
=== ===
Total non-performing loans past due 90 days or more to total loans..... .00% .12%
Total non-performing loans past due 90 days or more to total assets.... .00% .08%
=== ===
Total non-performing assets to total assets............................ .00% .08%
=== ===
</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 watch list 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.
11
<PAGE>
The following table provides further information regarding the Bank's
classified assets and allowances for credit losses at June 30, 1998.
(In Thousands)
Special Mention................... $ 0
Substandard....................... 302
Doubtful assets................... 0
Loss assets....................... 0
General loss allowance............ 207
Specific loss allowance........... 0
Charge-offs....................... 43
All loans were classified as substandard and were on one- to
four-family residential loans.
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, 1998.
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,
1998 1997
---------------- -----------
(Dollars in Thousands)
<S> <C> <C>
Total loans............................................................ $50,106 $52,884
======= ======
Allowance balances (at beginning of period)............................ $ 217 $ 194
Provision ............................................................. 33 23
Net Charge-offs ....................................................... (43) 0
------- ------
Allowance balance (at end of period)................................... $ 207 $ 217
======= ======
Allowance for credit losses as a percentage of total loans............. .41% .41%
</TABLE>
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.
12
<PAGE>
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1998 1997
-------------------------- --------------------------
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..... $ 142 77.03% $ 87 74.86%
Residential, multifamily......... 20 8.05 50 9.41
Nonresidential and land.......... 16 5.02 46 4.77
Construction..................... 14 5.95 13 6.69
Consumer......................... 14 3.82 15 3.97
Commercial....................... 1 0.13 6 0.30
---- ------ ---- ------
$ 207 100.00% $217 100.00%
===== ====== ==== ======
</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, 1998, the Bank had an investment securities
portfolio of approximately $18.8 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 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.
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,
1998, the Bank had no funds 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".
13
<PAGE>
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, 1998, the Bank purchased $9.5 million in GNMA
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, 1998, mortgage-backed securities amounted to $11.2
million or 13.27% of total assets.
Investment and Mortgage-Backed Securities Portfolio
The following table sets forth the carrying value of the Bank's
investment securities portfolio, short-term investments, FHLB stock, and
mortgage backed and related securities at the dates indicated. At June 30, 1998,
the fair value of the Bank's investment portfolio was $30.7 million.
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available for sale securities:
Mutual Fund - AMF Adjustable Rate Securities Portfolio ............ $ 0 $ 0 $ 1,007 $ 1,006
US Government & Agency Bonds ...................................... 9,750 9,812 5,750 5,751
Federal Home Loan Bank
of Atlanta Stock ........................................ 961 961 961 961
FNMA mortgage-backed securities ................................... 1,324 1,369 1,946 1,991
GNMA mortgage-backed securities ................................... 9,509 9,490 0 0
Municipal Bonds ................................................... 930 936 0 0
------- ------- ------- -------
22,474 22,568 9,664 9,709
------- ------- ------- -------
Held to maturity securities:
Interest-bearing deposits (1) ..................................... 7,840 7,840 6,038 6,038
FHLMC participation certificates .................................. 318 327 365 374
------- ------- ------- -------
8,158 8,167 6,403 6,412
------- ------- ------- -------
Total investment securities ... $30,632 $30,735 $16,067 $16,121
======= ======= ======= =======
</TABLE>
- ---------------------
(1) Includes time and overnight deposits which are also cash equivalents.
14
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
portfolio at June 30, 1998.
<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.. $7,344 5.84% $ 496 6.12% $ 0 .00% $7,840 5.86% $7,840
US Government &
agency bonds.............. 0 .00 1,250 6.68 8,500 7.25 9,750 7.18 9,812
Mortgage-backed
securities............... 0 .00 0 .00 11,151 6.55 11,151 6.55 11,186
FHLB Stock................. 961 7.32 0 .00 0 .00 961 7.32 961
Municipal Bonds............ 0 .00 0 .00 930 4.78 930 4.78 936
----- ----- ----- ----- ------ ---- ------ ---- ------
Total.................... $8,305 6.01% $1,746 6.52% $20,581 6.76% $30,632 6.54% $30,735
===== ===== ===== ===== ====== ===== ====== ==== ======
</TABLE>
Sources of Funds
General. The major source of the Bank's funds for lending and other
investment purposes are deposits, amortization and prepayment of loans and
mortgage-backed securities, maturities of investment securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions. The Bank has also
utilized advances from the FHLB of Atlanta.
Deposits. Customer deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments including noninterest-bearing demand deposit accounts, negotiable
order of withdrawal ("NOW") accounts, regular savings, money market deposit
accounts, term certificate accounts, individual retirement accounts ("IRAs")
with fixed and variable rates of interest and club accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit and the interest rate.
The interest rates paid by the Bank on deposits are set at the direction of
the asset/liability committee which consists of senior management. The interest
rates on deposit account products are determined by evaluating the following
factors: (I) the Bank's anticipated need for cash and the timing of that desired
cash flow; (ii) the interest rates offered by other local financial
institutions, and the degree of competition the Bank wishes to maintain; (iii)
the cost of borrowing from other sources versus the cost of acquiring funds
through customer deposits; and (iv) the Bank's anticipation of future economic
conditions and related interest rates.
The Bank relies primarily on its service and longstanding relationship with
customers to obtain deposits and does not accept brokered deposits. It is not
the general policy of the Bank to offer premiums to attract deposits. It is the
intent of the Bank's management to increase deposits through advertising and
marketing.
Products emphasized are checking accounts and certificates of deposit.
Noninterest-bearing demand deposit accounts, NOW accounts, money market
accounts, regular savings and club accounts constituted $16.4 million, or 23.97%
of the Bank's deposit portfolio at June 30, 1998. At that date, certificates of
deposit constituted $51.9 million or 76.03% of the deposit portfolio, including
certificates of deposit with principal amounts of $100,000 or more, which
constituted $5.7 million or 8.37% of the deposit portfolio. The Bank generally
negotiates retail rates for certificates of deposit of $95,000 or more.
15
<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,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -----------------------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Noninterest-bearing demand deposit. $ 953 1.40% .00% $ 739 1.28% .00%
NOW................................ 4,768 6.98 1.74 4,118 7.11 2.15
Money market....................... 3,168 4.64 2.96 3,477 6.00 2.96
Regular savings.................... 7,421 10.87 3.00 7,305 12.61 3.00
Club............................... 60 .08 2.00 66 0.11 2.00
-------- -------- -------- -----
Total........................... 16,370 23.97 15,705 27.11
------ ------- ------ -----
Certificate accounts:
Fixed rates of interest:
7 to 91 days.................... 87 .12 3.00 77 0.13 3.00
Over 91 to 180 days............. 2,920 4.28 4.65 3,756 6.49 4.63
Over 181 to 365 days............ 23,491 34.40 5.53 12,980 22.40 5.13
Over 1 year to 3 years.......... 12,162 17.81 5.33 10,220 17.64 5.16
Over 3 years and up............. 250 .37 5.19 468 .81 5.03
Other........................... 6,133 8.98 5.55 5,860 10.11 3.57
Variable rates of interest
Up to 1 year.................... 0 .00 .00 0 .00 .00
Over 1 year..................... 6,532 9.57 5.42 6,370 11.00 6.19
Negotiable rate...................... 343 .50 5.56 2,497 4.31 5.11
------- ------ ------
Total....................... 51,918 76.03 42,228 72.89
------- ------ ------ ------
Total deposits.............. $68,288 100.00% 4.70% $57,933 100.00% 4.58%
====== ====== ==== ====== ====== ====
</TABLE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1998.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------------------
After
June 30, June 30, June 30, June 30,
1999 2000 2001 2001 Total
---- ---- ---- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00-4.00%................. $ 239 $ 1 $ 0 $ 0 $ 240
4.01-5.00%................. 3,081 1 0 0 3,082
5.01-6.00%................. 40,337 7,731 280 45 48,393
6.01-7.00%................. 0 200 0 0 200
7.01-8.00%................. 3 0 0 0 3
------ ------ ------- -------- ------
Total.................... $43,660 $ 7,933 $ 280 $ 45 $51,918
====== ====== ======= ======= ======
</TABLE>
16
<PAGE>
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, 1998.
Certificates
of Deposits
(In Thousands)
Within three months....................................... $2,368
Three through six months.................................. 1,174
Six through twelve months................................. 1,550
Over twelve months........................................ 625
------
$5,717
======
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank may also obtain advances from the FHLB of Atlanta to supplement its supply
of lendable funds 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 FRB discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At June 30, 1998, the Bank had $7.0 million in outstanding
advances from FHLB. The Bank had a $575,000 outstanding balance on a note
payable to the Company as of June 30, 1998.
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, 1998, the Bank was authorized to invest up to approximately $1.7
million in the stock of, or loans to, service
17
<PAGE>
corporations (based upon the 2% limitation). As of June 30, 1998, 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 $3,000 for the fiscal year ended June 30, 1998.
Employees
As of June 30, 1998, the Bank had 33 full-time employees. None of the
Bank's employees are represented by a collective bargaining group. The Bank
believes that its relationship with its employees is good. 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. The Company files 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
savings association insured by the Savings Association Insurance Fund (SAIF"))
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.
Bank Regulation
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation (the "FDIC"). Lending activities and other investments
must comply with various federal statutory and regulatory requirements. The Bank
is also subject to certain reserve requirements promulgated by the 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
18
<PAGE>
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.
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, the deposit insurance assessment for most SAIF members was reduced to
approximately .065% of deposits on an annual basis through the end of 1999.
During this same period, BIF members will be 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%.
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.
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 of the dividend would be to
19
<PAGE>
reduce the regulatory capital of the Bank below the amount required for the
liquidation account established in connection with the Conversion.
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, 1998, 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. Savings institutions must meet a QTL test
or the definition of a domestic building and loan association under Section 7701
of the Internal Revenue Code (the "Code"). If the Bank maintains an appropriate
level of qualified thrift investments (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualifies as a QTL or a domestic building and loan association, it
will continue to enjoy full borrowing privileges from the FHLB of Atlanta. The
required percentage of qualified thrift investments is 65% of assets while the
Code requires investments of 60% of assets.
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.
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 Bank obtains rental income through the leasing of space in its main
office building. During the fiscal year ended June 30, 1998, such rental income
was $98,000.
In the opinion of the management of the Bank, all properties listed are
adequately covered by insurance.
20
<PAGE>
(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, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information contained under the section captioned "Stock Price
Information" on page 1of the Company's Annual Report to Stockholders for the
fiscal year ended June 30, 1998 (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 and 7 of
the Annual Report is incorporated herein by reference.
21
<PAGE>
Item 7. Financial Statements.
The following report and financial statements of the Company are
incorporated by reference from the Annual Report.
Report of Independent Auditors
Statement of Financial Condition as of the Fiscal Years Ended
June 30, 1998 and 1997
Statement of Operations for the Fiscal Years Ended
June 30, 1998, 1997 and 1996
Statement of Changes in Stockholders' Equity for the Fiscal Years Ended June 30,
1998, 1997 and 1996
Statement of Cash Flows for the Fiscal Years
Ended June 30, 1998, 1997 and 1996
Notes to Financial Statements
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 14, 1998 (the
"Proxy Statement") is incorporated herein by reference.
Additional information concerning executive officers is included in the
Proxy Statement in the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance."
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.
22
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the chart in the section captioned "Voting
Securities and Principal Holders Thereof" and to the first
chart in the section captioned "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
Item 12. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Certain Relationships and Related Transactions" in the Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K.
<TABLE>
<CAPTION>
<S> <C> <C>
(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****
10.6 1998 Directors Stock Compensation Plan*****
13 Annual Report to Stockholders for the fiscal year ended June 30, 1998
21 Subsidiaries of the Registrant***
23 Consent of Cherry Bekaert & Holland L.L.P.
27 Financial Data Schedule
</TABLE>
- ----------------
* Incorporated by reference to Exhibit 3.1 of the Registration Statement on
Form S-1 (SEC File No. 33-80434) filed with the SEC on June 17, 1994.
** Incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-QSB
(SEC File No. 0-24674) filed with the SEC for the fiscal quarter ended
December 31, 1997.
*** Incorporated by reference to the identically numbered exhibit to the
Registrant's Form 10-KSB (SEC File No. 0-24674) filed with the SEC for the
fiscal year ended June 30, 1995.
**** Incorporated by reference to the identically numbered exhibit to the
Registrant's Form 10-KSB (SEC File No. 0-24674) for the fiscal year ended
June 30, 1997.
*****Incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-QSB
(SEC File No. 0-24674) filed with the SEC for the fiscal quarter ended
March 31, 1998.
(b) In the last quarter of the fiscal year ended June 30, 1998, no
reports on Form 8-K were filed by the Registrant with the SEC.
23
<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 25, 1998.
/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 10.1
<PAGE>
EMPLOYMENT AGREEMENT
AS AMENDED
THIS AGREEMENT entered into this 17 th day of September, 1997
("Effective Date"), by and between Southwest Virginia Savings Bank, FSB (the
"Bank") and B. L. Rakes (the "Employee").
WHEREAS, the Employee and the Bank have previously entered into an
Employment Agreement ("Prior Agreement"); and
WHEREAS, the parties desire to amend this Prior Agreement by this
writing to set forth the continuing employment relationship of the Bank and the
Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the
President of the Bank. The Employee shall render such administrative and
management services to the Bank and SWVA Bancshares, Inc. ("Parent") as are
currently rendered and as are customarily performed by persons situated in a
similar executive capacity. The Employee shall promote as and to the extent
permitted by law the business of the Bank and Parent. The Employee's other
duties shall be such as the Board of Directors for the Bank (the "Board of
Directors" or "Board") may from time to time reasonably direct, including normal
duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $_______ per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide at
such time.
3. Discretionary Bonus. The Employee shall be entitled to participate
in an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
4. (a) Participation in Retirement and Medical Plans. The Employee
shall be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
<PAGE>
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Bank shall reimburse Employee for all
reasonable out-of-pocket expenses which Employee shall incur in connection with
his service for the Bank.
5. Term. The term of employment of Employee under this Agreement shall
be for the period commencing on the Effective Date and ending on September 30,
2000, thereafter. ("Term") Additionally, on, or before, each annual anniversary
date from the Effective Date, the term of employment under this Agreement shall
be extended for an additional period beyond the then effective expiration date
upon a determination and resolution of the Board of Directors that the
performance of the Employee has met the requirements and standards of the Board,
and that the term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be established
from time to time by the Board of Directors.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in
accordance with the policies as are periodically established by the Board of
Directors for senior management employees of the Bank.
<PAGE>
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which Employee's
death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors other than termination
for Just Cause, shall not prejudice the Employee's right to compensation or
other benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of the Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the
<PAGE>
term (including any renewal term) of this Agreement and the cost of Employee
obtaining all health, life, disability, and other benefits which the Employee
would be eligible to participate in through such date based upon the benefit
levels substantially equal to those being provided Employee at the date of
termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee
all or part of the compensation withheld while its
<PAGE>
contract obligations were suspended and (ii) reinstate any of its obligations
which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Employee during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Employee shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Employee's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Employee returns
to active employment on other than a full-time basis, then his compensation (as
set forth in Paragraph 2 of this Agreement) shall be reduced in proportion to
the time spent in said employment, or as shall otherwise be agreed to by the
parties.
12. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any change in control of the Bank or Parent, Employee shall be paid an amount
equal to the product of 2.99 times the Employee's "base amount" as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder. Said sum shall be paid, at the option of
Employee, either in one (1) lump sum within thirty (30) days of such termination
discounted to the present value of such payment using as the discount rate the
interest rate paid on one year U.S. Treasury obligations as published in the
Wall Street Journal Eastern Edition as of the date of such payment, or in
periodic payments over the next 36 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall
be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "control" shall refer to the
<PAGE>
ownership, holding or power to vote more than 25% of the Parent's or Bank's
voting stock, the control of the election of a majority of the Parent's or
Bank's directors, or the exercise of a controlling influence over the management
or policies of the Parent or Bank by any person or by persons acting as a group
within the meaning of Section 13(d) of the Securities Exchange Act of 1934. The
term "person" means an individual other than the Employee, or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntary terminate his employment under this Agreement
within twenty-four (24) months following a change in control of the Bank or
Parent, and Employee shall thereupon be entitled to receive the payment
described in Section 12(a) of this Agreement, upon the occurrence, or within
ninety (90) days thereafter, of any of the following events, which have not been
consented to in advance by the Employee in writing: (i) if Employee would be
required to move his personal residence or perform his principal executive
functions more than thirty-five (35) miles from the Employee's primary office as
of the signing of this Agreement; (ii) if in the organizational structure of the
Bank or Parent, Employee would be required to report to a person or persons
other than the Board of the Bank or Parent; (iii) if the Bank or Parent should
fail to maintain existing employee benefits plans, including material fringe
benefit, stock option and retirement plans; (iv) if Employee would be assigned
duties and responsibilities other than those normally associated with his
position as referenced at Section 1, herein; (v) if Employee would not be
elected or reelected to the Board of Directors of the Bank; or (vi) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced.
(c) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. The Bank shall incur the cost of all fees and expenses
associated with filing a request for arbitration with the AAA, whether such
filing is made on behalf of the Bank or the Employee, and the costs and
administrative fees associated with employing the arbitrator and related
administrative expenses assessed by the AAA. The Bank shall reimburse Employee
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, notwithstanding the ultimate outcome
thereof, following the delivery of the decision of the arbitrator or upon
delivery of other legal judgment or settlement of the matter. Such reimbursement
shall be paid within ten (10) days of Employee furnishing to the Bank or Parent
evidence, which may be in the form, among other things, of a canceled check or
receipt, of any costs or expenses incurred by
<PAGE>
Employee. Any such request for reimbursement by Employee shall be made
no more frequently than at sixty (60) day intervals.
13. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Virginia, except to the extent that Federal law
shall be deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
EXHIBIT 13
<PAGE>
SWVA BANCSHARES, INC.
1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Corporate Profile and Related Information.....................................1
Stock Market Information......................................................1
Selected Financial and Other Data.............................................3
President's Message...........................................................4
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................6
Report of Independent Auditors...............................................14
Consolidated Financial Statements............................................15
Notes to Consolidated Financial Statements...................................20
Office Locations.............................................................50
Directors and Executive Officers.............................................50
Other Corporate Information..................................................50
i
<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 Union, Roanoke, Virginia. This
information reflects inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual trades.
HIGH LOW
---- ---
July 1 - September 30, 1996 15.600 14.600
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 - September 30, 1997 21.000 16.000
October 1 - December 31, 1997 21.000 19.000
January 1 - March 31, 1998 21.030 19.750
April 1 - June 30, 1998 21.000 20.250
1
<PAGE>
The number of shareholders of record of common stock as of September 1,
1998 was approximately 226. This does not reflect the number of persons or
entities who held stock in "street" name through various brokerage firms. At
September 1, 1998, there were 495,887 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.
Dividends Declared and Paid
Amount Per
Date Declared Common Share Record Date Date Payable
- ------------- ------------ ----------- ------------
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
February 18, 1998 $0.15 March 20, 1998 March 31, 1998
2
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------------------------------------------------------
Financial Condition (Dollars in Thousands)
At June 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 84,387 $70,753 $ 66,987 $ 66,265 $ 54,878
Loans receivable, net 48,211 50,982 46,757 51,064 40,401
Mortgage-backed & investment securities 22,886 10,074 7,939 7,048 7,108
Interest-bearing deposits 5,897 5,304 3,841 3,061 2,757
Cash and cash equivalents 3,193 1,276 5,262 830 874
Savings deposits 68,288 57,933 57,643 54,642 50,029
Borrowed funds 7,000 3,500 -- 1,800 --
Equity capital/stockholders' equity 8,327 8,602 8,675 9,313 4,169
- --------------------------------------------------------------------------------------------------------------------------------
Summary of Operations (Dollars in Thousands)
Year Ended June 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Interest income $ 5,808 $ 5,310 $ 4,906 $ 4,539 $ 3,848
Interest expense 3,226 2,673 2,622 2,314 1,753
Net interest income 2,582 2,637 2,284 2,225 2,095
Provision for credit losses 33 23 -- 1 2
------- ------- ------- ------- -------
Net interest income after provision for
credit losses 2,549 2,614 2,284 2,224 2,093
Noninterest income 428 398 455 315 545
------- ------- ------- ------- -------
Noninterest expense 2,198 2,392 2,242 2,045 1,881
------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 779 620 497 494 757
Provision for income taxes 318 206 191 190 276
------- ------- ------- ------- -------
Net income before cumulative effect of
change in accounting principle 461 414 306 304 481
Cumulative effect of change in
accounting principle -- -- -- -- 87
------- ------- ------- ------- -------
Net income $ 461 $ 414 $ 306 $ 304 $ 568
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
Other Selected Data
Year Ended June 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.59% 0.60% 0.46% 0.47% 0.87%
Return on average equity 5.41 4.87 3.50 3.77 11.85
Interest rate spread 3.10 3.55 3.17 3.37 4.28
Non-performing loans to total loans 0.00 0.10 0.00 0.12 0.73
Non-performing loans to total assets 0.00 0.08 0.00 0.09 0.53
Allowance for credit losses to total loans 0.43 0.43 0.40 0.37 0.48
- --------------------------------------------------------------------------------------------------------------------------------
Per share data
Year Ended June 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .97 $ .85 $ .60 .57 N/A
Diluted earnings per share .95 .85 .60 .57 N/A
Stockholders' equity 16.76 16.83 15.97 16.32 N/A
Dividends 1.30 .30 .30 .15 N/A
Dividend payout ratio 134% 35% 50% 26% N/A
</TABLE>
3
<PAGE>
President's Message
Dear Shareholder:
Fiscal 1998 marks the completion of your Savings Bank's third full year
of operations as a federally chartered stock savings bank and I am pleased to
report that growth in assets and net income continues. During these past three
fiscal years, we have seen total assets grow from $66.3 million to $84.4 million
which is a 27.3% increase. $13.6 million or 75.1% of that growth occurred this
past fiscal year. Net income for the year was $461,000 or $0.97 per share. This
was an increase of $0.12 or 14.1% per common share over the previous fiscal
year.
Net interest income decreased modestly to $2.5 million for fiscal 1998
verses $2.6 million the previous year while interest rate spread declined to
3.10%. Our interest rate spread was impacted principally by higher funding
costs. Improving our spread is a primary goal. We hope to achieve our spread
improvement objectives with increased higher yielding loans and by lowering
overall deposits costs by more active solicitation of personal and business
demand accounts.
Management's strategy for the savings bank is to continue to be a
traditional lender for one-to-four family residential loans. However, we expect
to increase consumer lending such as personal loans and home equity line loans.
Also, because of the number of banks being sold in our market area we feel there
is a need for small business lending. This strategy in lending should increase
interest income as it normally demands higher interest rates over first mortgage
home loans. Although the envisioned lending will increase credit risk it will
reduce interest rate risk due to the short term maturity of the loans.
Management feels that the Savings bank has adequate capital to manage the
increased risks.
In today's interest rate environment fixed rate residential mortgage
loans and fixed rate commercial real estate loans will yield higher returns.
However, it has been the philosophy of management not to lend heavily in these
loans for the bank portfolio in order to protect shareholder's investment by
virtue of maintaining a rate sensitive portfolio -- although at times it may be
at the risk of short-term profitability. Solid aggressive lending in the
consumer and small business areas should offer the intermediate returns that we
need to balance our long-term strategies.
The Savings Bank's expertise in managing the above strategy has been
enhanced by our adding a chief operating officer with over 27 years of banking
experience to the management team and hiring a branch manager who has begun to
revitalize one of our smallest branches.. We have placed a concentrated focus on
improving retail delivery of products and services. In addition we have begun a
sales culture in order to more efficiently cross sell services, and we have
begun a more aggressive advertisement campaign to alert customers and potential
customers to our services and our desire to be their Bank. These changes are
expected to result in better use of the branch structure of the Bank which
should result in improvement in return on average assets and equity.
I reported last year that we expected our Savings Bank to grow within
our market area as larger institutions are sold or consolidated in our area.
This year we have reported a growth in assets of 27%.
In addition to our efforts to obtain market share, management has
managed the capital of the bank by leveraging the balance sheet, paying regular
dividends, paying a special dividend and stock repurchases. On June 30, 1995,
the end of the fiscal year in which Southwest Virginia Savings Bank, FSB
converted to a stock Savings Bank and SWVA Bancshares, Inc. was formed, the
assets of the company were $66.2 million and stockholder's equity was $9.3
million or 14.05% of total assets. For fiscal year ending June 30, 1998, the
assets of the company were $84.4 million and stockholders equity was $8.3
million or 9.86% of total assets. The company has paid regular dividends
totaling $1.05, a
4
<PAGE>
special dividend of $1.00 and repurchased 73,703 shares of stock. The closing
price per share of SWVA Bancshares, Inc. common stock on June 30, 1998 was
$20.375, a 103.8% increase from the initial offering price of $10.00 per common
share. Stockholders who acquired the stock during the initial offering of $10.00
per share have realized a total return (Dividends plus stock appreciation) of
124.3%. The board has declared a semiannual dividend of $.20 per share to be
paid on September 30, 1998 to stockholders of record on September 15, 1998. This
is an increase of 33% from prior regular dividends. SWVA Bancshares, Inc.
directors and employees own over 23% of the company's common stock. This
emphasizes added desire to operate the company in a manner to increase market
share and profitability which in turn will enhance the shareholder value of all
stockholders.
There continues to be many changes in the banking industry --
nationally, statewide and locally. However, the basic philosophy of our bank
remains steadfast. SWVA Bancshares, Inc. is a customer oriented company and our
primary focus is to deliver quality service at all times on a one-on-one basis.
As other local financial institutions loose their control center to other
cities/states, we feel strongly that our closeness to our customer gives us a
definite market advantage which will enhance shareholder value. Our challenge is
to improve our retail delivery service with innovation of new products, through
our enthusiastic and highly skilled staff, and our commitment to responsive
action. Our Board of Directors, officers, and employees look forward to serving
our community through our banking services and we thank you for your interest
and support.
Sincerely yours,
/s/B.L. Rakes
----------------------------------
B.L. Rakes
President
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The business of the Savings Bank consists of receiving monetary
deposits from the general public and reinvesting those funds primarily in its
primary market area in the form of mortgage loans secured by one- to four-family
residences. To a lesser extent, the Savings Bank originates nonresidential real
estate, multi-family, construction, commercial, and consumer loans. The Savings
Bank also purchases U.S. government and federal agency securities,
mortgage-backed and mortgage-related securities and invests in interest-bearing
deposits with other insured financial institutions.
Currently, the Savings Bank's primary market area consists of Roanoke
County, the City of Salem, the City of Roanoke, and portions of Botetourt,
Bedford, and Franklin Counties, 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 77.03% 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, 1998, the
Savings Bank had no non-performing assets. The Savings Bank's ratio of
non-performing loans to total assets at June 30, 1998 was .00%.
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 $29.5 million, or 53.73%, from $54.9 million at June
30, 1994, to $84.4 million at June 30, 1998. The increase was due primarily to
the conversion and an increase in loans receivable of $7.8 million, from $40.4
million at June 30, 1994, to $48.2 million at June 30, 1998. Mortgage backed and
investment securities increased $15.8 million, from $7.1 million at June 30,
1994 to $22.9 million at June 30, 1998.
For fiscal year 1997-98, the Bank's asset growth was 19.27%.
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 1998-99 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.
7
<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
--------------------------------------------------------------------------
1998 1997
-------------------------------- ------------------------------------
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) $49,531 $ 4,182 8.44% $50,601 $4,318 8.53%
Investments and mortgage-backed
securities:
Held to maturity, at cost 337 26 7.87 414 32 7.80
Available for sale, FMV (2) 15,079 986 6.54 8,510 567 6.66
Other investments (3) 8,830 614 6.95 6,577 393 5.97
------- ----- ------- ------
Total interest-earning assets 73,777 5,808 7.87 66,102 5,310 8.03
----- ------
Non-interest earning assets 3,736 3,120
------- ------
Total assets $77,513 $69,222
======= =======
Interest-bearing liabilities:
Interest-bearing demand accounts $ 5,039 92 1.83 $ 5,222 102 1.95
Regular savings & club accounts 7,516 222 2.96 7,363 222 3.02
Money market deposit accounts 3,168 94 2.95 3,735 110 2.95
Certificates of deposit 47,487 2,560 5.39 40,784 2,097 5.14
Borrowed funds 4,400 258 5.87 2,448 142 5.79
------ ----- ------ ------
Total interest-bearing liabilities 67,610 3,226 4.77 59,552 2,673 4.49
-----
Non-interest-bearing demand accounts 450 201
Non-interest bearing liabilities 945 984
Equity 8,508 8,485
------ ------
Total liabilities and equity $77,513 $69,222
======= ======
Net-interest income $2,582 $ 2,637
===== ======
Interest rate spread (4) 3.10 3.55
Net yield on interest-earning assets (5) 3.50 3.99
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.12 110.99
Average equity to average total assets 10.98 12.26
</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.
8
<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,
------------------------------- -------------------------------------
1998 vs. 1997 1997 vs. 1996
(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 $ (91) $ (46) $ 1 $(136) $ 59 $ 185 $ 3 $ 247
Mortgage backed securities
and investments:
Held to maturity, at cost (6) 0 0 (6) (7) (1) 0 (8)
Available for sale, FMV 438 (10) (8) 420 180 36 19 235
Other investments 134 64 22 220 (57) (15) 2 (70)
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets 475 8 15 498 175 205 24 404
----- ----- ----- ----- ----- ----- ----- -----
Interest expense:
Deposits:
Interest-bearing demand (4) (7) 0 (11) 8 (15) (1) (8)
accounts
Regular savings & club 5 (5) 0 0 3 3 0 6
accounts
Money market deposit (17) 1 0 (16) (1) 0 0 (1)
accounts
Certificates of deposit 345 102 17 464 33 (68) (1) (36)
Borrowed funds 113 2 1 116 117 (8) (19) 90
----- ----- ----- ----- ----- ----- ----- -----
442 93 18 553 160 (88) (21) 51
----- ----- ----- ----- ----- ----- ----- -----
Net change in interest income $ 33 $ (85) $ (3) $ (55) $ 15 $ 293 $ 45 $ 353
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
9
<PAGE>
Comparison of Financial Condition
and Results of Operations for
Fiscal Years Ended June 30, 1998 and June 30, 1997
Total assets at June 30, 1998 were $84.4 million as compared to $70.8
million at June 30, 1997, an increase of $13.6 million. The increase was due to
an increase in cash and cash equivalents, investments and interest bearing
deposits, offset by a decrease in loans receivable. Cash and cash equivalents
increased from $1.3 million at June 30, 1997 to $3.2 million at June 30, 1998,
an increase of $1.9 million. Interest bearing deposits and investments increased
from $15.4 million at June 30, 1997 to $28.8 million at June 30, 1998, an
increase of $13.4 million. The increases were due mainly to an increase in
investment securities purchased using cash available and borrowed funds. Net
loans receivable decreased $2.8 million from $51.0 million at June 30, 1997 to
$48.2 million at June 30, 1998, due to decreased origination of mortgage loans.
On the liability side, deposits increased $10.4 million to $68.3 million at June
30, 1998 from $57.9 million at June 30, 1997. At June 30, 1998, there were $7.0
million in advances outstanding from the Federal Home Loan Bank of Atlanta, an
increase of $3.5 million from June 30, 1997. Advances were used 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, 1998 was $461,000 as
compared to $414,000 for the year ended June 30, 1997, an increase of $47,000.
Basic per share earnings for the year ended June 30, 1998 was $0.97.
Interest Income. Interest income increased $500,000 from $5.3 million
at June 30, 1997 to $5.8 million at June 30, 1998. The increase was mainly a
result in the increase in earnings on a larger investment base offset by a
reduction in mortgage loans in the Bank's portfolio.
Interest Expense. Interest expense for the year ended June 30, 1998 was
$3.2 million as compared to $2.7 million for the year ended June 30, 1997, an
increase of $500,000. The increase was due mainly to an increase in deposits and
an increase in borrowed funds.
Net Interest Income. Net interest income decreased $55,000. The
decrease was mainly due to increased interest paid on deposits and borrowed
funds offset by decreased income on mortgage loans and increased income on
investment securities.
Provision for Credit Losses. The Bank made an addition of $33,000 to
the provision for credit losses for the year ended June 30, 1998. The addition
was made due to offset a loss on a delinquent real estate loan and to increase
the level of provision for credit losses. The allowance for credit losses is
$207,000 as of June 30, 1998. $23,000 was added to the provision for credit
losses during the year ended June 30, 1997.
Noninterest Income. Noninterest income increased $30,000 from $398,000
for the year ended
10
<PAGE>
June 30, 1997 to $428,000 for the year ended June 30, 1998. This was due
primarily to a one time gain on the sale of Financial Institution Insurance
stock in the amount of $51,000 during the year ended June 30, 1997 and a gain on
sale of mortgage loans of $92,000 during the year ended June 30, 1998.
Noninterest Expense. Noninterest expense decreased from $2.4 million
for the year ended June 30, 1997 to $2.2 million for the year ended June 30,
1998, an decrease of $200,000. This was mainly due to a decrease in Federal
Deposit Insurance premiums offset by an increase in data processing expenses and
personnel expenses. The increase of data processing expenses was due to the cost
of the ATM and Debit card programs. The increase in personnel costs was mainly
due to additions to the Bank's management team as well as an adjustment during
the fourth quarter of fiscal year ending June 30, 1997 to accruals for
retirement expenses that reduced non-interest expense for fiscal year ending
June 30, 1997 by approximately $76,000.
Provision for Income Taxes. The provision for income taxes for the year
ended June 30, 1998 was $318,000 as compared to $206,000 for the year ended June
30, 1997. 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,
1998, cash and cash equivalents totaled $3.2 million.
At June 30, 1998, the Savings Bank had $43.7 million in certificates of
deposits due within one year and $8.2 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, 1998, the Savings Bank had $4.1 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.
The Savings Bank is required under federal regulations to maintain
certain specified levels of "liquid investments," which include certain United
States government obligations and other approved investments. During the quarter
ended December 31, 1997, a change in regulations changed the liquidity
requirements for thrifts. Some of these changes included reducing the liquid
asset requirement from 5% to 4% of the liquidity base and elimination of the 5
year maximum maturity limitation.
The Savings Bank's regulatory liquidity at June 30, 1998 was 22.94%. At
June 30, 1997, using the prior regulations, the Savings Bank's regulatory
liquidity was 6.74%.
The Savings Bank is required to maintain specified amounts of capital
pursuant to the Financial
11
<PAGE>
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, 1998, the Savings Bank's tangible and core capital totaled $7.7
million. This amount exceeded the tangible capital requirement of $1.3 million
by $6.4 million and the core capital requirement of $2.5 million by $5.1 million
on that date. At June 30, 1998, the Savings Bank's risk-based capital totaled
$7.9 million, which exceeded its risk-based capital requirement of $3.0 million
by $4.9 million.
Impact of Inflation and Changing Prices
The financial statements and related data have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services since such
goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Savings Bank's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
The Year 2000 Issue
The Bank's Board of Directors has adopted an action plan for addressing
the computer-related concerns raised by Year 2000. An internal committee has
been appointed by the Board to manage this effort. The year 2000 committee meets
on a regular basis to review and assess the current status of the Year 2000
project. The committee then prepares a status report to Management and the Board
of Directors.
Equipment
- ---------
A process to identify all equipment that may potentially be impacted has been
completed. All outside servicers and major vendors have been contacted in order
to ascertain their individual degrees of readiness for Year 2000. This includes
items such as the vault, heating, ventilation and air conditioning controls and
telephones. All of the vendors have responded to these inquiries. We have
received certifications of year 2000 compliance for systems controlled by third
party providers or determined that the systems should not be impacted by the
year 2000. The only upgrade needed will be to our telephone system, at a cost of
approximately $1,000. This upgrade should be completed by December 31, 1998.
Internal Computers
- ------------------
All internal computers have been tested for the year 2000. At this time, we have
found no problems with the computers and software used on the computers. As we
begin testing with Bisys (our data services provider which processes the Bank's
major loan and deposit applications) we will evaluate if any further
expenditures are necessary.
Computers used by our borrowers
- -------------------------------
Large loan customers have been contacted in order to both instill awareness and
to determine their state
12
<PAGE>
of readiness for Year 2000. All customers contacted have responded. At this
point, the Bank has no reason to doubt the ability of any of these customer to
continue to operate effectively in a Year 2000 environment. We believe that most
of our residential borrowers are not dependent on their computers for income and
that none of our commercial borrowers are so large that a year 2000 problem
would render them unable to collect revenue or rent and in turn continue to make
loan payments to the Bank.
We do not expect any material costs to address this risk area.
Cost
- ----
The committee has presented to the Board of Directors, and the Board has
approved, a Year 2000 budget totaling approximately $30,000. At June 30, 1998,
total expenses paid were $9,500. The major cost is an upgrade and testing
surcharge paid to Bisys. (Bisys is a data services provider which processes the
Bank's major loan and deposit applications.)
Contingency Plan
- ----------------
Our data services provider has sponsored four meetings on their progress and
test plans for the Year 2000. Starting in November, 1998 and continuing until
April, 1999, a test facility will be set up to provide for formal testing
between the Bank and Bisys. At this time, we find no reason to believe that
Bisys will not be able to operate on January 3, 2000.
A Contingency Plan has been prepared by the committee to facilitate the ability
of the Bank to continue providing an acceptable level of service to the Bank's
customers in the event that Bisys encounters problems on January 3, 2000 or we
are unable to communicate with Bisys. Procedures were already in place to
accommodate interruptions of online service for periods of short duration. These
procedures have been re-evaluated for effectiveness over a longer duration.
Appropriate adjustments have been made and additional procedures required for
longer duration "down-time" have been put into place. At the end of December,
1999, we will generate paper backup of all customer accounts and general ledger
accounts. Customer payments will be processed manually, and due to the size of
the Bank, we believe that we would be able to operate in this manner
indefinitely, until our existing data servicer, or a replacement, is able to
again provide data processing services. This procedure could require changing of
schedules and the hiring of temporary staff during this time, which would
increase our cost. Should it be necessary to change data service providers
during the beginning of the Year 2000, the cost could be material.
13
<PAGE>
[LOGO GRAPHIC OMITTED]
- -----------------
CHERRY
BEKAERT &
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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998 in conformity with generally accepted accounting principles.
/s/Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
July 22, 1998
14
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,193 $ 1,276
Interest-bearing deposits 5,897 5,304
Investment and mortgage-backed securities
Held to maturity, at amortized cost 318 365
Available for sale, at fair value 21,607 8,748
Restricted at cost 961 961
Loans held for sale 1,608 727
Loans receivable, net 48,211 50,982
Property and equipment, net 1,662 1,666
Accrued interest receivable 565 437
Prepaid expenses and other assets 365 287
----------- -----------
Total assets $ 84,387 $ 70,753
=========== ===========
Liabilities and stockholders' equity
Liabilities
Deposits $ 68,288 $ 57,933
Advances from Federal Home Loan Bank 7,000 3,500
Advances from borrowers for taxes and insurance 243 205
Other liabilities and deferred income 529 513
---------- ----------
Total liabilities 76,060 62,151
---------- ----------
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, 496,887 and
510,984 shares outstanding for 1998 and 1997, respectively 50 51
Additional paid-in capital 4,050 4,286
Retained earnings, substantially restricted 4,742 4,904
Unrealized holding loss on securities, available for sale 58 29
Less unearned ESOP shares, 27,385 for 1998 and 31,951 shares for 1997 ( 274) ( 319)
Less unearned MSBP shares, 17,537 for 1998 and 20,145 shares for 1997 ( 299) ( 349)
----------- -----------
Total stockholders' equity 8,327 8,602
---------- ----------
Total liabilities and stockholders' equity $ 84,387 $ 70,753
========== ==========
</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, 1998, 1997 and 1996
(In thousands, except shares outstanding)
<TABLE>
<CAPTION>
Unrealized
Holding
Gain (Loss)
Common Stock Additional on 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, 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
Net income - - - 461 - - - 461
Change in unrealized gain on
marketable equity securities - - - - 29 - - 29
Repurchase of common stock ( 14,097) ( 1) ( 292) - - - - ( 293)
Allocated/earned ESOP shares - - 47 - - 45 - 92
Allocated/earned MSBP shares - - 9 - - - 50 59
Dividends declared and paid
($1.30 per share) - - - ( 623) - - - ( 623)
-------- ----- -------- ------ --------- ----- ----- --------
Balance at June 30, 1998 496,887 $ 50 $ 4,050 $ 4,742 $ 58 $ ( 274) $ ( 299) $ 8,327
======== ===== ======== ===== ========= ====== ====== ========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1998, 1997 and 1996
(In thousands, except per-share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
Interest income
<S> <C> <C> <C>
Loans $ 4,182 $ 4,318 $ 4,071
Mortgage-backed and related securities 284 407 360
U.S. government obligations including agencies 705 122 71
Interest on municipal bonds 23 - -
Other investments, including overnight deposits 614 463 404
---------- ----------- -----------
Total interest income 5,808 5,310 4,906
---------- ----------- -----------
Interest expense
Deposits 2,968 2,531 2,570
Borrowed funds 258 142 52
---------- ----------- -----------
Total interest expense 3,226 2,673 2,622
---------- ----------- -----------
Net interest income 2,582 2,637 2,284
Provision for credit losses 33 23 -
---------- ----------- -----------
Net interest income after provision for credit losses 2,549 2,614 2,284
---------- ----------- -----------
Noninterest income
Loan and other customer service fees 137 142 154
Gain on sale of mortgage loans 210 118 208
Gross rental income 98 98 93
Other ( 17) 40 -
---------- ----------- -----------
Total noninterest income 428 398 455
---------- ----------- -----------
Noninterest expenses
Personnel 1,285 1,155 1,258
Office occupancy and equipment 297 292 314
Data processing 179 132 127
Federal insurance of accounts 38 431 126
Advertising 63 64 74
Other 336 318 343
---------- ----------- -----------
Total noninterest expenses 2,198 2,392 2,242
---------- ----------- -----------
Income before income taxes 779 620 497
Provision for income taxes 318 206 191
---------- ----------- -----------
Net income $ 461 $ 414 $ 306
========== =========== ===========
Basic earnings per share $ .97 $ .85 $ .60
Diluted earnings per share $ .95 $ .85 $ .60
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities
Net income $ 461 $ 414 $ 306
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
ESOP shares allocated 92 74 74
MSBP shares allocated 59 39 -
Provision for credit losses 33 23 -
Provision for depreciation and amortization 96 87 101
Provision for deferred income tax ( 19) ( 85) ( 6)
Loans originated for sale ( 20,467) ( 9,695) ( 19,516)
Proceeds from sales of loans originated for sale 19,796 10,071 19,601
Gain on sale of loans ( 210) ( 118) ( 208)
Loss on disposal of fixed assets 1 3 -
Net (increase) decrease in other assets ( 302) ( 77) 110
Net increase in other liabilities 35 49 159
Gain on sale of investments, available for sale ( 17) ( 43) -
---------- ---------- ----------
Net cash provided by (used in) operating activities ( 442) 742 621
---------- ---------- ----------
Investing activities
Proceeds from maturity of investments and interest-bearing deposits 6,793 3,839 3,950
Proceeds from sale of investments, available for sale 6,257 4,300 -
Purchase of investments and interest-bearing deposits ( 6,887) ( 5,302) ( 4,730)
Purchase of investments, available for sale ( 20,408) ( 6,488) -
Purchase of property and equipment ( 91) ( 94) ( 49)
Net (increase) decrease in loans 3,080 ( 4,226) 4,304
Purchase of loans ( 343) ( 22) -
Principal repayments on mortgage-backed securities 1,018 116 143
---------- ---------- ----------
Net cash provided by (used in) investing activities ( 10,581) ( 7,877) 3,618
---------- ---------- ----------
Financing activities
Proceeds from advances 7,000 7,000 200
Curtailment of advances and other borrowings ( 3,500) ( 3,500) ( 2,000)
Net increase in savings deposits 10,355 290 3,001
Repurchase of stock ( 293) ( 495) ( 466)
Purchase of stock for MSBP - - ( 388)
Dividends paid ( 622) ( 146) ( 154)
---------- ---------- ----------
Net cash provided by financing activities 12,940 3,149 193
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 1,917 ( 3,986) 4,432
Cash and cash equivalents at beginning of year 1,276 5,262 830
---------- ---------- ----------
Cash and cash equivalents at end of year $ 3,193 $ 1,276 $ 5,262
========== ========== ==========
</TABLE>
(continued)
18
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for
Interest on deposits and borrowed funds $ 3,193 $ 2,680 $ 2,620
========== ========== ==========
Income taxes $ 440 $ 172 $ 159
========== ========== ==========
Other non-cash activities
Gross unrealized gain (loss) on securities, available for sale $ 93 $ 62 $ ( 16)
Deferred income taxes ( 35) ( 21) 6
---------- ---------- ----------
Net unrealized gain (loss) $ 58 $ 41 $ ( 10)
========== ========== ==========
Reclassification of investments from held to maturity to available
for sale $ - $ - $ 1,245
========== ========== ==========
</TABLE>
19
See notes to consolidated financial statements.
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
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, 1998, 1997 and 1996
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, at the time of purchase.
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.
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, 1998, 1997 and 1996
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. Interest determined to be uncollectible 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.
22
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 1 - Summary of significant accounting policies (continued)
Property, equipment and depreciation
The various classes of property are stated at cost and are depreciated by the
straight-line method over their estimated useful lives of 10 to 50 years for
buildings and improvements and 3 to 12 years for furniture, fixtures, and
equipment. Repairs are expensed as incurred. The cost and accumulated
depreciation of property are eliminated from the accounts upon disposal, and any
resulting gain or loss is included in the determination of net income.
Income taxes
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
$1,822,000 as of June 30, 1998.
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.
23
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 1 - Summary of significant accounting policies (continued)
Sales of mortgage loans, mortgage-related securities and foreclosed real estate
Gains and losses on the sales of loans, participation interest in loans, and
foreclosed real estate are accounted for by imputing gain or loss on those sales
where a yield rate guaranteed to the buyer is more or less than the contract
interest rate being collected, in the case of loans, and where foreclosed
property is sold on financing terms more or less favorable than the prevailing
market terms for similar property. Such gains or losses are recognized in the
financial statements for the year of sale. The Bank services loans that have
been sold with servicing retained. Such loan balances are not included in the
accompanying consolidated statements of financial condition.
Advertising
The Company expenses most advertising costs as incurred. Such expenses are shown
in the consolidated statements of income. As of June 30, 1998 and 1997, the
Company's statements of financial condition included $6,000 and $2,000 of
prepaid advertising, respectively.
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:
o Cash and short-term instruments - The carrying amounts of cash and
short-term instruments approximate their fair value.
o 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.
o 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.
o 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.
24
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 1 - Summary of significant accounting policies (continued)
o 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.
o 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.
o Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
o Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
counterparties' credit standings.
Conversion to stock ownership
At a special meeting on July 20, 1994, the members of the Bank approved
management's plan to convert the Savings Bank from a Federal Mutual to a Federal
Stock Savings Bank. The plan called for the formation of SWVA Bancshares, Inc.
which would own the stock of the Bank upon its conversion to a stock form of
ownership. The stock of the Parent Company would then be offered through a
Subscription and Community Offering to the Bank's tax-qualified employee stock
plans, eligible account holders and others. The transaction was in the form of a
pooling of interests.
On October 7, 1994, the Parent Company issued 570,590 shares of $.10 par value
common stock at $10 per share and became the parent company of the Bank. Net
proceeds, after deducting conversion expenses and underwriters' discounts of
$469,000, were $5,242,000 and are reflected as common stock and additional
paid-in capital in the accompanying consolidated statements of financial
condition. The Parent Company's Articles of Incorporation contain certain
limitations on voting rights and other "anti-takeover" provisions.
As part of the conversion to stock form, the Bank formed an Employee Stock
Ownership Plan (ESOP) for eligible employees. The ESOP purchased 45,647 common
shares of the Parent Company issued in the conversion, which purchase was funded
by a loan from the Parent Company. In accordance with generally accepted
accounting principles, the unpaid balance of the ESOP loan has been eliminated
on the Company's consolidated statements of financial condition. Stockholders'
equity has been reduced by the aggregate purchase price of the shares owned by
the ESOP net of the shares committed to be released. Contributions to the ESOP
by the Savings Bank are made to fund the principal and interest payments on the
debt of the ESOP. As of June 30, 1998, a total of 18,262 shares had been
released.
25
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 1 - Summary of significant accounting policies (continued)
Impact of new accounting standards
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 11).
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 December 31,
1996, 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.
26
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 1 - Summary of significant accounting policies (continued)
In February 1997, the FASB issued Earnings per Share (SFAS 128). This statement
is effective for financial statements, including interim periods issued for
periods ending after December 15, 1997. SFAS 128 provides for the calculation of
basic and diluted earnings per share, and requires comparative information for
prior periods to be restated to conform with this standard. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in earnings of an entity, similar to fully diluted
earnings per share (see Note 14). All previously reported earnings per share
amounts have been restated to conform to the provisions of this new accounting
standard.
In June 1997, the FASB issued Reporting Comprehensive Income (SFAS 130), which
established standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 is
effective for financial statements for periods beginning after December 15,
1997, and requires comparative information for earlier years to be restated.
Currently it is expected the only additional component of comprehensive income
to be disclosed under the provisions of this statement is the changes in
unrealized holding gains or losses on securities available for sale.
In June 1997, the FASB also issued Disclosures about Segments of an Enterprise
and Related Information (SFAS 131), which changes the way public companies
report information about segments of their business in annual financial
statements and requires segment information in quarterly reports to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company has not determined what
additional disclosures may be required by the provisions of this statement.
In February 1998, the FASB issued Employers' Disclosures about Pensions and
Other Postretirement Benefits (SFAS 132), which revises employers' disclosures
about pension and other postretirement benefit plans. SFAS 132 does not change
the measurement or recognition of those plans, but requires additional
information on changes in benefit obligations and fair values of plan assets,
and eliminates certain disclosures previously required by SFAS Nos. 87, 88 and
106. SFAS 132 is effective for fiscal years beginning after December 15, 1997.
The Company has not determined what additional disclosures may be required by
the provisions of this statement.
Reclassifications
Certain items in the 1997 financial statements have been reclassified to afford
comparability with the 1998 financial statements.
27
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
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>
1998
------------------------------------------------------------
Gross Unrealized
Amortized -----------------------------
Cost Gain Loss Fair Value
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Securities, held to maturity
FHLMC participation certificates $ 318 $ 9 $ - $ 327
----------- ----------- ----------- -----------
Securities, available for sale
Municipal bonds 930 6 - 936
U.S. Government and agency bonds 9,750 62 - 9,812
GNMA mortgage-backed securities 9,509 - 19 9,490
FNMA mortgage-backed securities 1,324 45 - 1,369
----------- ----------- ----------- -----------
21,513 113 19 21,607
----------- ----------- ----------- -----------
Total securities $ 21,831 $ 122 $ 19 $ 21,934
============== ============= ============= =============
</TABLE>
<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>
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
The amortized cost and estimated fair value of debt securities at June 30, 1998,
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 $ - $ - $ 5,250 $ 5,264
Due after one year through five years - - 5,030 5,080
Due after five years through ten years - - - -
Due after ten years - - 400 405
Mortgage-backed and related securities 318 327 10,833 10,858
----------- ----------- ----------- -----------
$ 318 $ 327 $ 21,513 $ 21,607
============ =========== =========== ===========
</TABLE>
Proceeds from maturities of interest-bearing deposits and investments were
$6,793,000 in 1998, $3,839,000 in 1997, and $3,950,000 in 1996. Gross realized
gains and losses on redemption of investments are summarized below in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ----------
<S> <C> <C> <C>
Gross realized gains $ - $ 52 $ -
Gross realized losses ( 17) ( 9) -
----------- ----------- -------
Net realized gains (losses) $ ( 17) $ 43 $ -
=========== ========== =======
</TABLE>
Cost was determined by the specific identification method.
29
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 3 - Loans receivable
Loans receivable at June 30 of each year were as follows in thousands:
1998 1997
------------- -------------
Mortgage loans
Residential, one to four family $ 38,596 $ 39,587
Residential, multifamily 4,033 4,976
Nonresidential and land 2,513 2,523
Construction 2,980 3,536
----------- -----------
48,122 50,622
----------- -----------
Non-mortgage loans
Consumer loans
Secured personal 725 862
Unsecured personal 39 10
Auto 34 53
Home improvement 35 37
Equity line 1,023 1,050
Other 59 87
Commercial
Unsecured 26 35
Secured 43 128
----------- -----------
1,984 2,262
----------- -----------
Total loans 50,106 52,884
----------- -----------
Less
Deferred loan fees 71 93
Undisbursed loans in process 1,617 1,592
Allowance for credit losses 207 217
----------- -----------
1,895 1,902
----------- -----------
Loans receivable, net $ 48,211 $ 50,982
=========== ===========
Real estate loans pledged as collateral for Federal Home Loan Bank of Atlanta
advances totaled $7,000,000 and $4,700,000 as of June 30, 1998 and 1997,
respectively.
30
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
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>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $ 321 $ 379 $ 459
Virginia Housing Development Authority (VHDA) 614 583 729
----------- ----------- -----------
$ 935 $ 962 $ 1,188
=========== =========== ===========
</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>
1998 1997
------------- -------------
<S> <C> <C>
FHLMC $ 6 $ 5
VHDA 6 4
----------- -----------
$ 12 $ 9
=========== ===========
</TABLE>
Activity in the allowance for credit losses for the years ended June 30, 1998,
1997 and 1996 is summarized as follows in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 217 $ 194 $ 194
Provision charged to operations 33 23 -
Charge-offs ( 43) - -
----------- ----------- -----------
Balance at end of year $ 207 $ 217 $ 194
========== =========== ===========
</TABLE>
31
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 3 - Loans receivable (continued)
The following table sets forth the maturity of the loan portfolio at June 30,
1998 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 $ - $ - $ - $ 478 $ 419 $ 897
3 months to 1 year 10 - 10 1,735 55 1,810
----------- --------- --------------- ------------ ---------- -----------
Total due within 1 year 10 - 10 2,213 474 2,707
----------- --------- --------------- ------------ ---------- -----------
After 1 year
1 to 3 years 57 - 24 767 155 1,003
3 to 5 years 492 - 306 - 119 917
5 to 10 years 2,768 948 578 - 151 4,445
10 to 20 years 9,429 2,444 1,595 - 1,085 14,553
Over 20 years 25,840 641 - - - 26,481
----------- --------- --------------- ------------ ---------- -----------
Total due after 1 year 38,586 4,033 2,503 767 1,510 47,399
----------- --------- --------------- ------------ ---------- -----------
Total due $ 38,596 $ 4,033 $ 2,513 $ 2,980 $ 1,984 50,106
=========== ========= =============== ============ ========== -----------
Less
Allowance for loan loss 207
Loans in process 1,617
Deferred loan fees 71
-----------
1,895
Loans receivable, net $ 48,211
===========
</TABLE>
The following table sets forth the dollar amount (in thousands) of all loans due
after June 30, 1999, 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 $ 9,836 $ 28,750 $ 38,586
Multifamily 2,197 1,836 4,033
Nonresidential and land 1,618 885 2,503
Construction 767 - 767
Consumer and other 486 1,024 1,510
----------- ----------- -----------
$ 14,904 $ 32,495 $ 47,399
=========== =========== ===========
</TABLE>
32
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 4 - Foreclosed real estate
Foreclosed real estate acquired in settlement of loans, at the lower of cost or
fair value, totaled $-0- at June 30, 1998 and June 30, 1997, respectively.
The net loss on foreclosed real estate at June 30 of each year consisted of the
following in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -----------
<S> <C> <C> <C>
Net loss on sale of foreclosed real estate $ 43 $ - $ -
=========== =========== =========
</TABLE>
Note 5 - Property, equipment and depreciation
Property and equipment at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Land $ 575 $ 575
Office buildings and improvements 1,788 1,783
Furniture, fixtures and equipment 1,017 935
----------- -----------
3,380 3,293
Less accumulated depreciation 1,718 1,627
----------- -----------
Property and equipment, net $ 1,662 $ 1,666
=========== ===========
</TABLE>
Accumulated depreciation at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Office buildings and improvements $ 899 $ 862
Furniture, fixtures and equipment 819 765
----------- -----------
$ 1,718 $ 1,627
=========== ===========
</TABLE>
Depreciation expense for the years ended June 30, 1998, 1997 and 1996 was as
follows in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Office buildings and improvements $ 37 $ 37 $ 37
Furniture, fixtures and equipment 55 50 64
----------- ----------- -----------
$ 92 $ 87 $ 101
=========== =========== ===========
</TABLE>
33
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 6 - Accrued interest receivable
Accrued interest receivable at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Accrued interest on loans $ 286 $ 316
Accrued interest on investments 279 121
----------- -----------
$ 565 $ 437
=========== ===========
</TABLE>
Note 7 - Deposits
Savings deposits at June 30 of each year, summarized by interest rate, were as
follows in thousands:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Negotiable order of withdrawal deposits
Non-interest bearing $ 953 1.40% $ 739 1.28%
1.74% 4,768 6.98 - 0.00
2.15% - 0.00 4,118 7.11
2.96% 3,168 4.64 3,477 6.00
----------- -------- ----------- --------
8,889 13.02 8,334 14.39
----------- -------- ----------- --------
Passbooks and statement deposits, 3.00% for each year 7,481 10.95 7,371 12.72
----------- -------- ----------- --------
Certificates of deposit and other term deposits
3.00% to 4.00% 240 .35 109 .19
4.01% to 5.00% 3,082 4.51 14,116 24.37
5.01% to 6.00% 48,393 70.87 21,430 36.98
6.01% to 7.00% 200 .29 6,570 11.34
7.01% to 8.00% 3 .01 3 .01
----------- -------- ----------- --------
Total term deposits 51,918 76.03 42,228 72.89
----------- -------- ----------- --------
Total deposits $ 68,288 100.00% $ 57,933 100.00%
=========== ========== =========== ==========
</TABLE>
The aggregate amounts of certificates of deposit with a denomination of $100,000
or more were $5,818,000, $5,121,000, and $3,970,000 at June 30, 1998, 1997 and
1996, respectively.
Certain deposit accounts were pledged as collateral for $207,000, $171,000, and
$152,000 of consumer loans at June 30, 1998, 1997 and 1996, respectively.
34
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 7 - Deposits (continued)
Maturities of certificates of deposit are scheduled for each fiscal year
indicated as follows in thousands:
<TABLE>
<CAPTION>
1999 2000 2001 After 2002 Total
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
3.00% to 4.00% $ 239 $ 1 $ - $ - $ 240
4.01% to 5.00% 3,081 1 - - 3,082
5.01% to 6.00% 40,337 7,731 280 45 48,393
6.01% to 7.00% - 200 - - 200
7.01% to 8.00% 3 - - - 3
----------- ----------- ----------- ----------- -----------
$ 43,660 $ 7,933 $ 280 $ 45 $ 51,918
=========== =========== =========== =========== ===========
</TABLE>
Interest expense on deposits for the years ended June 30, 1998, 1997 and 1996 is
summarized as follows in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Money market $ 93 $ 110 $ 111
Passbook savings 224 219 213
NOW 92 102 110
Club accounts 1 1 1
Certificates of deposit 2,558 2,099 2,135
----------- ----------- -----------
$ 2,968 $ 2,531 $ 2,570
=========== =========== ===========
</TABLE>
Note 8 - Borrowed funds
The following table sets forth certain information regarding advances at the
dates or for the periods indicated in thousands:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
FHLB-Atlanta advances
<S> <C> <C>
Balance outstanding at end of year $ 7,000 $ 3,500
Average balance outstanding 4,400 3,000
Maximum amount outstanding at any month-end during the year 7,000 3,500
Weighted-average interest rate during the year 5.87% 5.67%
Weighted-average interest rate at end of year 5.63% 6.12%
</TABLE>
35
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 8 - Borrowed funds (continued)
The following table sets forth the repayment schedule at June 30, 1998, which
includes interest rates and amounts due by year, in thousands:
Year Due Interest Rate Amount
1998 5.98% $ 1,000
2002 5.68% 2,000
2003 5.52% 2,000
2008 5.51% 2,000
-----------
$ 7,000
=============
Residential loans aggregating $7,000,000 and $3,500,000 were pledged as of June
30, 1998 and 1997, respectively, as collateral for the advances from
FHLB-Atlanta under a blanket floating lien agreement.
Note 9 - 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
1998 is currently .0625% of assessable deposits and was .0657% in 1997.
Note 10 - 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.
36
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 10 - Income taxes (continued)
The consolidated provision for income taxes for the years ended June 30, 1998,
1997 and 1996, consisted of the following elements in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Tax paid or payable currently
Federal $ 304 $ 250 $ 183
State 33 41 14
Income tax deferred, net ( 19) ( 85) ( 6)
----------- ----------- -----------
Total provision for income taxes $ 318 $ 206 $ 191
========== ========== ==========
</TABLE>
The provision for income taxes differed from that computed at the statutory
corporate rate for the years ended June 30, 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<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 2.8 2.0 1.9
Other 1.5 ( 4.2) -
Permanent non-deductible expenses 2.5 2.2 2.6
---------- ---------- ----------
Total provision for income taxes 40.8% 34.0% 38.5%
========== ========== ==========
</TABLE>
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
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Components of the deferred tax asset
Loan fees $ 9 $ 16
Pension expense 76 66
Stock bonus plan 21 20
Accelerated depreciation 12 4
----------- -----------
118 106
Valuation allowance - -
----------- -----------
Total deferred tax asset 118 106
----------- -----------
Components of the deferred tax liability
Bad debts 8 27
Unrealized gains on securities, available for sale 35 15
----------- -----------
Total deferred tax liability 43 42
----------- -----------
Net deferred tax asset $ 75 $ 64
=========== ===========
</TABLE>
37
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 10 - Income taxes (continued)
The Company's consolidated income tax returns for years not barred by the
statute of limitations are subject to review by tax authorities.
Note 11 - 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, 1998 was as follows in
thousands:
1998 1997 1996
------------- ------------- -------------
Pension expense $ - $ 49 $ 92
=========== =========== ===========
The multi-employer defined benefit plan covers substantially all employees who
have reached age 21 and who have completed one year of service. The benefits are
based on length of service and high five-year average earnings. However, in no
event will the benefits be less than those vested through June 30, 1992 under a
previous plan.
Supplemental executive retirement plan
The Company has deferred compensation agreements with two principal officers
which provide for retirement benefits supplementary to those of the pension
plan. As of June 30, 1998 and 1997, cumulative accruals under the contracts
totaled $201,000 and $175,000, 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 18,262 shares
of the common stock as of June 30, 1998. The Company recognized $12,000 and
$7,800 as accrued compensation costs in 1998 and 1997, respectively. The fair
value of unearned ESOP shares totaled $558,000 and $511,000 at June 30, 1998 and
1997, 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.
38
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 11 - Retirement plans and employee benefit programs (continued)
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, 1998 and 1997, the amounts included in compensation expense were
$63,000 and $54,000, respectively. The status of the shares in this plan at June
30, 1998 is shown as follows:
<TABLE>
Unawarded Awarded
Shares Shares
----------- ----------
<S> <C> <C>
Balance at June 30, 1996 4,328 18,484
Granted - -
Vested - ( 2,640)
Forfeiture - -
---------- ----------
Balance at June 30, 1997 4,328 15,844
Granted - -
Vested - ( 2,635)
Forfeiture - -
----------- ----------
Balance at June 30, 1998 4,328 13,209
=========== ==========
</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. On March 18, 1998, the Board of
Directors approved the establishment of a stock option plan for directors. The
exercise price is $21 per share, the fair market price on the date of grant.
Rights to exercise options are 100% vested as of June 30, 1998.
39
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 11 - Retirement plans and employee benefit programs (continued)
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
Available Options Vested and
for Grant Outstanding Exercisable
--------- ----------- -----------
<S> <C> <C> <C>
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
Granted - 10,122 10,122
Vested - ( 8,777) 8,777
Exercised - - -
Forfeiture - - -
-------------- ------------ -------------
Balance at June 30, 1998 13,132 36,487 27,684
============== ============ =============
</TABLE>
The Company applies APB Opinion 25 in accounting for employee stock option
plans. Accordingly, no compensation cost has been recognized in 1998 and 1997.
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 5.85%; dividend yields of 1.76%; volatility factor of 27.5%;
and a weighted-average expected life of the option of 6.45 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:
1998 1997 1996
----------- ----------- ------------
Pro forma net income $ 446 $ 413 $ 303
Pro forma earnings per share
Basic $ .93 $ .86 $ .59
Diluted $ .88 $ .86 $ .59
40
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 12 - Financial instruments with off-balance-sheet risk
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist primarily of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statements of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counter-party.
Collateral normally consists of real property.
The Company's commitments to finance real estate acquisitions and construction
were $4,050,000 at June 30, 1998, $2,994,000 at June 30, 1997, and $3,929,000 at
June 30, 1996. As of June 30, 1998, the Company had contracted to sell
$2,371,000 of the loans to be financed. No loss is anticipated. At June 30,
1998, outstanding letters of credit totaled $391,000, and unfunded lines of
credit totaled $1,155,000. There were no loans sold with recourse in 1998 and
1997.
Note 13 - 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 $1,777,000, $1,767,000
and $1,790,000 at June 30, 1998, 1997 and 1996, respectively.
41
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 13 - Restricted retained earnings (continued)
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, 1998, the
liquidation account, unadjusted for customer withdrawals, totaled $4,166,000,
and minimum regulatory capital was $3,003,000.
See Note 16 for Bank regulatory capital requirements.
Note 14 - Earnings per share
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Numerator:
(a) Net income available to shareholders $ 461 $ 414 $ 306
============= ============ ============
Denominator:
Weighted-average shares outstanding 509,008 522,884 550,826
Less: ESOP weighted-average shares ( 31,951) ( 36,518) ( 41,082)
------------- ------------ ------------
(b) Basic EPS weighted-average shares outstanding 477,057 486,366 509,744
Effect of dilutive securities:
Incremental shares attributable to the Stock Option 7,500 - 93
Plan and Management Stock Bonus Plan 2,255 - -
------------- ------------ --------
(c) Diluted EPS weighted-average shares outstanding 486,812 486,366 509,837
============= ============ ============
Basic earnings per share (a/b) $ .97 $ .85 $ .60
============= ============ ============
Diluted earnings per share (a/c) $ .95 $ .85 $ .60
============= ============ ============
</TABLE>
Earnings per share amounts for 1997 and 1996 have been restated to comply with
the provisions of SFAS 128.
42
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 15 - 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, 1998, the Company had commercial bank deposits of $733,000 in excess
of the Federal Deposit Insurance Corporation insurance limit.
Note 16 - 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, 1998 and 1997, 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>
1998
-----------------------------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital computed $ 7,683 9.1% $ 7,683 9.1% $ 7,890 20.8%
Minimum capital requirement 1,271 1.5 2,542 3.0 3,042 8.0
-------- ------- --------- ------ --------- ------
Regulatory capital excess $ 6,412 7.6% $ 5,141 6.1% $ 4,848 12.8%
======== ======= ========= ======== ========= ========
</TABLE>
<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>
43
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 17 - 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, 1998, 1997 and
1996 are summarized as follows in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Beginning balance $ 286 $ 49 $ 56
Additions - 285 -
Repayments ( 89) ( 48) ( 7)
----------- ----------- -----------
Ending balance $ 197 $ 286 $ 49
========== ========== ==========
</TABLE>
Fees for foreclosures, titles and deeds of trust, paid to a law firm, of which a
director is a principal, aggregated $2,575, $6,625, and $18,000 for the years
ended June 30, 1998, 1997 and 1996, respectively. Insurance commissions received
by a director from business with or for the Company aggregated $4,000, $3,000
and $3,000 for the years ended June 30, 1998, 1997 and 1996.
Note 18 - Commitments and contingencies
Rental expenses paid under operating leases for a loan office at June 30 of each
year was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Rental expense $ 25,000 $ 24,000 $ 24,000
=========== =========== ===========
</TABLE>
The Company entered into a three-year lease agreement for office space. The
lease terminates April 30, 2001.
The current minimum annual rental commitments under the noncancelable operating
lease in effect at June 30, 1998 are as follows:
Year Ending Amount
----------- ---------------
1999 $ 41,000
2000 42,000
2001 36,000
-------------
$ 119,000
===============
44
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 19 - 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>
1998 1997
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 3,193 $ 3,193 $ 1,276 $ 1,276
Interest-bearing deposits 5,897 5,897 5,304 5,304
Investment securities 11,641 11,709 6,711 6,712
Mortgage-backed securities 11,151 11,186 3,318 3,371
Loans receivable, net 48,211 59,620 50,982 54,579
Financial liabilities
Deposits 68,288 68,391 57,933 57,929
Advances from Federal Home Loan Bank 7,000 6,913 3,500 3,500
Unrecognized financial instruments
Commitments to purchase securities - - - -
Standby letters of credit issued 391 391 245 245
</TABLE>
Note 20 - Other noninterest expense
Other noninterest expense for the years ended June 30, 1998, 1997 and 1996 is
shown as follows in thousands:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Other noninterest expense
Contributions $ 7 $ 5 $ 5
Dues and subscriptions 14 12 14
Insurance 31 32 38
Office supplies, telephone and postage 113 101 101
Other expenses 41 46 24
Professional fees 100 91 128
Supervisory fees and assessments 30 31 33
----------- ----------- -----------
$ 336 $ 318 $ 343
=========== =========== ===========
</TABLE>
45
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 21 - 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, 1998 and 1997:
Balance Sheets
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 102 $ 76
Investment in Bank subsidiary 7,194 7,268
Loan to Bank ESOP 274 319
Loan to Bank subsidiary 575 850
Other assets 197 96
----------- -----------
Total assets $ 8,342 $ 8,609
=========== ===========
Liabilities and stockholders' equity
Liabilities $ 15 $ 7
Stockholders' equity 8,327 8,602
----------- -----------
Total liabilities and stockholders' equity $ 8,342 $ 8,609
=========== ===========
</TABLE>
46
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 21 - Condensed parent company information (continued)
Statements of Operations
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Income
Interest from
Bank's ESOP loan $ 27 $ 30
Loan to Bank subsidiary 36 55
Dividends from Bank subsidiary 503 -
---------- ----------
Total income 566 85
---------- ----------
Expense
Directors' compensation 25 25
Professional fees 84 49
Stationery and supplies 1 3
Other 21 18
---------- ----------
Total expense 131 95
---------- ----------
Net income (loss) before income taxes and equity in
undistributed net income of Bank subsidiary 435 ( 10)
Income tax expense (credit) ( 26) ( 5)
----------- ----------
461 ( 5)
Equity in undistributed net income of Bank subsidiary - 419
---------- ----------
Net income $ 461 $ 414
========== ==========
</TABLE>
47
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 21 - Condensed parent company information (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 461 $ 414
Adjustments
Equity in undistributed net income of Bank subsidiary ( 503) ( 419)
(Increase) decrease in other assets ( 56) 4
Increase (decrease) in other liabilities 8 ( 24)
---------- -----------
Net cash used in operating activities ( 90) ( 25)
----------- -----------
Cash flows from investing activities
Dividends received from Bank subsidiary 725 -
Principal repayments from Bank subsidiary 1,257 666
Loans to Bank subsidiary ( 950) -
---------- ----------
Net cash provided by investing activities 1,032 666
---------- ----------
Cash flows from financing activities
Dividends paid ( 622) ( 146)
Purchase of stock ( 294) ( 495)
----------- -----------
Net cash used in financing activities ( 916) ( 641)
----------- ----------
Increase in cash and cash equivalents 26 -
Cash and cash equivalents at beginning of year 76 76
---------- ----------
Cash and cash equivalents at end of year $ 102 $ 76
========== ==========
</TABLE>
48
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
Note 22 - Selected quarterly financial data (unaudited)
Condensed consolidated financial data for the years ended June 30, 1998 and 1997
is shown as follows in thousands, except per-share data:
<TABLE>
<CAPTION>
1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 1,393 $ 1,424 $ 1,520 $ 1,471
Total interest expense 718 789 850 869
---------- ---------- ---------- ----------
Net interest income 675 635 670 602
Provision for credit losses 24 3 3 3
---------- ---------- ---------- ----------
Net interest income after provision for credit losses 651 632 667 599
Other noninterest income 86 84 121 137
Noninterest expense ( 550) ( 531) ( 547) ( 570)
---------- ---------- ---------- ----------
Income before income tax expense 187 185 241 166
Income tax expense 71 70 88 89
---------- ---------- ---------- ----------
Net income $ 116 $ 115 $ 153 $ 77
========== ========== ========== ==========
Basic earnings per share $ .24 $ .24 $ .32 $ .17
Diluted earnings per share .24 .24 .31 .16
Cash dividends per share 1.15 - .15 -
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
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
========== ========== ========== ==========
Basic earnings per share $ ( .40) $ .46 $ .29 $ .50
Diluted earnings per share ( .40) .46 .29 .50
Cash dividends per share .15 - .15 -
</TABLE>
49
<PAGE>
OFFICE LOCATIONS
Corporate Office
SWVA Bancshares, Inc. and Southwest Virginia Savings Bank, FSB
302 Second Street, S.W.
Roanoke, VA 24011-1597
(540) 343-0135
Branch Offices - Southwest Virginia Savings Bank, FSB
1006 Hardy Road 1611 Hershberger Road
Vinton, VA Roanoke, VA
2133 Electric Road 40 W. Main Street
Roanoke, VA Salem, VA
Loan Production Office
Building D, Suite 101
2847 Penn Forest Blvd.
Roanoke, VA
------------------------------------------
Board of Directors of SWVA Bancshares, Inc.
John L. Hart
Chairman of the Board
Attorney-at-Law
<TABLE>
<CAPTION>
<S> <C> <C>
F. Courtney Hoge James C. Brock Michael M. Kessler
Vice Chairman of the Board President, Rusco Window Co. President, Kessler Associates, LTD,
Insurance Sales Representative a photo processor
New York Life Insurance Co.
B.L. Rakes Barbara C. Weddle Glen C. Combs
Executive Officer Executive Officer Vice President, Acosta Sales,
a food brokerage company
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
</TABLE>
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, 1998 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 14, 1998 at 10:30 a.m. at the
Holiday Inn-Tanglewood, 4468 Starkey Road, Roanoke, Virginia.
50
EXHIBIT 23
<PAGE>
INDEPENDENT ACCOUNTANT'S CONSENT
The Board of Directors and Stockholders
SWVA Bancshares, Inc.
We consent to incorporation by reference in the Registration Statement
on Form S-8, of our report dated July 22, 1998, relating to the consolidated
balance sheets of SWVA Bancshares, Inc. and subsidiary as of June 30, 1998 and
1997 and the related consolidated statements of income, stockholders' equity,
and cash flows for the years then ended, which report appears in the June 30,
1998 annual report on Form 10-KSB of SWVA Bancshares, Inc.
/s/ Cherry Bekaert & Holland, L.L.P.
------------------------------------
Cherry Bekaert & Holland, L.L.P
Lynchburg, Virginia
September 25, 1998
Cherry, Bekaert & Holland, L.L.P.
828 Main Street, 17th Floor (24504) - P.O. Box 1119 - Lynchburg, VA 24505
- (804) 847-6643 - Fax (804) 528-3605
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,193
<INT-BEARING-DEPOSITS> 5,897
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,568
<INVESTMENTS-CARRYING> 318
<INVESTMENTS-MARKET> 327
<LOANS> 48,211
<ALLOWANCE> 207
<TOTAL-ASSETS> 84,387
<DEPOSITS> 68,288
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 772
<LONG-TERM> 6,000
0
0
<COMMON> 50
<OTHER-SE> 8,277
<TOTAL-LIABILITIES-AND-EQUITY> 84,387
<INTEREST-LOAN> 4,182
<INTEREST-INVEST> 1,626
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,808
<INTEREST-DEPOSIT> 2,968
<INTEREST-EXPENSE> 258
<INTEREST-INCOME-NET> 2,582
<LOAN-LOSSES> 33
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 2,198
<INCOME-PRETAX> 779
<INCOME-PRE-EXTRAORDINARY> 779
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 461
<EPS-PRIMARY> .97
<EPS-DILUTED> .95
<YIELD-ACTUAL> 3.50
<LOANS-NON> 0
<LOANS-PAST> 102
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 217
<CHARGE-OFFS> 43
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 207
<ALLOWANCE-DOMESTIC> 207
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
